Orca Exploration Group Inc.
2008 Annual Report
Orca Exploration Group Inc. is a well-financed, international public company
engaged in hydrocarbon exploration, development and marketing. The Company’s
operations are directed from offices in Dar es Salaam, Tanzania.
Orca’s focus is on the exploration, production, development and marketing of natural gas
to meet Tanzania’s growing power and industrial energy needs.
Orca Exploration trades on the TSXV under the trading symbols ORC.B and ORC.A
Highlights
Chairman’s letter to shareholders
President & CEO’s letter to shareholders
Operations review
MD&A
Management’s report to shareholders
Auditors’ report
Financial statements
Notes to the consolidated financial statements
1
3
5
8
26
50
51
52
56
This annual report contains certain forward-looking statements based on current expectations, but which involve
risks and uncertainties. Actual results may differ materially. All financial information is reported in U.S. dollars
(US$), unless otherwise noted.
HIGHLIGHTS
Orca Exploration Group Inc.
FINANCIAL AND OPERATING HIGHLIGHTS
Years ended 31 december
Financial (US$’000 except where otherwise stated)
Revenue
(Loss)/profit before taxation
Operating netback (US$/mcf)
Cash and cash equivalents
Working capital
Shareholders’ equity
(Loss)/profit per share – basic and diluted (US$)
Funds from operations before working capital changes
Funds per share from operations before working capital changes - basic (US$)
Funds per share from operations before working capital changes - diluted (US$)
Outstanding Shares (‘000)
Class A shares
Class B shares
Options
Operating
Additional Gas sold – industrial (MMscf)
Additional Gas sold – power (MMscf)
Average price per mcf – industrial (US$)
Average price per mcf – power (US$)
Gross Recoverable Reserves to end of license (Bcf)
Proved
Probable
Proved plus probable
Present Value, discounted at 10% (US$ million)
2008
2007
change
23,782
(7,056)
2.60
10,586
9,727
64,712
(0.32)
9,751
0.33
0.31
1,751
27,863
2,814
1,475
7,185
11.98
2.37
389
102
491
258
299
18,777
3,775
2.31
16,515
7,299
71,544
0.06
8,696
0.31
0.29
1,751
27,863
2,847
1,504
6,227
9.31
2.19
309
165
474
183
255
27%
n/m
13%
(36%)
33%
(10%)
n/m
12%
6%
7%
0%
0%
(1%)
(2%)
15%
29%
8%
26%
(38%)
4%
41%
17%
Proved
Proved plus probable
GLOSSARY
mcf
MMscf
Bcf
Tcf
MMscfd
Mmbtu
HHV
Thousands of standard cubic feet
Millions of standard cubic feet
Billions of standard cubic feet
Trillions of standard cubic feet
Millions of standard cubic feet per day
Millions of British thermal units
High heat value
1P
2P
3P
GIIP
Kwh
MW
US$
Proven reserves
Proven and probable reserves
Proven, probable and possible reserves
Gas initially in place
Kilowatt hour
Megawatt
US dollars
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CHAIRMAN’S LETTER TO SHAREHOLDERS
In these uncertain times, Orca
Exploration Group Inc. has what it will take to successfully weather
the economic storm that has swept across the globe. We have
a cash generating asset in a friendly country, rapidly growing
demand for the natural gas that Orca produces from Tanzania’s
Songo Songo field, no corporate debt, no license commitments
and a skilled and disciplined team of employees.
Our work focuses on the further development of the Songo Songo
natural gas field – a project that has been in the works for more
than two decades. Today it enables Tanzania to displace expensive
oil imports used for power generation, improve its domestic
balance of payments and be an African leader in the reduction
of hydrocarbon emissions. This is a very valuable project both to
Tanzania and to our Orca shareholders.
To secure long term benefits for both Tanzania and our share-
holders, Orca has negotiated licenses that carry forward until
October 2026. We have also initialled sustainable pricing formulas
that will meet Tanzania’s need for cost-effective access to its gas
resources and Orca’s return on investment expectations. This has
been accomplished by a careful balancing of Orca’s financial and
operations strengths with our conservative fiscal philosophy. It is
also a tribute to the excellent working relationship we have with
our partner, Tanzania Petroleum Development Corporation and
for the guidance of the Ministry of Energy and Minerals.
In recent years there has been increasing industrial activity in
Tanzania’s main industrial hub of Dar es Salaam. This is borne out
by the US$100 million investment by Heidelberg Cement in a new
cement kiln at Wazo Hill to meet the increasing demands of the
construction industry and the projected 7% growth in electricity
demand. Tanzania’s overall economic growth was 7.5% in 2008
and is projected to be 4.5% in 2009.
The Tanzanian economy is fortunate in today’s climate in that it
has no significant exposure to the major financial markets which
are in turmoil. The country’s exports are focused on agricultural
products and its mining industry, which is growing in importance,
includes high value minerals. Tanzania is the third largest
producer of gold in Africa and the only supplier of Tanzanite.
The International Monetary Fund is extremely supportive of
Tanzania and the work of President Kikwete and the Chama cha
Mapinduzi Party to encourage private sector investments in
Tanzania. The country also has strong support from the World
Bank which has earmarked funds for Tanzania’s development
over the next three years. Some of this is expected to be allocated
to upgrade and strengthen the electricity transmission infra-
structure.
I have personally been associated with the development of
Tanzania’s natural gas resources since the early 1990s and I feel
confident that Orca has an excellent project that is creating long
term value for shareholders and real benefits for East Africa.
Orca’s management is working hard to safeguard and grow the
value of your investment.
W. David Lyons
Chairman
28 April 2009
Opposite page: A new US$100 million cement kiln which will
use Additional Gas is under construction at Dar es Salaam.
3
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Orca Exploration Group Inc.
PRESIDENT & CEO’S LETTER TO SHAREHOLDERS
As Orca Exploration enters 2009,
it is in a strong position to weather the global deterioration in
financial markets:
•
•
•
•
•
•
•
•
The Company had cash and cash equivalents of approximately
US$10 million as at 31 December 2008 and no outstanding long
term indebtedness.
The Company increased funds from operations before work-
ing capital changes by 12% to US$9.7 million in 2008. This is
expected to increase in 2009 as sales volumes increase and
there is a reduction in general and administrative costs.
The terms of the Company’s gas sales contracts partially in-
sulate the business from the volatility in world oil prices. The
prices are fixed in the case of sales to the power sector and
there are pricing floors in place for the majority of the sales
volumes to the industrial customers.
The Tanzanian economy is not currently expected to be as
severely impacted by the financial crisis given the minimal
credit levels in the country. It is expected that the World Bank
and other multi-laterals will continue to finance infrastructure
developments making credit available on a timely basis.
During 2008, the Company increased Additional Gas sales vol-
umes by 12% to an average of 23.7 MMscfd.
The Company’s recoverable gross proven and probable (2P)
reserves on a life of license basis increased by 4% to 491 Bcf
in 2008 providing Orca with the ability to commence the ne-
gotiation of further long term power contracts.
The Company has no expenditure or financial obligations to
Government or stakeholders with respect to its assets, and all
investments are entirely at Orca’s discretion.
In Q1 2009, the Company was given approval by Songas Lim-
ited, to increase the processing capacity of the gas plant on
Songo Songo Island by 20 MMscfd from 70 to 90 MMscfd. This
will facilitate the growth in sales volumes in 2009.
These factors will enable Orca to continue to grow its Tanzanian gas
business in 2009 and to have the confidence to invest a further US$11
million primarily in the development of the downstream gas markets.
INCREASED RESERVES
The independent reserve evaluator, McDaniel and Associates Con-
sultants Ltd. (“McDaniel”) report of the Songo Songo reserves as at
31 December 2008 demonstrates that the Company’s gross proven
(1P) and proven and probable (2P) reserves in Songo Songo to the
end of the license period have increased by 26% to 389 Bcf and
4% to 491 Bcf respectively during 2008. On a life of field basis the
proven and proven and probable reserves have increased by 18%
to 433 Bcf and 17% to 649 Bcf respectively. Orca Exploration will
look at ways to accelerate field deliverability such that increased
reserves can be assigned to the proved category, or seek to extend
the current license period. Since production from Songo Songo
began in 2004 there has been a 125% increase in Orca’s proven
reserves and a 92% increase in the proven and probable reserves
on a life of field basis.
Based on these reserves and deliverability profiles produced by
the Company and McDaniel, the Company is looking to develop gas
markets that can consume approximately 100 – 120 MMscfd of Ad-
ditional Gas. To meet these sales levels, it is assessed that there is
a need to drill two new development wells in the field and install
field compression.
Orca anticipates that reserves can be further increased by the drill-
ing of the Songo Songo West exploration prospect. In September
2008, McDaniel evaluated this prospect and assessed it to contain
unrisked mean resources of 552 Bcf. This prospect will be drilled as
soon as practical given the availability of capital.
SUCCESS IN INCREASING
GAS PROCESSING CAPACITY
In Q4 2008, the Company successfully completed the installation
of a new Joule-Thompson valve on each of the gas processing
trains and associated pipework, with no significant disruption of
gas supply to Dar es Salaam. In Q1 2009, Lloyds Register certified
the two processing trains at 45 MMscfd each and Songas Limited
approved the re-rating to 90 MMscfd. Each of the trains was
tested to 55 MMscfd and Lloyds Register may yet certify the plant
at 110 MMscfd after having successfully inspected the gas heat
exchangers later in 2009. If this level of processing is confirmed,
it is unlikely that infrastructure capacity would be a constraint
until 2011/2012, which allows sufficient lead time for further
processing and pipeline expansion.
Since 2006, Songas has been looking to expand the gas processing
infrastructure by installing two additional gas processing trains.
This expansion is planned to increase gas processing capacity to a
minimum of 160 MMscfd. With re-rating of all four trains to 55 MMscfd,
the plant would be capable of delivering in excess of 200 MMscfd.
Current delays in the implementation of this expansion involve
issues raised by the energy regulator, EWURA, in approving the
economic and contractual terms. Songas is currently reviewing its
position in relation to the latest order issued by EWURA on 27 Feb-
ruary 2009. All parties are working towards resolving the remain-
ing issues to allow this to happen. In the event that the currently
planned expansion does not proceed, the Company is developing a
contingency plan to expand the entire system (gas processing and
pipeline) to 200 MMscfd. The Company will look for a third party
to finance this expansion with the objective of it being in place by
the end of 2011, in line with the requirement for additional capacity.
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Opposite page: Orca is currently supplying Additional
Gas for the operation of Ubungo 6.
PRESIDENT & CEO’S LETTER TO SHAREHOLDERS
Orca Exploration Group Inc.
EXPANDING MARKETS
AND DOWNSTREAM DISTRIBUTION
During 2008, Orca expanded its downstream low pressure gas distri-
bution system extending it by 7 kilometers to 42 kilometers. Three
new customers were connected during 2008. This brings the total
number of customers on line to 20 as at 31 December 2008. In addi-
tion, eight new contracts were signed in 2008 and these customers
will be connected during the course of 2009. There is now significant
surplus system capacity that can accommodate further growth.
The most significant industrial contract signed in 2008 was with
Tanzania Portland Cement Company (“TPCC”) for the supply of gas
to a new US$100 million kiln at its Wazo Hill cement plant. The sup-
ply of gas commenced ahead of schedule in Q1 2009 at a rate of ap-
proximately 2.0 MMscfd. This is forecast to increase to 4.0 MMscfd
by 2010 given the significant growth in cement demand in Tanzania.
INITIALLING OF LONG TERM
POWER CONTRACTS
In June 2008, the Company agreed commercial terms and initialled
two long term power contracts with TANESCO, the owner of the
Ubungo power plant, Songas Limited and the Ministry of Energy and
Minerals for the supply of Additional Gas for power generation. The
first contract provides for the supply of gas to the sixth turbine at
the Ubungo power plant to a maximum of approximately 9 MMscfd
until July 2024. The second initialled contract covers the supply of
Additional Gas to the remaining gas powered generation currently
in Tanzania. Beginning in November 2010, the take or pay contract
volume in this contract is set at 32 MMscfd through to July 2023,
with a maximum daily quantity of 36 MMscfd.
The quantum of the gas sales volumes to the power sector in the
short term under these initialled contracts will depend on the avail-
ability of the 561 MWs of Tanzania’s hydro generation, the timing of
any further increase in the Songo Songo infrastructure capacity
and the level of installed and operational gas fired generation.
The same contract price applies to both contracts. It is primarily
composed of a wellhead price and an amount that is paid to Songas
for the use of the gas processing and pipeline infrastructure that is
subject to approval from the energy regulator, EWURA. The wellhead
price is fixed at approximately US$1.95/mcf which will increase at an
expected 2% per annum from July 2009. From July 2012, there will be
a step change in the wellhead price to a forecast US$2.83/mcf which
will then increase at 2% per annum. Retail downstream burner tip
price will be the wellhead price plus processing and transportation
tariff. This protocol insulates Orca Exploration from any increases in
the gas processing and pipeline infrastructure tariffs.
These contracts are currently interlinked with the construc-
tion of the third and fourth gas processing trains. Final
signature will take place once Songas commits to the EPC
contract for these trains. In the event that Songas does not reach
agreement with EWURA on the economic and contractual terms,
the contracts will need to be amended to delink them from the gas
processing expansion. In the meantime, gas continues to be sup-
plied to the power plants, and payment is received on a monthly
basis under an interim arrangement.
INSULATION OF CASH FLOWS
FROM OIL PRICE VOLATILITY
Orca’s cash flows are not significantly exposed to oil price volatility
as a result of negotiating fixed prices and pricing floors with its
customers.
During 2008, the Company extended the term of six of its largest
contracts accounting for the majority of the industrial gas sales
volumes. The extensions cover an additional five years from the
dates that existing contracts were due to expire with the earliest
contract termination date being September 2014. In return the
Company agreed to cap the price of gas to these customers whilst
also incorporating a floor price. This is expected to keep the price
of gas to these industrial customers in the range of US$7.38/mcf to
US$11.49/mcf (increasing at 2% per annum).
Power contract prices are fixed as per the initialled power con-
tracts. This also applies to the new gas supply contract with TPCC,
the cement manufacturer at Wazo Hill.
SALES GROWTH
During 2008, the Company increased Additional Gas sales volumes
by 12% to an average of 23.7 MMscfd. Based on the existing signed
industrial contracts and the initialled power contracts, it is fore-
cast that there will be approximately 50 MMscfd of Additional Gas
sales from 2011. Whilst the industrial market in Dar es Salaam, as
supplied by the low pressure distribution system, is expected to
expand steadily over the next few years, the majority of the growth
required to maximize the current proven and probable reserves is
expected to come from the production of CNG and demand from
the power sector.
Power sector
In response to the Tanzanian Power Sector Master Plan, which
projects growth in electricity demand at 7% to 10% per annum or
approximately 100 MWs of new generation per annum until 2016,
TANESCO has commenced planning for the installation of a 200
– 250 MW power plant at Kinyerezi, Dar es Salaam. This plant is
expected to consume a maximum of 50 MMscfd. The negotiation
of the Kinyerezi power plant contract is expected to commence in
the second half of 2009, once the initialled contracts are signed.
TANESCO has indicated that it would intend this plant to be
Photo opposite: Orca has initialled long term contracts for the sale of Additional Gas to the sixth
turbine at Ubungo and the remaining gas powered generation currently in Tanzania.
Photo below: Orca continues to add industrial customers to its low-pressure gas distribution system
at Dar es Salaam and to expand gas distribution into other cities using CNG trailers for transport.
7
operational by 2011/2012. Discussions have been held between
the Governments of Kenya and Tanzania as members of the East
African Community to progress a gas pipeline from Dar es Salaam
to Mombasa, which can take gas in excess of Tanzanian demand,
to fulfil existing thermal fuel generation in Mombasa, and a future
200 MWs of dual fuel new generation. This market fits well with the
potential Songo Songo West prospect.
cnG
During 2008, the Company commenced the construction of CNG
facilities in Dar es Salaam, which include the construction of one
“Mother Station” consisting of a compressor, a vehicle refuelling
dispenser and two trailer filling facilities and three “Daughter Sta-
tions” for the supply of some industries, hotels and one institution
at a cost of US$2.5 million. The CNG facilities are expected to be
operational in Q2 2009 and lead to 0.7 MMscfd of CNG sales. It is
anticipated that this market will expand rapidly to supply gas to
consumers that cannot be cost-effectively connected to Orca’s
existing low pressure gas distribution system. This will commence
with supply to the Mikocheni region, followed by a further supply to
the city of Morogoro.
NEW VENTURES
In 2008, Orca decided not to exercise its option to drill two wells in
Exploration Area 5 (“EA5”) in Uganda to secure a 50% interest in
the license. The 300 kilometers of 2-D seismic revealed a number of
structures, but the technical analysis indicated a level of risk too high
to warrant the costs of an exploration drilling program. The Company
believes that proven reserves can be acquired at lower cost by ac-
quisition in today’s market, rather then by exploration, which is still
a high cost activity. As part of the financial settlement with Tower
Resources Plc. it was agreed that if any discovery in EA5 is found to
be commercial, Orca could recover, out of the cost recovery pool, up
to US$7.5 million that was spent on the seismic acquisition.
FINANCIAL RESULTS
Orca Exploration’s 2008 revenues increased 27% to US$23.8 million
compared to 2007. Funds from operations before working capital
changes increased 12% to US$9.7 million.
The Company’s 2008 profitability was impacted by a US$9.5 million
write down of the costs associated with the Ugandan seismic acqui-
sition. If this one off item is removed, the Company made a profit
before taxation of US$2.5 million. In addition, profitability and cash
flows were impacted by higher general and administrative costs.
Approximately US$4.7 million was incurred on legal and marketing
costs in 2008 in respect of an arbitration claim initiated by Orca Ex-
ploration and the negotiation of the initialled long term power con-
tracts. Some of these costs will continue in 2009, but the intention
is to reduce the general and administrative cash costs by 20% or
approximately US$2.5 million in 2009 compared with 2008.
POSITIVE
OUTLOOK
Orca Exploration enters
2009 in a strong financial, operating and marketing position. De-
spite economic turmoil in world financial markets the Company is
expected to continue to bolster its cash reserves in 2009 through
the development of its Tanzanian asset.
During 2009, the Company will stay on course to build markets in
Tanzania so as to maximize the existing proven and probable re-
serves. This will involve:
•
•
•
•
•
•
•
Planning a two-well development drilling program in 2011 and
2012 to increase deliverability to meet the forecast sales growth;
Re-rating the capacity of the Songo Songo gas processing
plant to 110 MMscfd;
Preparing for the expansion of the high pressure gas processing
and pipeline system to process and transport a peak of 200
MMscfd (including Protected Gas);
Executing the initialled long term gas supply and related
agreements;
Commencing the negotiation of a contract with TANESCO to
supply between 40 and 50 MMscfd of gas to the proposed
Kinyerezi power plant;
Establishing and expanding the CNG market in Tanzania;
Further progressing potential export potential to Kenya.
Over the course of 2009, management’s first priority will be to focus
on successfully executing its base business plan in a manner which
avoids financial risk. However we have not lost sight of the longer
term goal to grow Orca’s assets beyond our existing base. The Com-
pany still intends to drill the relatively low risk Songo Songo West
exploration prospect as soon as practical. In addition, Orca will con-
tinue to monitor potentially suitable asset acquisition opportuni-
ties that may arise as result of turmoil in world capital markets.
These will focus on proven reserves rather than exploration.
In these uncertain times, Orca appreciates the confidence and sup-
port of its loyal shareholders. Management remains very optimistic
about your Company’s prospects in Tanzania and will work hard to
demonstrate the inherent value that is present in your Company’s
assets and operations.
Peter R. Clutterbuck
President and CEO
28 April 2009
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Forecast increase in power demand
(per Tanzania Power Sector Master Plan)
Peak MWs
Potential new additional gas required from 2010
Additional Gas volumes
Industrial Sales
Power Sales
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
2022
2023
2024
2025
2026
Tanzania Generation Supply and Demand
2004
2005
2006
Demand
500
450
400
350
300
250
200
150
100
50
0
d
f
c
s
M
M
f
c
s
M
M
10,000
9,000
8,000
7,000
6,000
5,000
4,000
3,000
2,000
1,000
0
HFO generation in dispute
Uncontracted natural gas generation
Well
Less firm hydro generation
IDO Generation
Available HFO Generation
Available Natural Gas Generation
Dam Hydro Generation
SS-3
SS-4
SS-5
SS-7
SS-9
Total
Supply
Demand
Protected gas volumes by year
14,000
Ubungo Power Plant
Wazo Hill
OPERATIONS REVIEW
Orca Exploration Group Inc.
Photo below: Industrial markets for Additional Gas continue to increase in Dar es Salaam
and new markets are being developed with CNG delivery systems.
Operations Review
PRODUCTION
During 2008, 20.1 Bcf (2007: 19.7 Bcf) of natural gas was produced
from the Songo Songo field offshore Tanzania or an average of
54.9 MMscfd (2007: 54.0 MMscfd). This brings total production
since commercial operations commenced on 20 July 2004 to 77.1
Bcf. The production volumes achieved during the year followed a
similar production profile to the levels attained in 2007.
On several occasions in 2008, production was limited by the
capacity of the gas processing plant at 70 MMscfd. Orca
Exploration, as operator of the plant, financed a number of
studies in 2007 and 2008 to persuade the owner of the gas
processing plant, Songas Limited, that the existing facilities
could be re-rated to 90 MMscfd. In Q4 2008, Songas approved
the installation of two new 3” Joule-Thompson valves and
the plant was recertified by Lloyds Register at 90 MMscfd in
January 2009. The Company received formal approval from
Songas that the plant could operate at this level in Q1 2009.
Operatorship
Orca Exploration operates the gas processing plant on Songo
Songo Island on behalf of the stakeholders, including Songas
Limited (“Songas”). Operatorship is on a ‘no gain/no loss’
basis. Two internationally experienced staff manage the
site operations on a rotational basis with support from the
Company’s head office personnel in Dar es Salaam. Twenty-six
Tanzanian technicians operate and maintain the wells,
gathering system and processing plant. Since commencement
of commercial operations, there has been 100% uptime in
relation to the supply of gas to major customers outside of
planned shutdowns.
2008
2007
songo songo production by well
d
f
c
s
M
M
Average daily production
2008
2007
Jan
Feb
Mar
Apr
May
June
July
Aug
Sep
Oct
Nov
Dec
75
70
65
60
55
50
45
40
35
30
25
The production from the five Songo Songo wells between 2004 and 2008 has been as follows:
Production volumes
2004
Bcf
0.8
0.6
1.7
1.5
–
4.6
2005
Bcf
1.3
1.9
3.9
3.8
3.8
25,000
20,000
f
c
s
M
M
15,000
10,000
2006
Bcf
Protected Gas sales
2007
Additional Gas sales
Bcf
2008
Bcf
1.5
1.9
8.9
3.2
2.5
Flare, generator at the
processing plant and line pack
1.9
1.1
8.5
3.4
4.8
1.5
0.9
7.1
3.5
7.1
14.7
18.0
19.7
20.1
Total
Bcf
7.0
6.4
30.1
15.4
18.2
77.1
2004
2005
2006
2007
2008
Target average gas sales per day
CNG
CNG for vehicles
Industrials
New power (Kinyerezi)
Existing power (PGSA and ARGA)
Wazo Hill cement plant
Protected Gas
5,000
0
d
f
c
s
M
M
180
160
140
120
100
80
60
40
20
0
s
t
t
a
w
a
g
e
M
4,000
3,500
3,000
2,500
2,000
1,500
1,000
500
0
1200
1000
800
600
400
200
0
f
c
s
M
M
12,000
10,000
8,000
6,000
4,000
2,000
0
2004
2005
2006
2007
2008
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
2022
2023
2024
2025
2026
Forecast increase in power demand
(per Tanzania Power Sector Master Plan)
Peak MWs
Potential new additional gas required from 2010
Additional Gas volumes
Industrial Sales
Power Sales
Average daily production
2008
2007
75
70
65
60
55
50
d
f
c
s
M
M
The total gas production from the Songo Songo field between 2004 and 2008 was allocated as follows:
45
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
2022
2023
2024
2025
2026
Protected Gas sales
Additional Gas sales
2004
2005
2006
Flare, generator at the
processing plant and line pack
2008
2007
Tanzania Generation Supply and Demand
Total
2004
Bcf
4.1
0.1
0.4
4.6
2005
Bcf
40
11.9
35
30
25
2.5
0.3
14.7
2006
2007
2008
Bcf
13.0
4.8
0.2
Feb
18.0
Jan
Bcf
11.5
7.7
Mar
Apr
0.5
May
19.7
June
July
Bcf
11.1
8.7
0.3
Aug
Sep
20.1
Oct
Total
Bcf
51.6
23.8
1.7
Dec
77.1
Nov
Demand
HFO generation in dispute
Uncontracted natural gas generation
Less firm hydro generation
IDO Generation
Available HFO Generation
Available Natural Gas Generation
Dam Hydro Generation
Protected Gas production
Under the terms of a Gas Agreement signed in 2001, the
Protected Gas from Songo Songo is 100% owned by the
Tanzanian Petroleum Development Corporation (“TPDC”)
and is sold to Songas under a 20 year Gas Agreement for:
1.
2.
3.
The operation of five turbines at the Ubungo power
plant;
Onward sale to the Tanzanian Portland Cement
Company (“TPCC”) for the operation of kilns 2 and 3
at its Wazo Hill cement plant; and
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Village electrification (at a rate not to exceed 1
MMscfd).
The Protected Gas was allocated as follows:
Production volumes
25,000
Protected Gas sales
Additional Gas sales
Flare, generator at the
processing plant and line pack
2004
2005
2006
2007
2008
20,000
15,000
10,000
5,000
0
Supply
Demand
Protected gas volumes by year
14,000
Ubungo Power Plant
Wazo Hill
500
450
400
350
300
250
200
150
100
50
0
d
f
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M
M
f
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10,000
9,000
8,000
7,000
6,000
5,000
4,000
3,000
2,000
1,000
0
s
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4,000
3,500
3,000
2,500
2,000
1,500
1,000
500
0
1200
1000
800
600
400
200
0
f
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M
M
12,000
10,000
8,000
6,000
4,000
2,000
0
9.5
1.6
–
11.1
25.8
4.5
–
d
f
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30.3
140
120
100
80
60
68
76
–
67
9.9
1.6
–
11.5
27.3
4.4
–
31.7
71
74
–
73
2004
2005
2006
2007
2008
Protected Gas utilization in 2008 decreased at the Ubungo power
plant primarily because of the significant rain fall experienced
during the first five months of 2008 that enabled TANESCO
to dispatch their hydro electricity generation capacity. Since
commercial operations commenced, the Protected Gas utilization
at the Ubungo power plant has been 76%.
40
At the Wazo Hill cement plant, the 2008 utilization rate averaged
76% (2007: 74%). The village electrification program was not
20
functional in 2007 or 2008 and there is no planned date for its
0
commencement.
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
2022
2023
2024
2025
2026
2007
Target average gas sales per day
Utilization
rate
CNG
CNG for vehicles
%
Industrials
New power (Kinyerezi)
Protected Gas consumed
Bcf
Year ended 31 December
Protected Gas user
Five turbines at the
Ubungo power plant
Wazo Hill cement plant
Village electrification
Total consumption
2008
Protected Gas consumed
Bcf
MMscfd
Existing power (PGSA and ARGA)
Wazo Hill cement plant
%
MMscfd
Protected Gas
Utilization
rate
180
160
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75
70
65
60
55
50
45
40
35
30
25
f
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15,000
10,000
5,000
0
d
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M
180
160
140
120
100
80
60
40
20
0
Forecast increase in power demand
(per Tanzania Power Sector Master Plan)
Peak MWs
Potential new additional gas required from 2010
Additional Gas volumes
Industrial Sales
Power Sales
Average daily production
2008
2007
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4,000
3,500
3,000
2,500
2,000
1,500
1,000
500
0
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
2022
2023
2024
2025
2026
500
450
400
350
300
250
200
150
100
50
0
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10,000
9,000
8,000
7,000
6,000
5,000
4,000
3,000
2,000
1,000
0
1200
1000
800
600
400
200
0
OPERATIONS REVIEW
Orca Exploration Group Inc.
Supply
Demand
Demand
HFO generation in dispute
Uncontracted natural gas generation
Less firm hydro generation
IDO Generation
Available HFO Generation
Available Natural Gas Generation
Dam Hydro Generation
Production volumes
25,000
Protected Gas sales
Additional Gas sales
20,000
Flare, generator at the
processing plant and line pack
Tanzania Generation Supply and Demand
2004
2005
2006
2007
2008
Jan
Feb
Mar
Apr
May
June
July
Aug
Sep
Oct
Nov
Dec
Protected gas volumes by year
14,000
Ubungo Power Plant
Wazo Hill
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12,000
10,000
8,000
6,000
4,000
2,000
0
500
450
400
350
300
250
200
150
100
50
0
d
f
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10,000
9,000
8,000
7,000
6,000
5,000
4,000
3,000
2,000
1,000
0
2004
2005
2006
2007
2008
The maximum gas required for the Protected Gas users over the
remaining 15 years and seven months of the Gas Agreement was
257 Bcf as at 31 December 2008. For the purposes of calculating
the level of gas available as Additional Gas, an assumption has to
be made as to the expected utilization of the Protected Gas over
the remaining term of the Gas Agreement. These assumptions
are reviewed on an annual basis based on historic and projected
usage.
Additional Gas volumes
Industrial Sales
Power Sales
2004
2005
2006
2007
2008
Demand
HFO generation in dispute
Uncontracted natural gas generation
Less firm hydro generation
IDO Generation
Available HFO Generation
Available Natural Gas Generation
Dam Hydro Generation
Forecast increase in power demand
(per Tanzania Power Sector Master Plan)
Peak MWs
Potential new additional gas required from 2010
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
2022
2023
2024
2025
2026
Tanzania Generation Supply and Demand
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4,000
3,500
3,000
2,500
2,000
1,500
1,000
500
0
1200
1000
800
600
400
200
0
f
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12,000
10,000
8,000
6,000
4,000
2,000
0
Supply
Demand
Protected gas volumes by year
14,000
Ubungo Power Plant
Wazo Hill
The Protected Gas users and their forecast maximum and most
likely demand are as follows:
Theoretical
maximum
100% load
factor
most likely
Utilizations
in 2008
Protected Gas Demand
MMscfd
MMscfd
MMscfd
Six gas turbines at the
Ubungo power plant
Less gas
supplied to the sixth
turbine which is
Additional Gas
Total Protected Gas
at Ubungo
Wazo Hill
cement plant
Village electrification
program
Total daily
Protected Gas demand
Protected Gas reserves
to end of the Songas
power purchase
agreement (Bcf)
47.4
39.8
32.2
(9.2)
(7.8)
(6.4)
38.2
32.0
25.8
5.9
1.0
45.1
4.4
1.0
4.5
–
37.4
30.3
257
213
2004
2005
2006
2007
2008
Target average gas sales per day
CNG
CNG for vehicles
Industrials
New power (Kinyerezi)
Existing power (PGSA and ARGA)
Wazo Hill cement plant
Protected Gas
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
2022
2023
2024
2025
2026
Average daily production
2007
75
The forecast theoretical maximum of Protected Gas is estimated
at 100% utilization to be 45.1 MMscfd based on technical tests
of the Ubungo turbines and the Wazo Hill cement plant though
there are variations during the year and over time depending
on ambient temperature and degradation. The ‘most likely’ uti-
lization, including the village electrification program, is forecast
to be 80 - 85% over the remaining term of the Gas Agreement.
This compares with an actual utilization rate of 67% in 2008. The
actual Protected Gas utilization at the Ubungo power plant pri-
marily depends on the availability of the Ubungo power units,
the status of the water levels at the hydroelectricity dams and
the capacity of the ‘run of river’ hydros. The run of river hydros
can only generate when the rivers are flowing, typically during
the short rains in November and December and the long rains in
April and May.
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2008
60
65
55
70
50
45
additional Gas Production
Under the terms of a Gas Agreement signed in 2001, the gas
from the Songo Songo field in excess of the volume reserved as
Protected Gas, is available to Orca Exploration to be marketed as
Additional Gas. The details of the 2008 Additional Gas sales are
reported in the ‘Markets’ section of this report.
40
35
30
25
Jan
Feb
Mar
Apr
May
June
July
Aug
Sep
Oct
Nov
Dec
Production volumes
25,000
Protected Gas sales
Additional Gas sales
20,000
Flare, generator at the
processing plant and line pack
2004
2005
2006
2007
2008
Target average gas sales per day
CNG
CNG for vehicles
Industrials
New power (Kinyerezi)
Existing power (PGSA and ARGA)
Wazo Hill cement plant
Protected Gas
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15,000
10,000
5,000
0
d
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180
160
140
120
100
80
60
40
20
0
2004
2005
2006
2007
2008
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
2022
2023
2024
2025
2026
Flare, generator and line pack requirements
A relatively small amount of gas is used in local electricity
generation on Songo Songo Island. Gas is also required to
maintain the Songo Songo Island gas plant flare at all times. This
leads to a small annual loss of gas.
There are also fluctuations in the line pack in the 232 kilometer
high pressure pipeline to Dar es Salaam. The line is estimated to
hold a maximum of 85 MMscf of gas. At current production levels
the line pack holds sufficient gas for less than a day of Protected
and Additional Gas sales in Dar es Salaam.
THE SONGO SONGO FIELD
summary of Orca exploration’s assessment of
Gas Initially in Place (GIIP)
During 2008, Orca Exploration’s management has estimated the
potential reserves and resources in its two Tanzanian license
blocks (“Discovery Blocks”). The reserves and resources are
assessed for the following areas:
1.
2.
3.
The Songo Songo main producing field (“Songo Songo Field”,
“SS Field”);
The northern section of the field that has gas reserves
established by the drilling of SS-1, but no current production
(“Songo Songo North”, “SS North”); and
The exploration prospect west of the Songo Songo Field
(“Songo Songo West”, “SS West”).
A summary of management assessment of P50 GIIP for the Songo
Songo Field and Songo Songo North discoveries and the forecast
unrisked resources of Songo Songo West are illustrated on the
right.
Songo Songo Field and Songo Songo North
Management’s internal evaluation of the P50 (Base Case) GIIP
for the combined Songo Songo Field and Songo Songo North
discovery is 1,571 Bcf. The GIIP estimates are based on the most
recent top reservoir depth structure maps resulting from the 2008
depth conversion study. The GIIP range is based on volumetric
structural mapping utilizing the Petrel modelling software, which
incorporates the reservoir properties derived from the 2008 pet-
rophysical reservoir analysis.
Management’s P50 GIIP of 1,571 Bcf for the Songo Songo Field and
Songo Songo North compares with the McDaniel end 2008 GIIP
estimates as presented below.
Bcf
1P
2P
3P
McDaniels Songo
Songo Field GIIP (Bcf)
1,236
1,433
1,562
Songo Songo Gas Fields and Songo Songo West Prospect
Songo Songo License; Management estimate
of Gas Initially In Place (GIIP)
Songo Songo
Songo Songo
North
North
P50 GIIP 226 Bcf
P50 GIIP 226 Bcf
SS-1
SS-1
Songo Songo
Songo Songo
Main
Main
P50 GIIP 1345 Bcf
P50 GIIP 1345 Bcf
SS-9
SS-9
SS-10
SS-10
SS-4
SS-4
SS-5
SS-5
SS-3
SS-3
SS-6
SS-6
SS-7
SS-7
KN-1
KN-1
PROVEN
PROVEN
SECTION
SECTION
SS-8
SS-8
K-1
K-1
5kms
Songo Songo
Songo Songo
Main
West
P50 GIIP 1345 Bcf
P50 GIIP 727 Bcf
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The McDaniel reserves evaluation are summarized in more detail
below.
Reservoir management
The static (Petrel™) and dynamic simulation (ECLIPSE™) reservoir
models were rebuilt during 2008. This was necessary primarily
due to the additional work undertaken on depth conversion dur-
ing 2008 which had a significant positive impact on Gross Rock
Volume (“GRV”), as well as the petrophysical analysis of well SS-10
which had a positive impact on the evaluation of net to gross
(“N:G”) and permeability in low porosity reservoir. The depth con-
version was re-addressed with two specific objectives: to assess
the GRV as input to resource evaluation of the Songo Songo West
prospect; and to review Songo Songo Field GRV as input to evalua-
tion of GIIP. The Petrel geological model incorporates revised res-
ervoir zonation and zonal facies distributions based on a revision
of the stratigraphy, depositonal environments and palaeography
of the Neocomian to Cenomanian reservoirs in early 2008.
The Company has in place a number of reservoir monitoring
procedures aimed at constantly reviewing both the field reserve
estimates, well and field deliverability, based on established
industry procedures and practices and expected reservoir
responses from similar gas developments throughout the world.
Through these reservoir surveillance and management practices
Orca Exploration is able to ensure delivery of the Protected
Gas volumes to the end of the contract term and assist with
the forecast of Additional Gas sales within the capability of the
reservoir.
The Company uses down hole pressure gauges to monitor and
record bottom hole pressure. The gauges are installed on all
producing wells with the exception of SS-9. A pressure gauge
will be installed in the SS-10 development well after it has been
connected to the gas processing facility. The pressure data
collected from the gauges is used for a variety of purposes
Structural Model
Songo Songo license Management
P50 geologic model (Petrel™)
The ECLIPSE™ simulation model
is used to monitor and continu-
ously evaluate the reserves of
the Songo Songo Field and
Songo Songo North in order to
ensure that the Protected Gas
deliverability requirements can
be met and to manage forecast
Additional Gas sales. The model
has been used to predict well
performance and identify the
investments in wells and well
head compression that will be
required to meet forecast gas
demand. It is used to assess the
likely well response to uncer-
tainties such as aquifer size and
extent of reservoir compartmen-
talization, if any.
Reservoir surveillance
Songo Songo
West
Songo Songo
North
3D model of Songo Songo Field and adjacent structures
Songo Songo
Field
Reservoir
Zones
N10
N9
N8
N7
N6
N5
N4
N3
N2
TANZSS-50
N
Orca Exploration is required to
deliver a peak supply of approxi-
mately 45 MMscfd of Protected
Gas until 31 July 2024 from
the Discovery Blocks as well as meet the Additional Gas sales
obligations.
Notes:
Zones 2-8 belong to the Neocomian. Zone 9 belongs to the Late Aptian and Zone 10 belongs to the Late Albian. Zone 10 is
the only Zone which is not correlated in all wells having been eroded to the south and southeast. The Cenomanian is treated
as a single zone in the model.
volume. In addition, the material balance GIIP of 1,342 Bcf is
consistent with management’s 2008 P50 volumetric assessment
and thus strengthens the validity of the Songo Songo Field GIIP
estimate. The Songo Songo North structure which produced gas
on test from the Songo Songo 1 discovery well when it was drilled
in 1974, is estimated by management to contain a further 226 Bcf
of GIIP in the P50 case.
Well and field deliverability
The flow rates of the wells (including an estimated rate for SS-10
when it comes on production) based on the requirement to have
1,600 pounds per square inch of pressure in the gas processing
plant are as follows:
Well deliverability summary
SS-3
SS-4
SS-5
SS-7
SS-9
SS-10 (Estimated)
Total
Maximum Protected
Gas demand
available for additional Gas
31 december
2008
maxiumum
capacity
(MMscfd)
16
14
65
20
55
55
225
(45)
180
The Songo Songo well pressures showed approximately a 1.3%
decline over the course of 2008 in line with expectations. The
current deliverability is sufficient to enable 180 MMscfd of
Additional Gas production above the peak demand for Protected
Gas. This will allow the Company to produce more than 115 MMscfd
of Additional Gas for a period of time even in the unlikely event
that the most productive well becomes unavailable at peak
demand.
including near well formation parameter assessment, well deliv-
erability and estimates of field GIIP. The pressure gauges were
last retrieved during October 2008 and at the same time were re-
installed to allow further ongoing evaluation. The data collected
in October has been interpreted for Pressure Transient Analysis
(“PTA”), and Material Balance (MBAL™) and has also been incorpo-
rated into a new simulation model (ECLIPSE™) with the production
history match extended to that date. The performance of each
individual well is in addition monitored throughout the year and
the well test schedule is reviewed to ensure the necessary field
performance data is obtained.
To obtain the most reliable data for reservoir management, the
Songo Songo gas plant is equipped with a test separator that
allows production from individual wells to be measured and
important surface pressures and temperatures to be captured
using Keller wellhead gauges. This
information has been
combined with the results of the downhole pressure gauges
to show that SS-3, SS-4, SS-5 and SS-9 demonstrate conclusive
evidence of communication with other wells. In addition, interfer-
ence testing in 2007 confirms that SS-7 is also in communication
with SS-5, reducing the risk of compartmentalization.
The pressure data acquired in October 2007 in development well
SS-10 supports the Eclipse interpretation that there has been little
or no movement in the gas water contact (“GWC”) since the field
start up in July 2004. The static GWC and pressure data acquired
from the offset wells, support a likely GIIP towards the upper end
of the Company’s estimated range.
The field is still in the early stages of it’s depletion with approxi-
mately 7.1% of the original recoverable 2P reserves produced to
the end of 2008. The downhole pressure data obtained in 2008
and the new history matched Eclipse simulation model suggest
the possible presence of a weak aquifer. At this early stage of
production the data remain inconclusive for the presence of an
aquifer, but management will continue to monitor for this as
more pressure data is available, and by continued monitoring for
water production from the wells.
Material Balance analysis
Material balance analysis using the down hole pressure gauge
data continues to support a main field GIIP of about 1,342 Bcf.
The material balance calculations use pressure data from the
producing wells which are located on the main Songo Songo field
structure. A saddle (structural low) is interpreted to separate the
main field from Songo Songo North structure, an interpretation
supported by (ECLIPSE™) forecast simulation runs which show
negligible pressure decline in Songo Songo North as the main
field wells are produced. Management therefore believes that
the MBAL GIIP of 1,342 Bcf applies to the main field only, and that
the SS North structure is an additional, currently un-depleted,
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Development of the Songo Songo Field
and Songo Songo North
The Company’s immediate objective is to maximize the sales
of gas from the Songo Songo Field and Songo Songo North. In
reviewing the potential of these reservoirs and the gas demand
forecasts, it is assessed that the Company should develop
the field to be able to deliver a maximum peak of 200 MMscfd
(including Protected Gas) and a maximum average of 160 MMscfd
(including Protected Gas). To meet these demand forecasts, it is
planned that an additional vertical development well will have
to be drilled in the Songo Songo Field by the end of 2011. It is
anticipated that the well will be drilled with a jack up rig and that
it will be tied back to the expanded Songo Songo gas processing
facilities (see under Infrastructure).
The current well stock will not drain the Songo Songo North
reservoir. Accordingly, the intention is to drill a single vertical
development well into this structure which would also enable
the GIIP associated with Songo Songo North to be quantified
with more certainty. The well will be completed as a producer
and tied back with a new flow line to the inlet manifold in front
of the Songo Songo Island gas processing facility. The intention
would be to drill the SS North well after drilling a single well in the
Songo Songo Field as described above.
In addition to the above, field compression will need to be
installed by 2013 to maintain the deliverability of the wells and
meet the inlet pressure of the gas processing facilities.
GAS RESERVES
In accordance with National Instrument 51-101 Standards of
Disclosure for Oil and Gas Activities, the independent petroleum
engineers, McDaniel prepared a report dated March 2009 that
assessed the Orca Exploration natural gas reserves based on
information on the Songo Songo Field and Songo Songo North as
at 31 December 2008 (the “McDaniel Report”). A summary of the
remaining Additional Gas reserves on a life of license and life of
field basis are presented in the tables on page 15. The 1P and 2P
reserves are based on production to the end of the license period
(October 2026) while the 3P reserves assume that the license will
be extended to the end of the field life.
Over the course of 2008, for the audited reserves on a gross
Company basis there has been a 26% increase in Songo Songo’s
1P Additional Gas reserves to the end of the license period, and
an 18% increase on a life of field basis, despite Additional Gas
sales of 8.7 Bcf being produced. The total 2P Additional Gas
reserves on a gross property basis have increased 4% on a life of
license basis and 18% on a life of field basis. The increase in the
proven and probable reserves has arisen from a combination of
improved volumetric structural mapping, the 2008 pressure and
gas production data and the SS-10 development well results.
Orca management estimates that the total recoverable P50
reserves (Protected Gas plus additional Gas) from the Songo
Songo Field and the Songo Songo North discovery is 1,116 Bcf at
31 December 2008.
Gross field reserves on a life-of-field basis
Gross field reserves on a life-of-license basis
1,200
1,000
800
f
c
B
600
400
200
0
Protected
Gas
Probable
Proved,
in excess of PG
Possible
2004
2005
2006
2007
2008
1,200
1,000
800
f
c
B
600
400
200
0
Protected
Gas
Proved,
in excess of PG
Probable
Possible 1
2004
2006
1 Audited life of license possible reserves were not estimated for the years
2008
2005
2007
2004 to 2006.
The gross and net Company Additional Gas reserves to end of license are as follows:
Songo Songo
Additional Gas reserves to October 2026 (Bcf)
Independent reserves evaluation
Proved producing
Proved undeveloped
Total proved (1P)
Probable
Total proved and probable (2P)
Possible
Total proved, probable and possible (3P)
2008
Gross (1)
2008
Net (2)
253.5
135.9
389.4
102.0
491.4
340.7
832.1
146.9
99.8
246.7
67.3
314.0
219.2
533.2
Gross equals the gross reserves that are available for the Company after estimating the effect of the TPDC back in (see below).
(1)
(2) Net equals the economic allocation of the Gross reserves to the Company as determined in accordance with the Production Sharing Agreement.
The gross and net Company Additional Gas reserves to end of field life are as follows:
Songo Songo Additional Gas reserves to end of field life (Bcf)
Independent reserves evaluation
Proved producing
Proved undeveloped
Total proved (1P)
Probable
Total proved and probable (2P)
Possible
Total proved, probable and possible (3P)
2008
Gross (1)
2008
Net (2)
434.7
(1.6)
433.1
215.6
648.7
183.4
832.1
263.2
15.4
278.6
144.2
422.8
110.4
533.2
(1)
Gross equals the gross reserves that are available for the Company after estimating the effect of the TPDC back in (see below).
(2) Net equals the economic allocation of the Gross reserves to the Company as determined in accordance with the Production Sharing Agreement.
2007
Gross
247.6
61.0
308.6
165.0
473.6
307.1
780.7
2007
Gross
367.7
(2.0)
365.7
186.4
552.1
228.6
780.7
2007
Net
159.1
51.0
210.1
113.8
323.9
191.4
515.3
2007
Net
235.8
12.6
248.4
131.6
380.0
135.3
515.3
The McDaniel Report has assumed that TPDC will exercise its right to ‘back in’ to the field development by contributing 20% of the
costs of the future wells, including SS-10 and a proportion of the infrastructure and operating costs, in return for a 20% increase in the
profit share for the production emanating from these wells. McDaniel has taken the view that this ‘back in’ right should be treated as a
TPDC working interest and therefore the Gross reserves have been adjusted for the volumes of Additional Gas (30.3 Bcf at 2P) that are
allocated to TPDC for their working interest share. The implications and workings of the ‘back in’ are still to be discussed in detail with
TPDC and may lead to future modifications in the way the Gross Company reserves are calculated.
For the purpose of calculating the gross Additional Gas reserves, McDaniel has assumed in their 2P case that 213 Bcf (2007: 227 Bcf) or
an average of 13.7 Bcf per annum will be required to meet the demands of the Protected Gas users from 1 January 2009 to 31 July 2024.
During 2008, the Protected Gas users consumed 11.1 Bcf.
15
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The principal assumptions used by McDaniel in its evaluation of the Tanzanian PSA are as follows:
Year
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
2022
2023
additional
Gas price
1P
Gross
additional
Gas volumes
1P
additional
Gas price
2P
Gross
additional
Gas volumes
2P
US$/mcf
MMscfd
US$/mcf
MMscfd
3.27
3.64
3.74
4.17
4.49
4.85
5.20
5.29
5.38
5.47
5.57
5.67
5.77
5.73
5.65
30.1
39.1
52.0
62.5
72.0
76.5
80.4
80.4
804
80.4
80.4
80.4
80.4
57.8
39.9
3.27
3.71
3.87
4.20
4.47
4.69
4.93
4.94
5.03
5.12
5.21
5.31
5.40
5.46
5.51
30.1
39.4
52.5
67.8
77.0
86.0
95.0
100.0
100.0
100.0
100.0
100.0
100.0
83.5
69.0
Present value of reserves
The estimated value of the Songo Songo reserves on a life of license basis based on the assumptions on production and pricing are as
follows:
US$ millions
Proved producing
Proved undeveloped
Total proved (1P)
Probable
Total proved and probable
(2P)
Possible
Total proved, probable
and possible
2008
2007
5%
168.9
203.0
371.9
81.1
453.0
238.8
691.8
10%
114.1
143.5
257.6
41.0
298.6
102.1
400.7
15%
83.8
103.4
187.2
21.0
208.2
48.7
256.9
5%
191.1
65.7
256.8
114.8
371.6
185.1
556.7
10%
125.6
57.1
182.7
72.2
254.9
87.1
342.0
15%
89.0
47.7
136.7
46.6
183.3
43.4
226.7
Songo Songo West is interpreted by McDaniel to be a low risk
prospect with a 52% chance of success in the Neocomian and
35% in the Cenomanian. The chance of success is measured as
the probability that a hydrocarbon accumulation exists that will
demonstrate stabilized flow of hydrocarbons if tested. McDaniel
assessed the P50, unrisked recoverable resources
in the
Songo Songo West prospect at 450 Bcf and the mean, unrisked
recoverable resources at 551 Bcf. Management’s unrisked mean
GIIP for the Songo Songo West prospect of 810 Bcf compares with
the McDaniel combined Neocomian and Cenomanian unrisked
mean GIIP of 740 Bcf.
Songo Songo West represents a major potential source of
reserves upside in the Songo Songo area, which could provide
the resources to underwrite a significant expansion of the gas
infrastructure and markets, both in Tanzania and beyond. It is
currently proposed that an initial exploration well would be
drilled towards the south of the Songo Songo West structure, and
closest to Songo Songo island (“Songo Songo West South”). If it
is successful and can flow at commercial rates, it is likely to be
tied back immediately to the manifold in front of the processing
plant and flowed for a period to prove up the long term deliv-
erability of gas from the field. Following this confirmation, it
is likely that an appraisal well will be drilled into the northern
extent of Songo Songo West (“Songo Songo West North”) to get a
better understanding of the areal extent of the reservoir and the
recoverable reserves. The final field development decision would
then be taken, but is likely to involve a significant expansion of
the existing facilities.
The 17% increase on the 2P present value at a 10% discount basis
from US$254.9 million to US$298.6 million on a life of licence basis
is primarily due to the increase in the reserves and the timing of
the future capital expenditure that has the effect of minimizing
the impact of Additional Profits Tax.
It should be noted that McDaniel has assumed in the 3P case, that
the Company receives an extension to the PSA. Hence for this
category only, the reserves are not restricted to the life of the
licence.
EXPLORATION
Songo Songo West
Orca Exploration has mapped and evaluated the Songo Songo
West prospect adjacent to the Songo Songo Field. The prospect
lies approximately 2.5 kilometers west of the main field and the
prognosis is that the prospect is very similar in terms of trap
and reservoir presence to the Songo Songo Field. The seismic on
Songo Songo West indicates closure on an elongate north-south
oriented tilted fault block trap at the same reservoir interval
as the main field. Songo Songo West lies entirely within the
Company’s Discovery Blocks.
McDaniel conducted an independent assessment of natural gas
resources in the Songo Songo West prospect in September 2008.
Several cases were reviewed to estimate the size of the potential
gas accumulation.
As within Songo Songo main field two reservoirs are envisaged
will be present within the SSW prospect – the Neocomian and the
Cenomanian.
The McDaniel’s Neocomian and Cenomanian GIIP and resources
are summarized in the tables below.
neocomian (Bcf)
Unrisked OGIP
Unrisked resources
Risked mean resources
P90
232
170
–
P50
566
418
–
mean
678
505
264
cenomanian (Bcf)
P90
P50
mean
Unrisked OGIP
Unrisked resources
Risked mean resources
12
9
43
32
–
62
46
16
Source: McDaniel September 2008
P10
1,381
1,028
–
P10
158
118
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Photo below: Field production is processed at the Songo Songo gas
plant before being pipelined to Dar es Salaam.
INFRASTRUCTURE
SSI gas processing plant
The infrastructure that processes and transports the gas from
the Songo Songo Field to Dar es Salaam was commissioned in
July 2004.
The initial infrastructure for the Songo Songo gas to electricity
project incorporated the following elements:
•
•
•
Completion and tie back of the original five producing wells;
Construction of a gas processing facility on Songo Songo
Island (“SSI”) with two gas processing trains;
Construction of a high pressure offshore and onshore
pipeline system;
a)
b)
c)
a 25 kilometer 12” offshore pipeline from the field to
the Somanga Funga landfall;
a 207 kilometer 16” onshore pipeline to the Ubungo
power plant;
a 16 kilometer 8” lateral pipeline to the Wazo Hill
cement plant.
•
Conversion of four existing turbines at the Ubungo power
plant (2 x 19 MW and 2 x 34 MW) from diesel to gas.
Orca Exploration is the operator of the wells and the gas
processing plant. Songas Limited (“Songas”) is the operator of
the high pressure pipeline system and the Ubungo power plant.
There are two trains at the gas processing facilities with a design
specification of 35 MMscfd. The Songo Songo raw gas is relatively
dry and requires minimal processing. The gas treatment is a
simple dew point control process which uses the energy in the
raw gas to chill the gas through a Joule-Thompson valve. Liquid
condensate is removed from the cold gas, leaving the dry gas to
be transported to Dar es Salaam.
With the growth in the market for Additional Gas, there were times
during 2008 and 2007 when the peak flow rates were in excess of
the gas processing capacity of 70 MMscfd. In Q3 2007, Orca Explora-
tion submitted a proposal to Songas to increase the gas processing
capacity to 90 MMscfd through upgrading and re-rating the exist-
ing trains to 45 MMscfd each. In Q4 2008, the Company signed an
agreement (“Re-rating Agreement”) with Songas and TANESCO that
enabled the Company, as operator of the gas processing plant, to
install two larger Joule-Thompson valves and modify the relief sys-
tems on the two existing gas processing trains. The work was suc-
cessfully implemented without significant disruption to the supply
of gas to customers in Dar es Salaam. The increase in the capacity
of the plant to 90 MMscfd has been certified by Lloyds Register and
the Company received formal approval from Songas to operate at
this level in Q1 2009.
During the plant tests, each of the gas processing trains was
operated at 55 MMscfd. Lloyds Register may yet certify the plant
to 110 MMscfd after they have inspected the heat exchangers.
This will be pursued with Songas during Q2 2009 as an interim
measure in the event that the capacity of the gas processing
plant impacts the supply of gas to Dar es Salaam over the course
of the next eighteen months.
Songo Songo Field development options
Songas has submitted an aplication
to the energy regulator, EWURA,
for the installation of two new gas
processing trains taking the capacity
to a minimum of 160 MMscfd with the
potential to increase it to in excess
of 200 MMscfd should the re-rating
of each train to 55 MMscfd be
approved. In February 2009, EWURA
issued an order that is currently
being reviewed by Songas. The total
cost of the expansion is estimated at
US$65 million.
High pressure
pipeline network
8°25'0"S
New gas
processing plant
8°30'0"S
8°35'0"S
39°20'0"E
0
TANZSS_02e1
Kilometers
The main pipeline from Songo
Songo Island to the Ubungo power
plant in Dar es Salaam including
both the offshore section and the
onshore section has an estimated maximum capacity
in its current configuration of 105 MMscfd. The limit-
ing upstream pressure at the exit of the gas process-
ing facilities on Songo Songo Island is between 84
bar and 87 bar while the minimum delivery pressure
at Ubungo is 53 bar.
is to
increase the
The Company’s objective
throughput capacity of the pipeline system to
a peak of 200 MMscfd by the middle of 2012 to
meet the forecast average consumption of 140-160
MMscfd (including Protected Gas) and to maximize
the potential of the Songo Songo Field and Songo
Songo North. The Company is currently commis-
sioning reports to assess how this may be achieved
with minimal cost. However, it is forecast that
twinning the existing system may be the most cost
effective way of achieving this level of deliverability
whilst also increasing the security of supply.
The capacity of the spur line to Wazo Hill is estimated
to be around 40 MMscfd. This value has been calcu-
lated using pipeline flow equations, using a pressure
at Ubungo of 53 bar and a delivery pressure at Wazo
Hill / Tegeta of 10 bar. Like the main pipeline, the ac-
tual flow levels have been considerably below this
rate to date, so the calculations will be recalibrated
once more data becomes available at higher rates.
SSW (N) platform
SSN single well
SS-1
SS-10
SS-4
SS-9
SS-5
SSW (S) platform
SS-3
SS-7
Gas processing plant
Songo Songo
Island
SS-6
KN-1
SS-8
K-1
Legend
Orca Exploration Group
Gas field
Prospect
Reefs
Gas processing plant
Possible gas processing plant
New drilling centres (proposed)
New drilling centres (possible)
Gas pipeline
Proposed pipelines
Possible pipelines
Land / Sea
39°25'0"E
39°30'0"E
39°35'0"E
Songo Songo Field, marine and land pipeline routes to market
Kimbiji
Petrodel
Dar es Salaam
Songo Songo
West Prospect
Block 07
Dominion O
Songo Songo
North Gas Field
I N D I A N
SS-1
5
Ruvu
Dodsal
Songo Songo
Gas Field
O C E A N
Gas Plant
SS-4
SS-10
Kisangire
Heritage
Bigwa-Rufiji / Mafia
Maurel PR
T A N Z A N I A
Kwale
SS-9
SS-5
SS-3
SS-7
SS-6
Songo Songo
Island
Block 06
KN-1
Petrobras
SS-8
K-1
Kiliwani
Gas Field
0
Kilometres
10
Latham
Petrodel
Block 05
Petrobras
Mafia
Jibondo
Block 04
Ophir En
Mandawa
Dominion O
Songo
Songo
West
Funguo
Nyuni
Ndovu Res
Songo Songo
PanAfrican Tanzania
Songo Songo
Block 03
Ophir En
Legend
Orca Exploration Group
Jewe
Gas Field
Prospect
Gas Pipeline
Possible Pipeline
Gas Pipeline
Land / Sea
TANZSS-01c4
0
Kilometers
50
East Pande
Rakgas
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Low pressure distribution system
The low pressure distribution system has been
designed so that there is significant spare capac-
ity and security of supply. There are three pres-
sure reduction stations (“PRS”) and two separate
connections to the 16” high pressure pipeline.
A fourth PRS was installed in Q1 2009 specifically
to handle the Additional Gas sales to the Wazo
Hill cement plant.
Since 2004, the Company has constructed
42 kms of low pressure pipeline in Dar es
Salaam and at the end of 2008 was delivering
Additional Gas to 20 industrial customers. Three
new customers were connected in 2008 and a
further five customers have signed contracts
and are in the process of installing equipment
to consume natural gas in the first half of 2009.
By the end of 2009, it is expected that the
Company will have increased its industrial base
to 30 customers with the addition of an 8 kms
extension to Mikocheni and the connection of a
series of small customers near the airport.
Power and industrial customers in the Dar es Salaam area
IPTL 100MW
Tegeta 45MW
Wazo Hill Kiln 4
UGT-6 42MW
Ubungo
100MW
Simba Steel
Nida Textile
Murzah 3
Mukwano
Yuasa Battery
Pepsi
8
“
L
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1 6 “ L i n e
Kinyerezi [250MW]
Namera
OK Plastic
Murzah 1&2
Azam
Bakhresa food
Tanzania Cutlery
Master Steel
Simba Plastic
0
Kilometres
10
MMI
Tanpack
Iron & Steel
CNG Hub
CNG Hub
CNG for Vehicles
Chinese Textile
mills
Tanzania Breweries
Nampack
CNG Hub
VOT
METL
Kioo Glass
Kamal Steel
Alaf
Bora
TCC
Serengeti Breweries
Karibu Textile
LEGEND: Additional Gas Supplies
Gas Pipeline
Existing Ringmain
Planned Pipelines
Pressure Reduction Stations (PRS)
Town / City
Power Generation Stations
Power Generation Stations - to be supplied
PNG - supplied
PNG - to be supplied
CNG - to be supplied
MARKET DEVELOPMENT
summary
The 4% increase in the 2P recoverable reserves
on a life of license basis in 2008 continues to
provide the Company with an opportunity to
develop new markets.
TANZCW-02b
The current target profile for the sales of gas in Tanzania
(including Protected Gas) is based on the forecast gas reserves in
the Songo Songo Field and Songo Songo North. It is dependent on
the investment in the drilling of two new wells, field compression
and the expansion of the pipeline system to Dar es Salaam.
In the event that gas is discovered in Songo Songo West, then
there is assessed to be sufficient demand, especially from the
power sector and the CNG market, to absorb the majority of the
P50 resources.
Power sector
Sales to the power sector averaged approximately 19.7 MMscfd in
2008. Until the end of 2010, the demand for gas from the power
sector will be determined by the quantum of gas fired generation
capacity in Tanzania and the availability of the hydro and gas
processing capacity. Thereafter, the take or pay provisions in the
long term initialled power contracts will set a floor on the annual
gas volumes sold to the power sector. There is expected to be
significant growth in electricity demand in Tanzania and gas is
likely to be the feedstock provided the right contractual terms
can be agreed. This is discussed below.
demand by the power sector until the end of 2010
As at 31 December 2008, there was 143 MWs of installed gas fired
generation in Tanzania that is being powered by Additional Gas
(maximum demand of approximately 30 MMscfd). A further 45
MWs of additional generation is due to be connected and commis-
sioned at Tegeta in Q4 2009 (maximum demand of approximately
10 MMscfd). Accordingly, the maximum consumption by the power
sector is expected to be 40 MMscfd from Q4 2009.
s
t
t
a
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a
g
e
M
4,000
3,500
3,000
2,500
2,000
1,500
1,000
500
0
1200
1000
800
600
400
200
0
f
c
s
M
M
12,000
10,000
8,000
6,000
4,000
2,000
0
Forecast increase in power demand
(per Tanzania Power Sector Master Plan)
Peak MWs
Potential new additional gas required from 2010
Additional Gas volumes
Industrial Sales
Power Sales
500
450
400
350
300
250
200
150
100
50
0
d
f
c
s
M
M
f
c
s
M
M
10,000
9,000
8,000
7,000
6,000
5,000
4,000
3,000
2,000
1,000
0
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
2022
2023
2024
2025
2026
Tanzania Generation Supply and Demand
2004
2005
2006
2007
2008
d
f
c
s
M
M
75
70
65
60
55
50
45
40
35
30
25
Average daily production
2008
2007
The following lists the capacity of the gas fired generation consuming Additional Gas as at 31 December 2008 and forecast additions
during 2009:
Status
Operational
Operational
Mar
Feb
Jan
Apr
June
Total as at 31 december 2008
May
July
Aug
Sep
Oct
Nov
Dec
Demand
HFO generation in dispute
Uncontracted natural gas generation
Less firm hydro generation
IDO Generation
Available HFO Generation
Available Natural Gas Generation
Dam Hydro Generation
f
c
s
M
M
Operational from Q4 2009
Production volumes
25,000
Forecast total as at 31 december 2009
Protected Gas sales
Additional Gas sales
Flare, generator at the
processing plant and line pack
In July 2008, the Company ceased supplying Additional Gas to the
120 MWs of emergency power generation owned and operated by
Dowans Tanzania Limited (“Dowans”). This was a result of TANESCO
cancelling its power purchase agreement with Dowans due to con-
tractual irregularities. The power plant still remains in country but
its future is uncertain.
20,000
15,000
10,000
demand by the power sector from 2011
under the arGa and PGsa
Supply
Demand
Protected gas volumes by year
14,000
Ubungo Power Plant
Wazo Hill
2004
2005
2006
2007
2008
5,000
0
d
f
c
s
M
M
180
160
140
120
100
80
60
40
20
0
The supply of Additional Gas to the power sector is currently
governed by two interim power agreements. It is forecast that
these will be superseded by two long term contracts with Songas
and TANESCO that were initialled in June 2008; the Amended and
Restated Gas Agreement (“ARGA”) and the Portfolio Gas Supply
2005
Agreement (“PGSA”).
2008
2004
2006
2007
Target average gas sales per day
CNG
CNG for vehicles
Industrials
New power (Kinyerezi)
Existing power (PGSA and ARGA)
Wazo Hill cement plant
Protected Gas
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
2022
2023
2024
2025
2026
Power Plant
Ubungo power plant (Unit 6)
Wärtsilä at Ubungo
Tegeta
Installed
capacity
mWs
41
102
143
45
188
Under the ARGA, 19.5 % of the gas supplied to the six turbines
at Ubungo is considered to be Additional Gas. Whilst there is
no explicit take or pay in the agreement the utilization at the
Ubungo power plant is expected to be high given the low cost
of the Protected Gas (Gas (US$0.55/Mmbtu LHV escalating with
US CPI) that makes up the remaining 80.5% of the supply to the
plant. The maximum volume of Protected and Additional Gas
delivered to the Ubungo power plant is capped at approximately
47.4 MMscfd. At an 84% utilization rate, it is expected that 7.7
MMscfd will be supplied to the Ubungo power plant as Additional
Gas until the termination of the agreement on 31 July 2024.
The PGSA covers the supply of Additional Gas to a portfolio of
gas generation facilities (namely; Wärtsilä 102 MWs and Tegeta 45
MWs). Further delivery points may be added in the future subject
to the consent of the Company and TPDC, and provided that
TANESCO pay all the tie-in costs.
Under the terms of the initialled PGSA, it is forecast that in
the periods prior to the installation of the third and fourth gas
processing trains, the Company will supply TANESCO’s existing gas
fired generation as nominated subject to there being available
gas processing capacity. From November 2010, the maximum
daily quantity (“MDQ”) that the Company has to supply under the
initialled PGSA is approximately 37 MMscfd.
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Photo below: Gas from the Songo Songo will soon be available as compressed natural gas (CNG).
To service this new market, Orca is constructing compression and refuelling stations at Dar es Salaam.
OPERATIONS REVIEW
Orca Exploration Group Inc.
Growth in electricity
demand and the potential
for further gas fired
generation
As at 31 December 2008 there
was approximately 1,127 MWs
of available power genera-
tion in Tanzania though only
925 MWs was operational due to contractual disputes with Dowans
and IPTL. In the last few years there has been a rebalancing of
power generation mix in Tanzania resulting in hydro generation ac-
counting for less than 50% of the available generation. The only
major water storage is at the Mtera reservoir which supplies the
80 MW Mtera and 200 MW Kidatu hydro plants. The remaining 261
MWs of hydro generation is “run of river” which is only operational
on average for 4-5 months in the year. Accordingly, the level of the
Mtera reservoir is integral to the generation of 280 MWs of electric-
ity. Since 2006 there have been good rainfalls in the rainy seasons
which occur between April and May and November and De-
cember each year and the Mtera reservoir is still relatively
full.
It is estimated that under the base case assumptions of
the TANESCO’s power sector master plan (“PSMP”) that
peak demand (before adding in any capacity margin to
provide a more normal level of security of supply) will
be 1,700 MWs in 2016 (growth of 7.8% per annum from
2006) and 4,800 MWs in 2031 (growth of 7.2% from 2016).
Total current aggregate available capacity (with all hydro
facilities producing) is expected to between 925 MWs by
the end of 2009 though this could increase to a maximum
of 1,172 MWs if contractual issues are resolved with IPTL
and Dowans. Of this amount, 150 MWs is operating on
expensive heavy fuel oil (“HFO”) (100MWs) or industrial
diesel oil (“IDO”) (50MWs).
s
t
t
a
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a
g
e
M
4,000
3,500
3,000
2,500
2,000
1,500
1,000
500
0
Based on this forecast availability at the end of 2009,
there has to be an increase of between 528 MWs and 775
MWs in the period 2010-2016 to meet forecast demand increased
in Tanzania or in excess of 100 MWs per annum. It is therefore
reasonable to assume that an additional 20 MMscfd of peak
demand will be required for each year between 2010 and 2016 to
meet power sector demand in Tanzania in addition to the existing
available generation.
1200
Whilst the rate of growth slows
marginally after 2016, there is
still a requirement for in excess
of 100 MWs per annum of new generation (adding 20 MMscfd of
peak potential gas demand).
If it is assumed that TANESCO would want to maximize the use of
gas in its generation mix, dispatching gas generation after the
hydro and Protected Gas and would like to displace the existing
HFO or IDO generation, then this is the forecast gas require-
ments over the period to 2026 in excess of the gas requirements
outlined in the PGSA and the ARGA assuming a 70% utilization
rate for the gas fired generation.
Forecast increase in power demand
(per Tanzania Power Sector Master Plan)
Peak MWs
Potential new additional gas required from 2010
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
2022
2023
2024
2025
2026
Tanzania Generation Supply and Demand
Additional Gas volumes
Industrial Sales
Power Sales
500
450
400
350
300
250
200
150
100
50
0
d
f
c
s
M
M
f
c
s
M
M
10,000
9,000
8,000
7,000
6,000
5,000
4,000
3,000
2,000
1,000
0
Demand
HFO generation in dispute
Uncontracted natural gas generation
Less firm hydro generation
IDO Generation
Available HFO Generation
Available Natural Gas Generation
Dam Hydro Generation
2004
2005
2006
2007
2008
Jan
Feb
Mar
Apr
May
June
July
Aug
Sep
Oct
Nov
Dec
Average daily production
2008
2007
Production volumes
25,000
Protected Gas sales
Additional Gas sales
20,000
Flare, generator at the
processing plant and line pack
d
f
c
s
M
M
75
70
65
60
55
50
45
40
35
30
25
f
c
s
M
M
15,000
10,000
5,000
0
d
f
c
s
M
M
180
160
140
120
100
80
60
40
20
0
2004
2005
2006
2007
2008
Target average gas sales per day
CNG
CNG for vehicles
Industrials
New power (Kinyerezi)
Existing power (PGSA and ARGA)
Wazo Hill cement plant
Protected Gas
Supply
Demand
Protected gas volumes by year
14,000
Ubungo Power Plant
Wazo Hill
2004
2005
2006
2007
2008
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
2022
2023
2024
2025
2026
1000
800
600
400
200
0
f
c
s
M
M
12,000
10,000
8,000
6,000
4,000
2,000
0
The Company has extended the term of six contracts accounting
for the majority of the industrial gas sales volumes for an
additional five years from the dates that existing contracts were
due to expire (the earliest termination date is now September
2014). In return the Company has agreed to cap the price of gas
to these customers whilst also incorporating a floor price. This is
expected to keep the price of gas in the range of US$7.38/mcf to
US$11.49/mcf (increasing at 2% per annum).
Demand for cement in Tanzania has increased significantly and
this is forecast to lead to an increase in the gas consumption
at the Wazo Hill cement plant in Dar es Salaam. In Q3 2008, a
contract was signed with Tanzania Portland Cement Company
(“TPDCC”) for the supply of gas to a new kiln (“Kiln 4”) at its Wazo
Hill cement plant that was commissioned in February 2009, ahead
of schedule. Kiln 4 consumes more gas than the existing two kilns
(“Kilns 2 and 3”) that utilize Protected Gas. It is envisaged that
the supply of Additional Gas will rise during Q2 2009 to a rate of
approximately 2.0 MMscfd. TPCC is considering accelerating their
growth and continuing to partly run kilns 2 and 3 from 2010. If all
kilns were operational TPCC would require up to 7.5 MMscfd of
Additional Gas.
It
is forecast that whilst
there are sufficient gas
reserves in the country, gas
fired generation will be the
for new
preferred choice
capacity.
the
current gas is priced at a
level that makes gas fired
In addition,
generation competitive with the all-in-cost of coal generation.
TANESCO has indicated that they intend to construct a 200-250
MW generation plant at Kinyerezi, Dar es Salaam by 2011/2012.
The Company has commenced discussions to assess how gas
may be made available for these units, recognizing the need
for additional drilling and infrastructure to be able to deliver
the volumes contemplated for these units. The sales projections
assume that a contract will be negotiated with TANESCO for the
supply of gas to 200 MWs at Kinyerezi in incremental amounts
starting 2012.
Prospective industrial sales
Sales to the industrial sector averaged approximately 4.0 MMscfd
in 2008 peaking at 5.0 MMscfd in July. The Company continues
to sign and connect other smaller industrial customers to the
existing 42 kilometers of low pressure pipeline. A total of three
new industrial contracts were signed in 2008 and gas is currently
being supplied to 20 customers. Subsequent to December 31, 2008 a
further five industrial customers have signed contracts and are in
the process of installing equipment to consume natural gas.
It is anticipated that the level of industrial sales will increase to
in excess of 6.0 MMscfd in 2009 (excluding the Additional Gas
sales to Wazo Hill) through the construction of an 8 kilometer
extension of the distribution system to the Mikocheni area and
the hook up of new customers in Dar es Salaam. It is then forecast
that 1.0 MMscfd will be added each year through expansion of the
industrials existing facilities and the connection of new industrial
customers that have relocated to Dar es Salaam.
23
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OPERATIONS REVIEW
Orca Exploration Group Inc.
The CNG market development is advancing as planned. New facilities including a compressor
and two trailer-filling facilities were under construction in Dar es Salaam at the end of 2008.
The diesel and gasoline market in Tanzania is extremely significant
and has a combined maximum demand in excess of 100 MMscfd,
with over 50% of the vehicle in Tanzania being located within
the general vicinity of Dar es Salaam. Whilst it would not be
possible to capture all this market, it is assumed that by 2014
this market could grow to 5 MMscfd. This compares with typical
penetration rates in other countries of approximately 25%. It is
envisaged that CNG will retail at a 40%-60% discount to gasoline
to encourage vehicles owners to convert their vehicles.
The Company is currently installing a compressor and a vehicle
dispenser adjacent to its Pressure Reduction Station at a busy
intersection at the Ubungo power plant. This is expected to be
followed by the construction of a station in Morogoro to facilitate
transport between these two industrial centres and the instal-
lation of compressors at the existing customers that have a
fleet of trucks e.g. Pepsi. It is anticipated that once the market
is established in the medium term, the local petrol retailers will
retail the CNG. Accordingly there will be no need for significant
capital after this time, but the price realized for the CNG will be
reduced.
CORPORATE SOCIAL RESPONSIBILITY
The Board of Directors regularly reviews the aims of the
corporate social responsibility strategy and how this translates
into practical and beneficial community relations support in
Tanzania. A budget is established with agreed ongoing assistance
covering education, health and the provision of water and power
on Songo Songo Island. Particular emphasis is given to providing
educational materials and equipment for the existing school, with
support being given to the setting up of a new secondary school.
The overall aim is to improve the quality of life for all the local
inhabitants and maintain good community relations.
Compressed Natural Gas (CNG)
CNG is widely used around the world, including India and China.
There is a strong push by the Government of Tanzania to utilize
CNG and the Company plans to expand CNG activities in 2009. In
Q3 2008, the Company committed US$2.5 million to purchase one
compressor, a vehicle dispenser and two trailer filling facilities to
deliver 0.7 MMscfd of CNG. The facilities are currently in the process
of being delivered to site and installed. It is anticipated that the
Company will start the sale of CNG in Tanzania in Q2 2009.
During 2009, it is anticipated that these facilities will be expanded
so that CNG can be transported to other non pipeline markets in
Dar es Salaam.
CNG vehicles are available in a variety of developed and
developing countries around the globe including Argentina, Italy,
Pakistan, Brazil, USA and India. There are over 8.5 million natural
gas vehicles in the world with Argentina, Pakistan and Brazil
having over 1.5 million each.
MANAGEMENT’S
DISCUSSION & ANALYSIS
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MANAGEMENT’S DISCUSSION & ANALYSIS
Orca Exploration Group Inc.
Management’s Discussion & Analysis
FORWARD LOOKING STATEMENTS
THIS MDA OF FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS
SHOULD BE READ IN CONJUNCTION WITH THE AUDITED FINANCIAL
STATEMENTS AND NOTES THERETO FOR YEAR ENDED 31 DECEMBER
2008. THIS MDA IS BASED ON THE INFORMATION AVAILABLE ON 28
April 2009.
CERTAIN STATEMENTS IN THIS MD&A INCLUDING (I) STATEMENTS
THAT MAY CONTAIN WORDS SUCH AS “ANTICIPATE”, “COULD”,
“EXPECT”, “SEEK”, “MAY” “INTEND”, “WILL”, “BELIEVE”, “SHOULD”,
“PROJECT”, “FORECAST”, “PLAN” AND SIMILAR EXPRESSIONS,
INCLUDING THE NEGATIVES THEREOF, (II) STATEMENTS THAT ARE
BASED ON CURRENT EXPECTATIONS AND ESTIMATES ABOUT THE
MARKETS IN WHICH ORCA OPERATES AND (III) STATEMENTS OF
BELIEF, INTENTIONS AND EXPECTATIONS ABOUT DEVELOPMENTS,
RESULTS AND EVENTS THAT WILL OR MAY OCCUR IN THE FUTURE,
CONSTITUTE “FORWARD-LOOKING STATEMENTS” AND ARE BASED
ON CERTAIN ASSUMPTIONS AND ANALYSIS MADE BY ORCA. FOR-
WARD-LOOKING STATEMENTS IN THIS MD&A INCLUDE, BUT ARE
NOT LIMITED TO, STATEMENTS WITH RESPECT TO FUTURE CAPITAL
EXPENDITURES, INCLUDING THE AMOUNT, NATURE AND TIMING
THEREOF; NATURAL GAS PRICES AND DEMAND.
SUCH FORWARD-LOOKING STATEMENTS ARE SUBJECT TO IMPORTANT
RISKS AND UNCERTAINTIES, WHICH ARE DIFFICULT TO PREDICT
AND THAT MAY AFFECT ORCA’S OPERATIONS, INCLUDING, BUT NOT
LIMITED TO: THE IMPACT OF GENERAL ECONOMIC CONDITIONS IN
TANZANIA AND CANADA; INDUSTRY CONDITIONS, INCLUDING THE
ADOPTION OF NEW ENVIRONMENTAL, SAFETY AND OTHER LAWS AND
REGULATIONS AND CHANGES IN HOW THEY ARE INTERPRETED AND
ENFORCED; VOLATILITY OF NATURAL GAS PRICES; NATURAL GAS
PRODUCT SUPPLY AND DEMAND; RISKS INHERENT IN ORCA’S ABILITY
TO GENERATE SUFFICIENT CASH FLOW FROM OPERATIONS TO MEET
ITS CURRENT AND FUTURE OBLIGATIONS; INCREASED COMPETITION;
THE FLUCTUATION IN FOREIGN EXCHANGE OR INTEREST RATES;
STOCK MARKET VOLATILITY; AND OTHER FACTORS, MANY OF WHICH
ARE BEYOND THE CONTROL OF THE ORCA.
ORCA’S ACTUAL RESULTS, PERFORMANCE OR ACHIEVEMENTS COULD
DIFFER MATERIALLY FROM THOSE EXPRESSED IN, OR IMPLIED BY,
THESE FORWARD-LOOKING STATEMENTS AND, ACCORDINGLY, NO
ASSURANCE CAN BE GIVEN THAT ANY OF THE EVENTS ANTICIPATED
BY THE FORWARD-LOOKING STATEMENTS WILL TRANSPIRE OR
OCCUR, OR IF ANY OF THEM DO TRANSPIRE OR OCCUR, WHAT
BENEFITS ORCA WILL DERIVE THEREFROM. SUBJECT TO APPLICABLE
LAW, ORCA DISCLAIMS ANY INTENTION OR OBLIGATION TO UPDATE
OR REVISE ANY FORWARD-LOOKING STATEMENTS, WHETHER AS A
RESULT OF NEW INFORMATION, FUTURE EVENTS OR OTHERWISE. ALL
FORWARD-LOOKING STATEMENTS CONTAINED IN THIS DOCUMENT
ARE EXPRESSLY QUALIFIED BY THIS CAUTIONARY STATEMENT.
NON-GAAP MEASURES
TTHE COMPANY EVALUATES ITS PERFORMANCE BASED ON PROFIT
AND FUNDS FLOW FROM OPERATING ACTIVITIES. FUNDS FLOW FROM
OPERATING ACTIVITIES IS A NON-GAAP (GENERALLY ACCEPTED
ACCOUNTING PRINCIPLES) TERM THAT REPRESENTS CASH FLOW
FROM OPERATIONS BEFORE WORKING CAPITAL ADJUSTMENTS. IT
IS A KEY MEASURE AS IT DEMONSTRATES THE COMPANY’S ABILITY
TO GENERATE CASH NECESSARY TO ACHIEVE GROWTH THROUGH
CAPITAL INVESTMENTS. ORCA EXPLORATION ALSO ASSESSES ITS
PERFORMANCE UTILIZING OPERATING NETBACKS. OPERATING
NETBACKS REPRESENT THE PROFIT MARGIN ASSOCIATED WITH THE
PRODUCTION AND SALE OF ADDITIONAL GAS AND IS CALCULATED
AS REVENUES LESS RINGMAIN TARIFF, GOVERNMENT PARASTATAL’S
REVENUE SHARE, OPERATING AND DISTRIBUTION COSTS FOR ONE
THOUSAND STANDARD CUBIC FEET OF ADDITIONAL GAS. THIS IS
A KEY MEASURE AS IT DEMONSTRATES THE PROFIT GENERATED
FROM EACH UNIT OF PRODUCTION, AND IS WIDELY USED BY THE
INVESTMENT COMMUNITY. THESE NON-GAAP MEASURES ARE NOT
STANDARDISED AND THEREFORE MAY NOT BE COMPARABLE TO
SIMILAR MEASUREMENTS OF OTHER ENTITIES.
ADDITIONAL INFORMATION REGARDING ORCA EXPLORATION GROUP
INC IS AVAILABLE UNDER THE COMPANY’S PROFILE ON SEDAR AT
www.sedar.com.
BACKGROUND
Orca Exploration’s principal operating asset is its interest in
a Production Sharing Agreement (“PSA”) with the Tanzania
Petroleum Development Corporation (“TPDC”) in Tanzania. This
PSA covers the production and marketing of certain gas from the
Songo Songo gas field.
The gas in the Songo Songo field is divided between Protected
Gas and Additional Gas. The Protected Gas is owned by TPDC
and is sold under a 20-year gas agreement to Songas Limited
(“Songas”). Songas is the owner of the infrastructure that enables
the gas to be delivered to Dar es Salaam, namely a gas processing
plant on Songo Songo Island, 232 kilometers of pipeline to Dar es
Salaam and a 16 kilometer spur to the Wazo Hill Cement Plant.
Songas utilizes the Protected Gas (maximum 45.1 MMscfd) as
feedstock for its gas turbine electricity generators at Ubungo,
for onward sale to the Wazo Hill cement plant and for electrifica-
tion of some villages along the pipeline route. Orca Exploration
receives no revenue for the Protected Gas delivered to Songas
and operates the field and gas processing plant on a ‘no gain no
loss’ basis.
Orca Exploration has the right to produce and market all gas in
the Songo Songo field in excess of the Protected Gas require-
ments (“Additional Gas”).
Principal terms of the PSA
and related agreements
The principal terms of the Songo Songo PSA and related
agreements are as follows:
Obligations and restrictions
(a) The Company has the right to conduct petroleum operations,
market and sell all Additional Gas produced and share the
net revenue with TPDC for a term of 25 years expiring in
October 2026.
(b) The PSA covers the two licenses in which the Songo Songo
field is located (“Discovery Blocks”).
The Proven Section is essentially the area covered by the
Songo Songo field within the Discovery Blocks.
(c) No sales of Additional Gas may be made from the Discovery
Blocks if in Orca Exploration’s reasonable judgment such
sales would jeopardise the supply of Protected Gas. Any
Additional Gas contracts entered into are subject to interrup-
tion. Songas has the right to request that the Company and
TPDC obtain security reasonably acceptable to Songas prior
to making any sales of Additional Gas from the Discovery
Block to secure the Company’s and TPDC’s obligations in
respect of Insufficiency (see (e) below).
In June 2008, the Company initialled two long term power
contracts with TANESCO, the owner of the Ubungo power
plant, Songas Limited and the Ministry of Energy and
Minerals for the supply of approximately 30 - 45 MMscfd
for power generation. The first of the contracts [Amended
and Restated Gas Agreement (“ARGA”)] covers the supply
of gas to the sixth turbine at the Ubungo power plant and
provides for a maximum of approximately 9 MMscfd until
July 2024. The second initialled contract [Portfolio Gas Sales
Agreement (“PGSA”)] covers the supply of Additional Gas
sales to a portfolio of gas fired generation in Tanzania.
The ARGA provides clarification of the Protected Gas
volumes and removes all terms dealing with the security of
the Protected Gas and the consequences of any insufficien-
cy to a new Insufficiency Agreement (“IA”). The IA specifies
terms under which Songas may demand cash security in
order to keep them whole in the event of a Protected Gas in-
sufficiency. Once the IA is signed, it will govern the basis for
determining security. Under the provisional terms of the IA,
when it is calculated that funding is required, the Company
shall fund an escrow account at a rate of US$2/Mmbtu on
all industrial Additional Gas sales out of its and TPDC share
of revenue and TANESCO shall contribute the same amount
on Additional Gas sales to the power sector. The funds
provide security for Songas in the event of an insufficiency
of Protected Gas. The Company is actively monitoring the
reservoir and does not anticipate that a liability will occur in
this respect.
(d) By 31 July 2009, the Government of Tanzania (“GoT”) can
request Orca Exploration to sell 100 Bcf of Additional Gas
for the generation of electricity over a period of 20 years
from the start of its commercial use, subject to a maximum
of 6 Bcf per annum or 20 MMscfd (“Reserved Gas”). In the
event that the GoT does not nominate by 31 July 2009, or
consumption of the Reserved Gas has not commenced
within three years of the nomination date, then the
reservation shall terminate. Where Reserved Gas is utilized,
TPDC and the Company will receive a price that is no greater
than 75% of the market price of the lowest cost alternative
fuel delivered at the facility to receive Reserved Gas or the
price of the lowest cost alternative fuel at Ubungo. Under
the terms of the initialled ARGA, sales under the ARGA and
PGSA are considered Reserved Gas.
(e) “Insufficiency” occurs if there is insufficient gas from the
Discovery Blocks to supply the Protected Gas requirements
or is so expensive to develop that its cost exceeds the
market price of alternative fuels at Ubungo.
27
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MANAGEMENT’S DISCUSSION & ANALYSIS
Orca Exploration Group Inc.
Where there have been third party sales of Additional Gas by
Orca Exploration and TPDC from the Discovery Blocks prior
to the occurrence of the Insufficiency, Orca Exploration
and TPDC shall be jointly liable for the Insufficiency
and shall satisfy its related liability by either replacing
the Indemnified Volume (as defined in (f) below) at the
Protected Gas price with natural gas from other sources; or
by paying money damages equal to the difference between:
(a) the market price for a quantity of alternative fuel that is
appropriate for the five gas turbine electricity generators
at Ubungo without significant modification together with
the costs of any modification; and (b) the sum of the price
for such volume of Protected Gas (at US$0.55/Mmbtu) and
the amount of transportation revenues previously credited
by Songas to the electricity utility, TANESCO, for the gas
volumes.
(f) The “Indemnified Volume” means the lesser of the total
volume of Additional Gas sales supplied from the Discovery
Blocks prior to an Insufficiency and the Insufficiency
Volume. “Insufficiency Volume” means the volume of natural
gas determined by multiplying the average of the annual
Protected Gas volumes for the three years prior to the Insuf-
ficiency by 110% and multiplied by the number of remaining
years (initial term of 20 years) of the power purchase
agreement entered into between Songas and TANESCO in
relation to the five gas turbine electricity generators at
Ubungo from the date of the Insufficiency.
An Insufficiency Agreement has been negotiated with TPDC,
Songas and TANESCO that reduces these potential liabilities.
The Insufficiency Agreement is expected to be signed at the
same time as the long term power contracts.
access and development of infrastructure
(g) The Company is able to utilize the Songas infrastructure
including the gas processing plant and main pipeline to Dar
es Salaam. Access to the pipeline and gas processing plant
is open and can be utilized by any third party who wishes to
process or transport gas.
Songas is not required to incur capital costs with respect
to additional processing and transportation facilities unless
the construction and operation of the facilities are, in the
reasonable opinion of Songas, financially viable. If Songas
is unable to finance such facilities, Songas shall permit the
seller of the gas to construct the facilities at its expense,
provided that, the facilities are designed, engineered and
constructed in accordance with good pipeline and oilfield
practices.
revenue sharing terms and taxation
(h) 75% of the gross revenues less processing and pipeline
tariffs and direct sales taxes in any year (“Net Revenues”)
can be used to recover past costs incurred. Costs recovered
out of Net Revenues are termed “Cost Gas”.
The Company pays and recovers all costs of exploring,
developing and operating the Additional Gas with two
exceptions: (i) TPDC may recover reasonable market and
market research costs as defined under the PSA; and (ii)
TPDC has the right to elect to participate in the drilling of
at least one well for Additional Gas in the Discovery Blocks
for which there is a development program as detailed in the
Additional Gas plans as submitted to the Ministry of Energy
and Minerals (“Additional Gas Plan”) subject to TPDC being
able to elect to participate in a development program only
once and TPDC having to pay a proportion of the costs of
such development program by committing to pay between
5% and 20% of the total costs (“Specified Proportion”). If
TPDC does not notify the Company within 90 days of notice
from the Company that the Ministry of Energy and Minerals
(“MEM”) has approved the Additional Gas Plan, then TPDC is
deemed not to have elected. If TPDC elects to participate,
then it will be entitled to a rateable proportion of the Cost
Gas and their profit share percentage increases by the
Specified Proportion for that development program.
TPDC has indicated that they wish to exercise their right
to ‘back in’ to the field development by contributing 20%
of the cost of SS-10 and the cost of future wells in return
for a 20% increase in the profit share percentage for the
production emanating from these wells. The implications
and workings of the ‘back in’ are still to be discussed in
detail with TPDC and there may be the need for reserve
modifications once these discussions are concluded. For
the purpose of the reserves certification as at 31 December
2008, it has been assumed that they will ‘back in’ for 20%
and this is reflected in the Company’s net reserve position.
However, the financial statements have not taken account of
any reimbursement for the SS-10 capital expenditure incurred,
pending the finalisation of the terms of the ‘back in’.
(i) The price payable to Songas for the general processing
and transportation of the gas is 17.5% of the price of gas
delivered to a third party less any direct taxes payable by
the customer that are included in the gas price less any
tariffs paid for non-Songas owned distribution facilities
(“Songas Outlet Price”).
In September 2001, the GoT, made a formal request to the World
Bank for funds to increase the diameter of the onshore pipeline
from 12 inches to 16 inches at a projected incremental cost of
US$3.5 million. The World Bank agreed to finance this increase
and accordingly the pipeline capacity was increased from circa
65 MMscfd to 105 MMscfd. The tariff that is payable to GoT for
this incremental capacity has yet to be formally agreed, but the
Company expects it to be 17.5% of the Songas Outlet Price.
In October 2008, Songas submitted a third tariff application
to the regulator, EWURA, to cover the financing and operating
costs of the third and fourth train which is forecast to increase
the gas processing capacity to 140 MMscfd. On 27 February
2009, EWURA issued an order that sees the introduction of flat
rate tariffs from 1 January 2010. The tariff level will be set at
a rate that enables Songas to make a rate of return on their
investment as determined by EWURA. Songas may challenge
this order and there is no certainty that they will finance the
third and fourth train. The Company is negotiating the long
term gas price to the power sector based on the price of gas at
the Wellhead. As a consequence, the Company is not impacted
by the changes to the tariff paid to Songas in respect of sales to
the power sector.
(j) The cost of maintaining the wells and flowlines is split between
the Protected Gas and Additional Gas users in proportion to the
volume of their respective sales. The cost of operating the gas
processing plant and the pipeline to Dar es Salaam is covered
through the payment of the pipeline tariff.
(k) Profits on sales from the Proven Section (“Profit Gas”) are
shared between TPDC and the Company, the proportion
of which is dependent on the average daily volumes of
Additional Gas sold or cumulative production.
The Company receives a higher share of the net revenues
after cost recovery, the higher the cumulative production or
the average daily sales, whichever is higher. The profit share
is a minimum of 25% and a maximum of 55%.
average
daily sales
of additional
Gas
cumulative
sales of
additional
Gas
TPdc’s
share of
Profit Gas
company’s
share of
Profit Gas
MMscfd
0 - 20
Bcf
0 – 125
> 20 <= 30
> 125 <= 250
> 30 <= 40
> 250 <= 375
> 40 <= 50
> 375 <= 500
> 50
> 500
%
75
70
65
60
45
%
25
30
35
40
55
For Additional Gas produced outside of the Proven Section,
the Company’s profit share increases to 55%.
Where TPDC elects to participate in a development program,
their profit share percentage increases by the Specified
Proportion (for that development program) with a corre-
sponding decrease in the Company’s percentage share of
Profit Gas.
The Company is liable to income tax. Where income tax is
payable, there is a corresponding deduction in the amount
of the Profit Gas payable to TPDC.
(l) Additional Profits Tax is payable where the Company has
recovered its costs plus a specified return out of Cost
Gas revenues and Profit Gas revenues. As a result: (i) no
Additional Profits Tax is payable until the Company recovers
all its costs out of Additional Gas revenues plus an annual
return of 25% plus the percentage change in the United
States Industrial Goods Producer Price Index (“PPI”); and
(ii) the maximum Additional Profits Tax rate is 55% of the
Company’s Profit Gas when costs have been recovered
with an annual return of 35% plus PPI return. The PSA is,
therefore, structured to encourage the Company to develop
the market and the gas fields in the knowledge that the
profit share can increase with larger daily gas sales and
that the costs will be recovered with a 25% plus PPI annual
return before Additional Profits Tax becomes payable.
Additional Profits Tax can have a significant negative impact
on the project economics if only limited capital expenditure
is incurred.
Operatorship
(m) The Company is appointed to develop, produce and process
Protected Gas and operate and maintain the gas production
facilities and processing plant, including the staffing,
procurement, capital improvements, contract maintenance,
maintain books and records, prepare reports, maintain
permits, handle waste, liaise with GoT and take all necessary
safe, health and environmental precautions all in accordance
with good oilfield practices. In return, the Company is paid or
reimbursed by Songas so that the Company neither benefits
nor suffers a loss as a result of its performance.
(n) In the event of loss arising from Songas’ failure to
perform and the loss is not fully compensated by Songas,
Orca Exploration, CDC or insurance coverage, then Orca
Exploration is liable to a performance and operation
guarantee of US$2.5 million when (i) the loss is caused by
the gross negligence or willful misconduct of the Company,
its subsidiaries or employees, and (ii) Songas has insuffi-
cient funds to cure the loss and operate the project.
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MANAGEMENT’S DISCUSSION & ANALYSIS
Orca Exploration Group Inc.
CONSOLIDATION
Industrial sector
The companies that are being consolidated are:
company
Incorporated
Orca Exploration Group Inc.
British Virgin Islands
PAE PanAfrican Energy Corporation
Mauritius
PanAfrican Energy Tanzania Limited
Jersey
Orca Exploration Uganda Inc
British Virgin Islands
Orca Exploration Uganda (Holdings) Inc
British Virgin Islands
Orca Exploration (Ventures) Inc
British Virgin Islands
Results for the year ended
31 December 2008
OPERATING VOLUMES
The sales volumes for the year were 8,660 MMscf or 23.7 MMscfd.
This represents an overall increase of 12% over the previous year.
The Company’s sales volumes were split between the industrial
and power sectors as follows:
During the year a total of three new customers signed contracts
for the supply of Additional Gas and were connected to the low
pressure gas distribution system. Sales to these customers
accounted for 5% of the total industrial operating volumes in the
year. The overall level of industrial operating volumes declined
by 2% compared to 2007, primarily as a consequence of a fall
in the operating volumes sold to the textile customers. The fall
in demand from the textile customers can be attributed to the
increased level of competition within the world textile markets.
By the end of 2008, the Company had 20 industrial customers.
Industrial sales for the year averaged 4.0 MMscfd (2007: 4.1
MMscfd). The level of industrial sales peaked in July 2008 with
sales of 5.0 MMscfd.
Power sector
Sales to the power sector averaged 19.7 MMscfd (2007: 17.1 MMscfd)
during 2008. The Additional Gas was consumed by the Ubungo
power plant, the newly installed Wärtsilä 102 MWs power plant
and the emergency power generation units operated by Aggreko
Plc (“Aggreko”) and Dowans Tanzania Limited (“Dowans”) which
were installed in 2007. The allocation of the gas volumes between
the different power generation units is as follows:
2008
2007
( MMscf )
2008
2007
Gross sales volume (MMscf):
Industrial sector
Power sector
Total volumes
Gross daily sales volume ( MMscfd):
Industrial sector
Power sector
Total daily sales volume
1,475
7,185
8,660
4.0
19.7
23.7
1,504
6,227
7,731
4.1
17.1
21.2
Permanent generation
Ubungo power plant
Wärtsilä
Total volumes
emergency generation
Aggreko
Dowans A and B
Total volumes
Total power sector volumes
2,339
2,125
4,464
1,908
813
2,721
7,185
2,350
–
2,350
2,735
1,142
3,877
6,227
The Ubungo power plant gas consumption during 2008 remained
at a similar level to 2007. The 102 MWs Wärtsilä power plant was
installed and commissioned in February 2008, but did not become
fully operational until August 2008, from which point the average
daily consumption was 13.6 MMscfd.
The emergency power units operated by Aggreko consumed a total
of 1,908 MMscf during the year, a fall of 30% over 2007. The unit
had consumed on average 9.8 MMscfd up to the Wärtsilä power
generation unit becoming fully operational, with an average of
2.4 MMscfd thereafter. TANESCO’s power purchase agreement for
the Aggreko units was terminated in December 2008.
In July 2008 TANESCO terminated its power purchase agreement
with Dowans in respect of the 120 MWs of emergency power
generation, following a contractual dispute. The units still remain
in country, but their future is uncertain.
COMMODITY PRICES
US$/mcf
Average sales price:
Industrial sector
Power sector
Weighted average price
Industrial sector
2008
2007
11.98
2.37
4.01
9.31
2.19
3.58
The price of gas for the industrial sector continued to be set at a
discount to the price of Heavy Fuel Oil (“HFO”) in Dar es Salaam.
During 2008, the Company renegotiated the sales contracts
with six of the largest industrial customers, who between them
accounted for the majority of the 2008 industrial sales volumes.
Under the new five year contracts the pricing mechanism
included both caps and floors, which had the effect of limiting
the downside to approximately US$ 7.38/mcf, whilst imposing a
pricing cap of US$ 12.60/mcf increasing at a rate of 2% per annum.
The average gas prices for the year was US$11.98/mcf (2007:US$9.31/
mcf). The higher gas price achieved for the industrial sector is
a consequence of the high world oil prices experienced in the
first three quarters of the year. The highest average Additional
Gas price to industrial customers in Dar es Salaam during the
year was US$13.53/mcf in July and the lowest average price of
US$7.97/mcf was recorded in December 2008.
Power sector
The average sales price to the power sector was US$2.37/mcf for
the year (2007: US$2.19).
The increase in the sales price is primarily due to the new sales
contracts with the power sector. The previous Interim Agreement
for the sale of Additional Gas to the Ubungo power plant provided
for different gas prices, depending on the average availability of
the six turbines, from a minimum of US$0.62/mcf to the maximum
of US$2.14/mcf. Under the new sales contract the price of gas no
longer fluctuates with the availability of turbines, and is based on
a fixed price which is subject to an annual inflationary increase.
As a result an average Additional Gas price of US$2.22/mcf was
recorded in the year for the Ubungo power plant and a price of
US$2.34/mcf for the 102 MWs power generation unit operated by
Wärtsilä.
The price of Additional Gas to the Aggreko emergency power
plant increased in January 2008 by the consumer price index to
US$2.29/mcf from US$2.22/mcf in accordance with the contract.
The price of Additional Gas to the Dowans emergency power
plants averaged US$2.92/mcf for 2008.
During the second quarter of 2008, the Company initialled the
long term contracts for the supply of a forecast 200 - 250 Bcf of
Additional Gas to the power sector. The wellhead price is fixed
at approximately US$1.95/mcf and will increase at an expected
2% per annum until July 2012 at which point there will be a step
change to US$2.83/mcf and then increase at 2% per annum. These
prices are net of the gas processing, transportation, marketing
and distribution costs that are subject to annual approval by the
energy regulator, EWURA. Based on existing tariff rates approved
by EWURA, the initial all-in Additional Gas price to the power
sector is expected to be approximately US$2.36/mcf. The final
price will be determined once final charges are known.
OPERATING REVENUE
Under the terms of the PSA with TPDC, Orca Exploration is
responsible for invoicing, collecting and allocating the revenue
from Additional Gas sales.
Orca Exploration is able to recover all costs incurred on the
exploration, development and operations of the project out of
75% of the Net Revenues (“Cost Gas”). Any costs not recovered
in any period are carried forward to be recovered out of future
revenues.
During 2008, Additional Gas sales volumes were in excess of 20
MMscfd for all quarters with the exception of the second quarter.
Consequently, the revenue less cost recovery share of revenue
(“Profit Gas”) increased to 30% from 25% for all quarters except
Q2 where it remained at 25%.
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MANAGEMENT’S DISCUSSION & ANALYSIS
Orca Exploration Group Inc.
Orca Exploration had recoverable costs throughout 2007 and
2008 and accordingly was allocated 82.3% (2007: 81.25%) of the
Net Revenues as follows:
(Figures in US$’000)
Gross sales revenue
Gross tariff for processing plant and
pipeline infrastructure
Gross revenue after tariff
Analysed as to:
Company Cost Gas
Company Profit Gas
Company operating revenue
TPDC Profit Gas
2008
34,727
2007
27,674
(5,664)
(4,493)
29,063
23,181
17,937
5,979
23,916
5,147
29,063
17,393
1,630
19,023
4,158
23,181
The Company’s total revenues for the year amounted to
US$23,782,000 after adjusting the Company’s operating revenue
of US$23,916,000 by:
i)
US$249,000 for current income tax. The Company is liable for
income tax in Tanzania, but the income tax is recoverable out
of TPDC’s Profit Gas when the tax is payable. To account for this,
revenue is adjusted to reflect the current income tax charge
or loss.
ii) US$383,000 for the deferred effect of additional profits tax.
This tax is considered a royalty and is netted against revenue.
Revenue per the income statements may be reconciled to the
operating revenue as follows:
(Figures in US$’000)
Industrial sector
Power sector
Gross sales revenue
Processing and
transportation tariff
2008
17,673
17,054
34,727
2007
14,010
13,664
27,674
(5,664)
(4,493)
TPDC share of revenue
(5,147)
(4,158)
company operating revenue
23,916
19,023
Additional Profits Tax
Current income tax
adjustment
revenue
(383)
(324)
249
78
23,782
18,777
Processing and Transportation Tariff
Historical
Under the terms of the project agreements, the current tariff paid
for processing and transporting the Additional Gas is calculated
as 17.5% of the price of gas at the Songas main pipeline in Dar es
Salaam (“Songas Outlet Price”).
In calculating the Songas Outlet Price for the industrial customers,
an average amount of US$1.69/mcf (“Ringmain Tariff”) (2007:
US$1.36/mcf) has been deducted from the achieved industrial
sales price of US$11.98/mcf (2007: US$9.31/mcf) to reflect the gas
price that would be achievable at the Songas main pipeline. The
Ringmain Tariff represents the amount that would be required to
compensate a third party distributor of the gas for constructing
the connections from the Songas main pipeline to the industrial
customers. No deduction has been made for sales to the power
sector since the gas is not transported through the Company’s
own infrastructure.
To enable the Company to supply 30-45 MMscfd of Additional
Gas to the power sector under the initialled long term power
contracts, Songas is planning to install a third and fourth gas
processing train on Songo Songo Island conditional on a satis-
factory economic return as approved by the energy regulator,
EWURA. This will take the gas processing capacity to 140 MMscfd.
During August 2008, EWURA informed Songas that they would
need to re-submit their application on the grounds that the costs
of the engineering and procurement contract needed to be firm. In
October, Songas re-submitted their application and EWURA issued
their order on 26 February 2009. Songas is currently reviewing
the order and there is no certainty that they will finance the third
and fourth train.
The regulatory process is likely to lead to a new tariff regime
being introduced that will be subject to annual amendments.
A flat rate gas processing and transportation tariff may be
introduced from 1 January 2010 that will be set at a rate that
enables Songas to make a rate of return on their investment as
determined by EWURA. The Company will pass on any increase or
decrease in the EWURA approved charges to TANESCO/Songas in
respect of sales to the power sector. This protocol insulates Orca
Exploration from any increases in the gas processing and pipeline
infrastructure costs.
In the last quarter of the year, Orca Exploration as operator
installed larger Joule Thompson valves on the two existing
gas processing trains as a way of increasing throughput. This
has resulted in the Songo Songo gas processing plant being
re-rated by Lloyds Register to 90 MMscfd. The re-rating of the gas
processing plant was approved by Songas in Q1 2009.
PRODUCTION AND
DISTRIBUTION EXPENSES
The well maintenance costs are allocated between Protected and
Additional Gas based on the proportion of their respective sales
during the year. The total costs for the maintenance for the year
was US$541,000 (2007: US$989,000) of which US$243,000 (2007:
US$403,000) was allocated for the Additional Gas.
Other field operating costs include an apportionment of the
annual PSA license costs and some costs associated with the
evaluation of the reserves.
The direct cost of maintaining the ring main distribution pipeline
and pressure reduction station (security, insurance and personnel)
is approximately US$0.7 million per annum in its current form.
These costs are summarized in the table below:
(Figures in US$’000)
2008
2007
Share of well maintenance
Other field and operating costs
Ring main distribution pipeline
Production and
distribution expenses
243
566
668
403
306
484
1,477
1,193
OPERATING NETBACK
The operating netback per mcf before general and administrative
costs, overheads, income tax and additional profits tax may be
analysed as follows:
(Amounts in US$/mcf)
Gas price – industrial
Gas price – power
Weighted average price for gas
Tariff (after allowance for
the Ringmain Tariff)
TPDC Profit Gas
net selling price
Well maintenance
and other operating costs
Ring main distribution pipeline
Operating netback
11.98
2.37
4.01
(0.65)
(0.59)
2.77
(0.09)
(0.08)
2.60
9.31
2.19
3.58
(0.58)
(0.54)
2.46
(0.09)
(0.06)
2.31
Operating netbacks were higher in 2008 mainly due to the high-
er sales price achieved in both the industrial and power markets.
The sales mix remaining relatively unchanged with the power
sector accounting for 83% of the total sales volume for the year
compared to 81% in 2007.
There was a US$0.3 million increase in the production and dis-
tribution expenses during the year, which resulted in a marginal
increase in the rate to US$0.17/mcf from US$0.15/mcf in 2007.
The 11% increase in the US$/mcf rates for the Tariff and TPDC
share of profit gas from US$1.12/mcf to US$1.24/mcf is a direct
function of the higher sales price that was achieved in the year
compared to 2007.
The operating netback continues to benefit from the recovery of
75% of the Net Revenues as Cost Gas.
GENERAL AND
ADMINISTRATIVE EXPENSES
The general and administrative expenses (“G&A”) may be
analysed as follows:
(Figures in US$’000)
Employee costs
Consultants
Travel and accommodation
Communications
Office
Insurance
Depreciation
Reporting, regulatory
and corporate
2008
2,107
3,184
912
66
936
238
166
76
290
2007
2,059
2,037
656
85
598
176
152
154
310
7,975
6,227
Marketing costs and legal fees
4,663
2,134
New ventures
294
90
Stock based compensation
1,754
2,257
net general
and administrative expenses
14,686
10,708
2008
2007
Auditing and taxation
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MANAGEMENT’S DISCUSSION & ANALYSIS
Orca Exploration Group Inc.
During the year, US$0.6 million of general administrative
expenses (2007: US$1.2 million) were capitalized. These costs
include consultancy fees and the proportionate share of options,
treasury stock and stock appreciation rights for the personnel
directly responsible for the development of the option agreement
and the continuing management of the project in Exploration
Area 5 in Uganda (“EA5”) until the decision not to exercise the
option was taken in June 2008.
G&A averaged approximately US$1.22 million per month in 2008
(2007: US$0.89 million). G&A per mcf was US$1.70/mcf (2007:
US$1.39/mcf). Whilst a large proportion of G&A is relatively fixed
in nature and therefore declines on a mcf basis as volumes pro-
duced increase, significant costs have been incurred during the
last three quarters in the negotiation of the power contracts, re-
newing sales contracts with industrial customers, the preparation
of applications to EWURA and the commencement of arbitration
proceedings against a third party contractor for breaches of con-
tract that occurred during the drilling of the SS-10 well in 2007.
This has led to the G&A costs being relatively high per mcf. It is
expected that these will fall as volumes increase and long term
power contracts are signed.
The main variances are summarized below:
employee costs
The increase in the cost is a result of hiring new local staff in
Tanzania including the employment of an additional expat to
oversee the next phase of infrastructure expansion. There
has also been an increase of expenditure on staff training and
development. The average number of staff for the year was 21
(2006: 15). The Company has reduced the provision for staff
bonuses when compared to 2007.
stock based compensation
No new options were issued during 2008. A total of 2,814,000
options were outstanding at the end of 2008 following the can-
cellation of 33,000 options in 2008. The increase in compensation
recorded in 2008 is a result of a full years charge for the option
issued during 2007 as they have started to vest, as opposed to a
partial year charge in 2007. The fair value of these options, have
been determined using the Black-Scholes option pricing model.
A total charge of US$2.1 million was recorded in 2008 of which
US$0.1 million was capitalized.
A total of 810,000 stock-appreciation rights were outstanding
at the end of the year. A total of 120,000 stock appreciation
rights were issued in the year, of which 105,000 were capped
at a maximum payout of $Cdn 3 per option. All stock apprecia-
tion rights, are revalued at each reporting date using the Black-
Scholes option pricing model. A total credit of US$0.6 million
was recorded in 2008 for all stock appreciation rights compared
to a charge of US$0.8 million in 2007. The fall in the charge is a
consequence of the deterioration of the Company’s stock price
in line with the world wide stock market collapse. The additional
US$0.7 million charge in 2007 is in relation to the 400,000 capped
stock appreciation rights at Cdn$3 that were issued in 2006 and
fully expensed by the end of 2007.
In April 2007, 200,000 Class B shares were awarded to a newly
appointed officer. These shares were held in escrow and vested
to the officer in three equal installments starting 7 April 2007.
At the time the shares were awarded they had a market value of
US$1.6 million (Cdn$1.7 million). A total charge of US$0.6 million
has been recognized during 2008 (2007: US$0.9 million) of which
US$0.1 million has been capitalized in 2008 (2007: US$0.4 million).
Total charges for Class B shares, stock options and stock appre-
ciation rights may be summarized as follows:
(Figures in US$’000)
Stock options
Stock appreciation rights
Treasury stock
Capitalized
2008
2,086
(570)
606
2,122
(368)
1,754
2007
691
1,475
930
3,096
(839)
2,257
consultancy costs
The increase in consultancy costs is reflective of the increase in
the number of consultants contracted by the Company in 2007
being employed for the full year in 2008. There has also been
a significant decrease in the capitalization of consultancy costs
following the decision not to participate in the exercise of the
option to acquire a 50% working interest in Exploration Area 5
in Uganda.
Travel and accommodation
The increase in travel and accommodation costs is primarily due
to the increase in the number of business trips to Tanzania by
Company officials and other marketing and legal professionals
for the negotiation of the power and related contracts which
coincided with higher airfares.
Office costs
The increase in office costs is a result of the expansion of the
marketing development activities which has ultimately led to
the establishment of a second office location in Dar es Salaam.
marketing costs including legal fees
These costs include marketing costs, legal, corporate promotion
and costs of training Government officials in accordance with the
terms of the PSA. During the year, higher costs were experienced
in negotiating power and other contracts with Songas, and
TANESCO and in preparing pricing applications for the regulatory
authority, EWURA. In addition, a total of US$1.0 million was incurred
during the year on legal costs associated with the commence-
ment of arbitration proceedings against a third party contractor
for breaches of contract that occurred during the drilling of the
SS-10 well in 2007.
NET FINANCING INCOME/(CHARGE)
Interest income decreased to US$0.1 million (2007: US$0.6 million).
The decrease is due to the reduction in cash balances and the
decline in interest rates. The large interest income in 2007 was the
result of the large cash balance at the start of the year following
the US$18.1 million rights issue which was boosted by the US$30.4
million raised from a private equity placement in July 2007. The
exchange loss in the year is a result of the strengthening of the
US Dollars against the Tanzanian Shilling. Despite the gas sales
price being denominated in US Dollars, the invoices are submitted
in Tanzanian Schillings. Therefore, there is an exchange exposure
between the time that the invoices are submitted and the date
that the payment is received. The total gain on foreign exchange
recorded in 2007 was primarily the result of a gain of US$0.4
million on the conversion of the Canadian dollars received from
the private placement.
The movement in finance income and charges is summarized in
the table below:
2008
2007
145
56
201
(62)
(578)
(640)
(439)
628
832
1,460
–
(85)
(85)
1,375
Figures in US$’000
Finance income
Interest income
Foreign exchange gain
Finance charges
Overdraft charges
Foreign exchange loss
net financing income/(charge)
TAXATION
Income Tax
Under the terms of the PSA with TPDC, the Company is liable
for income tax in Tanzania at the corporate tax rate of 30%.
However, where income tax is payable, this is recovered from
TPDC by deducting an amount from TPDC’s profit share. This is
reflected in the accounts by adjusting the Company’s revenue by
the appropriate amount.
As at 31 December 2008, there were temporary differences
between the carrying value of the assets and liabilities for
financial reporting purposes and the amounts used for taxation
purposes under the Income Tax Act 2004. Applying the 30%
Tanzanian tax rate, the Company has recognized a deferred tax
liability of US$5.5 million which represents an additional deferred
future income tax charge of US$2.3 million for the year. This tax
has no impact on cash flow until it becomes a current income tax
at which point the tax is paid to the Commissioner of Taxes and
recovered from TPDC’s share of Profit Gas.
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MANAGEMENT’S DISCUSSION & ANALYSIS
Orca Exploration Group Inc.
additional Profits Tax
CARRYING VALUE OF ASSETS
Under the terms of the PSA, in the event that all costs have been
recovered with an annual return of 25% plus the percentage
change in the United States Industrial Goods Producer Price
Index, an Additional Profits Tax (“APT”) is payable.
Capitalized costs are periodically assessed to determine whether
it is likely that such costs will be recovered in the future. To the
extent that these capitalized costs are unlikely to be recovered in
the future, they are written off and charged to earnings.
The Company provides for APT by forecasting the total APT
payable as a proportion of the forecast Profit Gas over the term
of the PSA license. The effective APT rate has been calculated
to be 20%. Accordingly, US$0.4 million (2007: US$0.3 million) has
been netted off revenue for the year ended 31 December 2008.
As at 31 December 2008, the Company had US$29.1 million (2007:
US$41.7 million) of accrued costs (unaudited by TPDC) that are
recoverable out of 75% of the future Net Revenues. Management
does not anticipate that any APT will be payable in 2009, as the
forecast revenues will not be sufficient to cover the un-recovered
costs brought forward as inflated by 25% plus the PPI percentage
change and the forecast expenditures for 2009. The actual APT
that will be paid is dependent on the achieved value of the
Additional Gas sales and the quantum and timing of the operating
costs and capital expenditure program.
The APT can have a significant negative impact on the Songo
Songo project economics as measured by the net present value
of the cash flow streams. Higher revenue in the initial years
leads to a rapid payback of the project costs and consequently
accelerates the payment of the APT that can account for up to
55% of the Company’s profit share. Therefore, the terms of the
PSA rewards the Company for taking higher risks by incurring
capital expenditure in advance of revenue generation.
DEPLETION AND DEPRECIATION
The Natural Gas Properties are depleted using the unit of
production method based on the production for the period as a
percentage of the total future production from the Songo Songo
proven reserves. As at 31 December 2008, the proven reserves
as evaluated by the independent reservoir engineers McDaniel
& Associates Consultants Ltd (“McDaniel”) were 389.4 Bcf after
TPDC ‘back in’ on a life of license basis. This leads to an average
depletion charge of US$0.54/mcf for the year (2007: US$0.58/mcf).
Non-Natural Gas Properties are depreciated as follows:
A total of US$9.5 million was incurred in 2007 and 2008 for the
securing of an option agreement with Tower Resources plc and
the initial evaluation of Exploration Area 5 (“EA 5”) in Uganda.
300 kilometers of 2-D seismic was shot during Q4 2007 and Q1
2008. Whilst the seismic data did show the existence of a number
of structures, other aspects indicated that the level of risk was
higher than expected and in the view of the Company did not
warrant the cost of participating in a drilling exploration program.
Accordingly the Company decided not to exercise its option to
secure a 50% working interest in Exploration Area 5 and US$9.5
million was written off to the income statement in recognition of
the impairment of the exploration assets in Uganda.
FUNDS GENERATED BY OPERATIONS
Funds from operations before working capital changes were
US$9.7 million for the year ended 31 December 2008 (2007: US$8.7
million).
(Figures in US$’000)
(Loss)/profit after taxation
Adjustments (i)
Funds from operations
before working capital changes
Working capital adjustments
net cash flows
from operating activities
Net cash flows
used in investing activities
Net cash flows
from financing activities
net decrease in cash
and cash equivalents
2008
(9,523)
19,274
9,751
(4,566)
2007
1,745
6,951
8,696
2,071
5,185
10,767
(11,113)
(45,633)
(1)
30,703
(5,929)
(4,163)
Leasehold improvements
Over remaining life of the lease
(i)
See consolidated statements of cash flows
Computer equipment
Vehicles
Fixtures and fittings
3 years
3 years
3 years
The decrease in cash and cash equivalents is effectively a
consequence of the paying down of trade creditors following the
completion of the SS-10 well. Whilst the increase in the year-end
level of trade debtors, has lead to a decrease in cash, the overall
increase in sales for the year due to higher volumes and higher
realized prices has not materialized in increased cash balances
as a consequence of the increase in the level of general adminis-
trative costs. The cash flow generated from operations have been
re-invested in property, plant and equipment.
CAPITAL EXPENDITURES
Capital expenditures amounted to US$7.7 million during the year
(2007: US$53.7 million). The capital expenditures may be analysed
as follows:
(Figures in US$’000)
2008
2007
Geological and geophysical
and well drilling
Pipelines and infrastructure
Power development
Other equipment
3,473
4,147
38
82
51,129
2,267
146
175
7,740
53,717
Geological and geophysical and well drilling – Us$3.5 million
A total of US$0.2 million was incurred in the year on geological
studies and interpretation of data sets from the main Songo
Songo reservoir attained through down hole pressure gauges
during 2008 and the suite of logs ascertained from the drilling
of SS-10 in the last quarter of 2007. The aim of these studies was
to get a better understanding of the connectivity between the
wells, establish optimum well performance with a view to get a
better understanding of well deliverability, and assessing the GIIP
reserves in place. A more detailed discussion can be found under
reservoir management and studies in the operations report.
A total of US$0.6 million was incurred on well planning and
geological interpretation for the future exploration drilling
scheduled on the Songo Songo West prospect. With the assistance
of the internal work undertaken by Orca Exploration, McDaniel
associates were commissioned to undertake an independent
evaluation of the mineral resources potential of the Songo Songo
West prospect.
A total of US$2.7 million was incurred on technical analysis of the
Ugandan seismic results of Exploration Area 5. Following the in-
terpretation of the finding, the Company decided not to exercise
its option to acquire a 50% working interest in the block and wrote
off a total of US$9.5 million of expenditure incurred on the asset.
Pipelines and infrastructure – Us$4.1 million
A total of US$0.2 million was spent on the completion and com-
missioning of an 8 kilometer extension to the low pressure
distribution system that was primarily constructed in 2007.
The extension increased the total low pressure network to 42
kilometres within Dar es Salaam. A total of US$0.3 million was
incurred on connecting three new customers to the network in
the year. These three new customers accounted for 5% of the
total industrial sales volume in 2008.
In September 2008, the Company signed a five year contract with
Tanzania Portland Cement Company (“TPCC”), a subsidiary of
Heidelberg Cement, for the supply of gas to a new US$100 million kiln
at its Wazo Hill plant in Dar es Salaam. The contract commenced in Q1
2009 when the kiln started consuming commissioning gas. Initially, it
is forecast that 2 MMscfd of Additional Gas will be supplied under the
contract during 2009, but this is expected to increase to in excess of
6 MMscfd by 2012 as TPCC overhauls its existing kilns and brings them
back on production to meet increasing demand. In the last quarter of
2008 Orca Exploration installed a pressure reduction station (“PRS”)
at the Wazo Hill cement plant at a cost of US$1.0 million to enable it
to meet its obligations under the contract.
Orca Exploration incurred US$2.3 million in the year on compressed
natural gas (“CNG”) facilities, consisting of a compressor, a vehicle
dispenser, and two trailer filling facilities to deliver 0.7 MMscfd of CNG
to industrial customers in Dar es Salaam. The facilities are expected
to be operational during Q2 2009.
Orca Exploration incurred a total of US$0.3 million on expansion
studies and the re-rating of the Songo Songo gas processing
plant. As a result of the fitting of larger capacity Joules
Thompson valves to the two existing gas processing trains, there
has been a 20 MMscfd increase in the certified capacity of the gas
processing plant.
37
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MANAGEMENT’S DISCUSSION & ANALYSIS
Orca Exploration Group Inc.
WORKING CAPITAL
OUTSTANDING SHARE CAPITAL
Working capital as at 31 December 2008 was US$9.7 million
(31 December 2007: US$7.3 million) and may be analysed as follows:
There were 29.6 million shares outstanding as at 31 December
2008 which may be analysed as follows:
(Figures in US$’000)
Cash and cash equivalents
Trade and other receivables
Trade and other payables
Working capital
Number of shares (‘000)
shares outstanding
Class A shares
Class B shares
2008
10,586
13,196
23,782
14,055
9,727
2007
16,515
8,236
24,751
17,452
7,299
2008
2007
1,751
27,863
29,614
1,751
27,863
29,614
convertible securities
Options
2,814
2,847
Fully diluted class a
and class b shares
Weighted average
32,428
32,461
Class A and Class B shares
29,614
28,259
Convertible securities
Options
Weighted average diluted
class a and class b shares
1,425
1,543
31,039
29,802
The movement in Class B shares during the year is analysed in
the table below:
Number of shares (‘000)
as at 1 January
Issued
Stock options exercised
Normal course issuer bid
as at 31 december
2008
27,863
–
–
–
2007
25,023
2,700
160
(20)
27,863
27,863
The increase in working capital by US$2.4 million during 2008 is
primarily due to the generation of US$2.0 million of funds from
operating activities in the period after capital expenditure of
US$7.7 million. Within the working capital components, there
has been a decrease in trade and other payables balances of
US$3.4 million as a result of the payment of trade payables, with
total trade debtors increasing by US$5.0 million as a result of
increased sales.
The majority of the cash is held in US and Cdn dollars in Mauritius
and in Tanzanian Shillings in Tanzania bank accounts. There are
no restrictions in Tanzania for converting Tanzania Shillings into
US dollars. Any surplus cash is held in a fixed rate interest earning
deposit account.
Trade and other receivables at 31 December 2008 represent
US$11.9 million of trade receivables (2007: US$7.3 million), US$0.95
million of prepayments (2007: US$0.8 million) and other US$0.35
million (2007: US$0.1 million).
Under the contract terms with the industrial customers, the
Additional Gas payments must be received within 30 days of
the month end. As at 31 December 2008, US$3.0 million (2007:
US$3.3 million) was due from industrial customers which has all
subsequently been received. The balance of US$8.9 million (2007:
US$4.0 million) is made up of amounts due from the two power
customers, TANESCO and Songas.
The contracts with Songas and TANESCO accounted for 49%
(2007: 49%) of the Company’s operating revenue in 2009. Songas’
financial security is, in turn, heavily reliant on the payment of
capacity and energy charges by TANESCO. TANESCO is dependent
on the Government of Tanzania for some of its funding. Whilst
some payments have been delayed, the Company has subse-
quently collected all amounts from Songas and TANESCO in
respect of the amounts due at 31 December 2008.
Of the trade and other payables, US$3.8 million related to capital
expenditure (2007: US$7.7 million).
CONTRACTUAL OBLIGATIONS
AND COMMITTED CAPITAL INVESTMENT
Capital Investment
re-rating of the songas processing plant
Orca Exploration is committed to paying Songas US$0.5 million
on successful completion and operation of the gas processing
facilities at 90 MMscfd together with a further US$0.5 million on
the first anniversary of the successful completion of the project.
The gas processing plant was re-rated from 70 Mmscfd to 90
MMscfd by Lloyds Register in January 2009. The re-rating was
approved by Songas in Q1 2009.
Wazo Hill cement plant
Orca Exploration signed a five year contract with Tanzania
Portland Cement Company (“TPCC”), a subsidiary of Heidelberg
Cement, for the supply of gas to a new US$100 million kiln at its
Wazo Hill plant in Dar es Salaam. In order to honour this contract,
Orca Exploration committed to install a pressure reduction
station at Wazo Hill at a cost of US$0.7 million.
compressed natural gas
In Q3 2008, Orca Exploration ordered US$2.5 million of CNG
facilities, consisting of a compressor, a vehicle refueling dispenser
and two trailer filling facilities to deliver 0.7 MMscfd of CNG to
industrial customers in Dar es Salaam. The facilities are expected
to be operational during Q2 2009. A total of US$2.3 million had
been spent on this project by the end of 2008.
Funding
Management forecasts that the Company will be able to meet its
2009 capital expenditure program through the use of existing
cash balances and self-generated cash flows. The Company
currently has no bank borrowings and there is scope for utilizing
debt funding once the longer term contracts for the supply of gas
to the power sector are in place.
The Company issued 2,500,000 Class B shares at Cdn$13.80 per
share following a fully subscribed private placement that closed
in July 2007. Net proceeds of US$30.4 million were raised for
the Company. A large proportion of the funds were used for the
completion of the SS-10 well in Tanzania and for the funding of a
new venture in Uganda.
In April 2007, the Company issued 200,000 Class B shares to a
newly appointed officer. These shares are held in escrow by the
Company and vest to the officer in three equal annual install-
ments starting 7 April 2007.
In January 2007, the Company initiated a normal course issuer
bid to purchase up to 1,085,379 Class B shares between 31 January
2007 and 31 December 2007, subject to a maximum usage of
US$2.2 million of funds. A total of 19,800 Class B shares were
purchased during the bid period. The normal course issuer bid
was renewed in 2008 to 31 December 2008 with a total of 200
shares purchased during the year.
stock based compensation
The stock option plan provides for the granting of stock options
to directors, officers, employees and consultants. The exercise
price of each stock option is determined as the closing market
price of the common shares on the day prior to the day of grant.
Each stock option granted permits the holder to purchase one
common share at the stated exercise price. In accordance with
IFRS2, the Company records a charge to the profit and loss
account using the Black-Scholes fair valuation option pricing
model. The valuation is dependent on a number of estimates,
including the risk free interest rate, the level of stock volatility,
together with an estimate of the level of forfeiture. The level of
stock volatility is calculated with reference to the historic closing
share price at the date of issue.
The movement in stock options for the year is analysed in the
table below:
Number of options (‘000)
as at 31 december 2007
Issued
Exercised
Forfeited
as at 31 december 2008
Options
2,847
–
–
(33)
2,814
39
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MANAGEMENT’S DISCUSSION & ANALYSIS
Orca Exploration Group Inc.
Contractual Obligations
back in
Protected Gas
Under the terms of the original gas agreement for the Songo
Songo project (“Gas Agreement”), in the event that there is a
shortfall/insufficiency in Protected Gas as a consequence of
the sale of Additional Gas, then the Company is liable to pay
the difference between the price of Protected Gas (US$0.55/
mmbtu) and the price of an alternative feedstock multiplied by
the volumes of Protected Gas up to a maximum of the volume of
Additional Gas sold (23.8 Bcf as at 31 December 2008).
The Gas Agreement has been amended by an initialled Amended
and Restated Gas Agreement (“ARGA”). The ARGA provides clari-
fication of the Protected Gas volumes and removes all terms
dealing with the security of the Protected Gas and the conse-
quences of any insufficiency to a new Insufficiency Agreement
(“IA”). The IA specifies terms under which Songas may demand
cash security in order to keep them whole in the event of a
Protected Gas insufficiency. Once the Insufficiency Agreement is
signed, it will govern the basis for determining security. Under
the provisional terms of the IA, when it is calculated that funding
is required, the Company shall fund an escrow account at a rate
of US$2/Mmbtu on all industrial Additional Gas sales out of its and
TPDC share of revenue, and TANESCO shall contribute the same
amount on Additional Gas sales to the power sector. The funds
provide security for Songas in the event of an insufficiency of
Protected Gas. The Company is actively monitoring the reservoir
and does not anticipate that a liability will occur in this respect.
TPDC has indicated that they wish to exercise their right to ‘back
in’ to the field development by contributing 20% of the costs
of the future wells including SS-10 in return for a 20% increase
in the profit share percentage for the production emanating
from these wells. The implications and workings of the ‘back in’
are still to be discussed in detail with TPDC and there may be
the need for reserve modifications once these discussions are
concluded. For the purpose of the reserves certification, it has
been assumed that they will ‘back in’ for 20% and this is reflected
in the Company’s net reserve position. However, the financial
statements do not take account of any reimbursement for the
SS-10 capital expenditure, pending the finalisation of the terms
of the ‘back in’.
Operating leases
The Company has entered into two five year rental agreements
that expire on 30 November 2012 and 30 November 2013 respec-
tively at a cost of approximately US$0.2 million per annum for the
use of offices in Dar es Salaam.
OFF-BALANCE SHEET TRANSACTIONS
As at 31 December 2008, the Company had no off-balance sheet
arrangements.
RELATED PARTY TRANSACTIONS
One of the non executive Directors is a partner at a law firm.
During the year, the Company incurred US$195,000 to this firm for
services provided. The transactions with this related party was
made at the exchange amount.
POST BALANCE SHEET EVENTS
There are no post balance sheet events.
SUMMARY QUARTERLY RESULTS
The following is a summary of the results for the Company for the last eight quarters:
(Figures in US$’000 except
where otherwise stated)
Financial
Revenue
Profit/(loss)
after taxation
Operating netback
(US$/mcf)
Working capital
Shareholders’ equity
Profit/(loss) per share –
basic and diluted (US$)
Capital expenditures
Geological, geophysical
and well drilling
Pipeline and
infrastructure
Power development
Other equipment
Operating
Additional Gas sold –
industrial (MMscf)
Additional Gas sold –
power (MMscf)
Average price per mcf
– industrial (US$)
Average price per mcf
– power (US$)
2008
2007
Q4
Q3
Q2
Q1
Q4
Q3
Q2
Q1
6,371
7,301
4,826
5,284
5,562
6,363
3,021
3,831
12
816
(10,208)
(143)
284
1,942
(609)
2.32
9,727
64,712
2.79
8,705
64,142
3.44
6,094
62,824
2.21
8,297
2.27
7,299
72,053
71,544
2.30
2.79
20,939
70,996
(3,050)
38,291
128
2.03
10,570
37,983
0.00
0.03
(0.35)
0.00
0.01
0.07
(0.02)
0.00
2,851
1,190
16,323
10,426
13,723
10,657
(987)
2,217
13
31
419
705
4
51
392
425
2,149
2,097
979
21
–
336
956
10.08
13.29
12.97
2.39
2.41
2.93
246
–
–
469
4
–
322
364
1,983
2,152
11.55
2.05
11.08
2.19
314
7
108
442
1,974
9.58
2.19
1,205
26
35
397
745
8.61
2.17
279
109
32
301
1,356
7.70
2.19
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MANAGEMENT’S DISCUSSION & ANALYSIS
Orca Exploration Group Inc.
The principal developments in Q4 were as follows:
•
•
•
•
Achieved a quarterly sales volume of 2,541 MMscf or 27.6
MMscfd which represents the best quarter since sales began
in 2004.
Completed the installation of larger capacity Joule-Thompson
valves on the two existing gas processing trains which has
resulted in the gas processing capacity of the plant increasing
by 20 MMscfd to 90 MMscfd.
Continued the installation of Compressed Natural Gas facilities
in Dar es Salaam. It is intended that the facilities will be
operational during Q2 2009 leading to 0.7 MMscfd of CNG sales.
It is anticipated that this market will expand rapidly to supply
gas to consumers that cannot be cost-effectively connected to
the Company’s existing low pressure gas distribution system.
The negative capital charge in the geological, geophysical and
well drilling category is a result of the renegotiation of some
of the charges incurred during the standby period whilst the
Caroil-6 rig was repaired during the 2007 drilling campaign. The
Company has begun arbitration proceedings against a third
party contractor for breaches of contract that occurred during
the drilling of the SS-10 well in 2007 with a view to recovering
further costs.
Variance analysis between quarters
revenue
The Company commenced the sale of Additional Gas to industrial
customers in September 2004. Since then, the volumes of
Additional Gas sold to the industrial sector have increased from
an average of 1.2 MMscfd in Q4 2004 to 4.3 MMscfd in Q4 2008
(Q4 2007: 4.3 MMscfd). Industrial sales peak in the third quarters
of each year as textile customers take advantage of low cotton
prices during the harvest season. The average sales in Q3 2008
were 4.6 MMscfd which was lower than Q3 2007 when 5.3 MMscfd
was sold. The textile industry is facing some contraction due to
heavy competition in world markets.
The average price to the industrial sector has varied in line with
the price of crude oil as the gas is priced at a discount to the price
of Heavy Fuel Oil in Dar es Salaam. The average price ranged from
US$5.23/mcf in Q1 2005 peaking at US$13.29/mcf in Q3 2008. During
the second half of 2008, the Company extended the term of six
contracts accounting for the majority of the industrial gas sales
volumes for an additional five years from the dates that existing
contracts were due to expire (the earliest termination date is now
September 2014). In return the Company has agreed to cap the price
of gas to these customers whilst also incorporating a floor price. This
is expected to keep the price of gas in the range of US$7.38/mcf to
US$11.49/mcf (increasing at 2% per annum).
The sale of Additional Gas to the power sector commenced in Q3
2005 and this contributed towards a significant step increase
in revenue from that quarter. In Q4 2008 sales averaged 23.4
MMscfd which was identical to the rate achieved in Q4 2007 and
represented the highest level of sales achieved in any quarter.
Historically the gas price paid by Songas for use at the Ubungo
power plant has varied month by month depending on the avail-
ability of the gas turbines at the Ubungo power plant. However
from January 2008 the price was fixed at US$2.37/mcf. The higher
average sales price for the power sector recorded in 2008 is due
to an increase in the sales price paid by TANESCO for Additional
Gas for the emergency power units operated by Dowans Tanzania
Limited (“Dowans”). TANESCO cancelled the contract with Dowans
at the end of July 2008.
Loss / profit after taxation
The majority of the Company’s costs associated with the
production and distribution of gas are fixed in nature. There has
been an increase during 2008 because of the increase in the
costs of negotiating the initialled long term power contracts.
Profitability in the first and fourth quarters of each year is
affected by the seasonality of gas demand by the textile
customers. In addition, there tends to be lower demand for gas
by the power sector in the first two quarters of each year as the
hydro generation utilization increases with the seasonal rainfall.
A profit of US$0.01 million was recorded in Q4 2008 compared to
a profit of US$0.8 million in Q3 2008. The fall in profit is primarily
the result of the decline in both the level of sales volumes and
prices achieved in the industrial markets.
The loss after taxation recorded in 2008 is the result of the US$9.5
million impairment of the Company’s Uganda assets following the
decision not to exercise the right to acquire a 50% working interest
from Tower, together with the step change increase in the level of
general administrative expenses. The increase in general and ad-
ministrative costs has occurred due to an increase in the legal and
marketing costs associated with negotiating long term power con-
tracts together with an increase in the costs of the Company’s new
venture activities. The Company is currently focussed on reducing
its general and administrative expenses in 2009.
Working capital
The increase in working capital by US$2.4 million during 2008
to US$9.7 million in Q4 2008 from US$7.3 million in Q4 2007 is
primarily due to the generation of US$2.0 million of funds from
operating activities in the year after incurring capital expenditure
of US$7.7 million. The available funds enabled the Company to
reduce the trade and other payables balances especially those
related to the drilling of SS-10.
Despite increased sales, a loss of US$9.5 million was recorded
in 2008 due to the write off of US$9.5 million in relation to the
withdrawal from exploration activities in Uganda, and the increase
in general administrative costs. During 2008, the Company’s
assets decreased by 8% to US$85.2 million (2007: increased 111%
to US$92.8 million). The Company’s assets are made up as follows:
(Figures in US$’000)
2008
2007
2006
SELECTED FINANCIAL INFORMATION
Selected annual financial information derived from the audited
consolidated financial statements for the years ended 31
December 2006, 2007 and 2008 is set out below:
(Figures in US$’000
except per share amount)
Revenue
Funds from operations
before working capital
changes
(Loss)/profit
after taxation
Total assets
(Loss)/profit per share:
Basic
Diluted
2008
23,782
2007
18,777
2006
13,828
9,751
8,696
5,969
(9,523)
1,745
2,577
85,248
92,789
43,904
(0.32)
(0.32)
0.06
0.06
0.11
0.10
Revenue increased by 27% in 2008 compared to 2007. Additional
Gas volumes sold increased 12% from 7,731 MMscf in 2007 to
8,660 MMscf due to the increase in sales to the power sector
for increasing electricity demand. Revenue increased by 36% in
2007 compared to 2006. Additional Gas volumes sold increased
from 4,837 MMscf in 2006 to 7,731 MMscf in 2007 primarily due to
the installation of emergency power generation by Dowans and
Aggreko in the last quarter of 2006.
Funds from operations before working capital changes increased
by 12% in 2008 primarily as a result of the increase in revenues
associated with higher volumes and prices.
current assets
Cash and cash
equivalents
Trade and other
receivables
Fixed assets
Exploration and
evaluation assets
Property, plant and
equipment
Total assets
10,586
16,515
20,678
13,196
23,782
8,236
24,751
4,275
24,953
648
6,881
–
60,818
85,248
61,157
92,789
18,951
43,904
The decrease in the cash and cash equivalents in 2008 is primarily
the result of reducing the trade and other payables and the
payment of capital expenditure in both Uganda and Tanzania. The
decrease in the cash and cash equivalents in 2007 is primarily
the result of the high level of capital expenditure associated with
the SS-10 development well and the expansion of activities into
Uganda. This was financed by the net receipt of US$30.4 million
from the issue of 2.5 million Class B shares at Cdn$13.80 per share
in July 2007.
The increase in trade and other receivables is due to the increased
trading activities in the power sector and the delay in payments from
TANESCO. This is more fully discussed in ‘Working Capital’ on page 38.
In 2008, the Company’s capital expenditure was focused on
expanding the infrastructure and improving the geological
understanding of the gas reserves in place, both with a view
to increasing the deliverability and security of Additional Gas
supply. The efforts undertaken resulted in the initialling of two
long-term power contracts and a relaxation of the financial
security required in the event of an insufficiency of Protected
Gas. The expenditures incurred on plant, property and equipment
is discussed further in ‘Capital Expenditure’ above.
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MANAGEMENT’S DISCUSSION & ANALYSIS
Orca Exploration Group Inc.
BUSINESS RISKS
Foreign Operations
Operating Hazards and Uninsured risks
The business of Orca Exploration is subject to all of the operating
risks normally associated with the exploration for, and the
production, storage, transportation and marketing of oil and
gas. These risks include blowouts, explosions, fire, gaseous leaks,
migration of harmful substances and oil spills, any of which could
cause personal injury, result in damage to, or destruction of, oil
and gas wells or formations or production facilities and other
property, equipment and the environment, as well as interrupt
operations. In addition, all of Orca Exploration’s operations will
be subject to the risks normally incident to drilling of natural
gas wells and the operation and development of gas properties,
including encountering unexpected formations or pressures,
premature declines of reservoirs, blowouts, equipment failures
and other accidents, sour gas releases, uncontrollable flows
of oil, natural gas or well fluids, adverse weather conditions,
pollution and other environmental risks. Drilling conducted by
Orca Exploration overseas will involve increased drilling risks of
high pressures and mechanical difficulties, including stuck pipe,
collapsed casing and separated cable. The impact that any of
these risks may have upon Orca Exploration is increased due to
the fact that Orca Exploration currently only has one producing
property. Orca Exploration will maintain insurance against some,
but not all, potential risks; however, there can be no assurance
that such insurance will be adequate to cover any losses or
exposure for liability. The occurrence of a significant unfavour-
able event not fully covered by insurance could have a material
adverse effect on Orca Exploration’s financial condition, results
of operations and cash flows. Furthermore, Orca Exploration
cannot predict whether insurance will continue to be available at
a reasonable cost or at all.
All of Orca Exploration’s operations and related assets are
located in Tanzania which may be considered to be politically
and/or economically unstable. Exploration or development
activities in Tanzania may require protracted negotiations with
host governments, national oil companies and third parties and
are frequently subject to economic and political considerations,
such as, the risks of war, actions by terrorist or insurgent groups,
expropriation, nationalization, renegotiation or nullification of
existing contracts, taxation policies, foreign exchange restric-
tions, changing political conditions, international monetary fluc-
tuations, currency controls and foreign governmental regulations
that favour or require the awarding of drilling contracts to local
contractors or require foreign contractors to employ citizens of,
or purchase supplies from, a particular jurisdiction. In addition, if
a dispute arises with foreign operations, Orca Exploration may be
subject to the exclusive jurisdiction of foreign courts.
In the foreign countries in which Orca Exploration will conduct
business, currently limited to Tanzania, the state generally retains
ownership of the minerals and consequently retains control of
(and in many cases, participates in) the exploration and production
of hydrocarbon reserves. Accordingly, these operations may
be materially affected by host governments through royalty
payments, export taxes and regulations, surcharges, value added
taxes, production bonuses and other charges.
All of Orca Exploration’s development properties and all of its
proved natural gas reserves are located offshore on the Songo
Songo Island in Tanzania, and, consequently, Orca Exploration’s
assets will be subject to regulation and control by the government
of Tanzania and certain of its national and parastatal organiza-
tions including the energy regulator, EWURA. Orca Exploration
and its predecessors have operated in Tanzania for a number
of years and believe that it has good relations with the current
Tanzanian government. However, there can be no assurance that
present or future administrations or governmental regulations in
Tanzania will not materially adversely affect the operations or
future cash flows of Orca Exploration.
additional Financing
Depending on future exploration, development, and marketing plans,
Orca Exploration may require additional financing. The ability of Orca
Exploration to arrange such financing in the future will depend in part
upon the prevailing capital market conditions as well as the business
performance of Orca Exploration. There can be no assurance that
Orca Exploration will be successful in its efforts to arrange additional
financing on terms satisfactory to Orca Exploration. If additional
financing is raised by the issuance of shares from treasury of Orca
Exploration, control of Orca Exploration may change and sharehold-
ers may suffer additional dilution.
From time to time Orca Exploration may enter into transactions
to acquire assets or the shares of other companies. These trans-
actions may be financed partially or wholly with debt, which
may temporarily increase Orca Exploration’s debt levels above
industry standards.
Industry conditions
The oil and gas industry is intensely competitive and Orca
Exploration competes with other companies which possess
greater technical and financial resources. Many of these
competitors not only explore for and produce oil and natural
gas, but also carry on refining operations and market petroleum,
natural gas products and other products on an international
basis. Oil and gas production operations are also subject to all
the risks typically associated with such operations, including
premature decline of reservoirs and invasion of water into
producing formations. Currently, Orca Exploration operates the
Songo Songo natural gas property. There is a risk that in the
future either the operatorship could change and the property
operated by third parties or operations may be subject to control
by national oil companies, Songas, or parastatal organisations
and, as a result, Orca Exploration may have limited control over
the nature and timing of exploration and development of such
properties or the manner in which operations are conducted on
such properties.
The marketability and price of natural gas which may be acquired,
discovered or marketed by Orca Exploration will be affected by
numerous factors beyond its control. There is currently no
developed natural gas market in Tanzania and no infrastructure
with which to serve potential new markets beyond that being
constructed by Orca Exploration and Songas. The ability of Orca
Exploration to market any natural gas from current or future
reserves may depend upon its ability to develop natural gas
markets in Tanzania and the surrounding region, obtain access
to the necessary infrastructure to deliver sales gas volumes,
including acquiring capacity on pipelines which deliver natural
gas to commercial markets. Orca Exploration is also subject to
market fluctuations in the prices of oil and natural gas, uncer-
tainties related to the delivery and proximity of its reserves to
pipelines and processing facilities and extensive government
regulation relating to prices, taxes, royalties, land tenure,
allowable production, the export of oil and gas and many other
aspects of the oil and gas business. Orca Exploration is also
subject to a variety of waste disposal, pollution control and
similar environmental laws.
The oil and natural gas industry is subject to varying environ-
mental regulations in each of the jurisdictions in which Orca
Exploration may operate. Environmental regulations place re-
strictions and prohibitions on emissions of various substances
produced concurrently and oil and natural gas and can impact
on the selection of drilling sites and facility locations, potentially
resulting in increased capital expenditures.
additional Gas
Orca Exploration has the right, under the terms of the PSA, to
market volumes of Additional Gas subject to satisfying the re-
quirements to deliver Protected Gas to Songas.
There is a risk that Songas could interfere in Orca Exploration’s ability
to produce, transport and sell volumes of Additional Gas if Orca Explo-
ration’s obligations to Songas under the Gas Agreement are not met.
In particular, Songas has the right to request reasonable security on
all Additional Gas sales.
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MANAGEMENT’S DISCUSSION & ANALYSIS
Orca Exploration Group Inc.
replacement of reserves
environmental and Other regulations
Orca Exploration’s natural gas reserves and production and,
therefore, its cash flows and earnings are highly dependent
upon Orca Exploration developing and increasing its current
reserve base and discovering or acquiring additional reserves.
Without the addition of reserves through exploration, acquisition
or development activities, Orca Exploration’s reserves and
production will decline over time as reserves are depleted. To
the extent that cash flow from operations is insufficient and
external sources of capital become limited or unavailable, Orca
Exploration’s ability to make the necessary capital investments
to maintain and expand its oil and natural gas reserves will be
impaired. There can be no assurance that Orca Exploration will be
able to find and develop or acquire additional reserves to replace
production at commercially feasible costs.
asset concentration
Orca Exploration’s natural gas reserves are limited to one
property, the Songo Songo field, and the production potential
from this field is limited to six wells. There has been limited
production from the six wells in the Songo Songo field to date.
There is no assurance that Orca Exploration will have sufficient
deliverability through the existing wells to provide additional
natural gas sales volumes, and that there may be significant
capital expenditures associated with any remedial work, or new
drilling required to achieve deliverability. In addition, any difficul-
ties relating to the operation or performance of the field would
have a material adverse effect on Orca Exploration.
Extensive national, state, and local environmental laws and
regulations in foreign jurisdictions will affect nearly all of Orca
Exploration’s operations. These laws and regulations set various
standards regulating certain aspects of health and environ-
mental quality, provide for penalties and other liabilities for the
violation of such standards and establish in certain circumstanc-
es obligations to remediate current and former facilities and
locations where operations are or were conducted. In addition,
special provisions may be appropriate or required in environmen-
tally sensitive areas of operation. There can be no assurance that
Orca Exploration will not incur substantial financial obligations
in connection with environmental compliance. Significant liability
could be imposed on Orca Exploration for damages, cleanup
costs or penalties in the event of certain discharges into the
environment, environmental damage caused by previous owners
of property purchased by Orca Exploration or non-compliance
with environmental laws or regulations. Such liability could
have a material adverse effect on Orca Exploration. Moreover,
Orca Exploration cannot predict what environmental legislation
or regulations will be enacted in the future or how existing or
future laws or regulations will be administered or enforced.
Compliance with more stringent laws or regulations, or more
vigorous enforcement policies of any regulatory authority, could
in the future require material expenditures by Orca Exploration
for the installation and operation of systems and equipment
for remedial measures, any or all of which may have a material
adverse effect on Orca Exploration. As party to various licenses,
Orca Exploration has an obligation to restore producing fields
to a condition acceptable to the authorities at the end of their
commercial lives.
While management believes that Orca Exploration is currently in
compliance with environmental laws and regulations applicable
to Orca Exploration’s operations in Tanzania, no assurances can
be given that Orca Exploration will be able to continue to comply
with such environmental laws and regulations without incurring
substantial costs.
Orca Exploration’s petroleum and natural gas operations are subject
to extensive governmental legislation and regulation and increased
public awareness concerning environmental protection.
Recently, there has been increased activity in the exploration of
oil and gas in Tanzania, with the result that one well has been
drilled on an adjacent prospect to Songo Songo and is assessed
to have a small accumulation of gas. There are currently two
rigs operating in Tanzania and two wells were being drilled in
Q1 2009. The exploration activity will be closely monitored by
the Company, but could lead to increased competition for gas
markets and lower gas prices in the future.
In addition, various factors, including the availability and capacity
of oil and gas gathering systems and pipelines, the effect of
foreign regulation of production and transportation, general
economic conditions, changes in supply due to drilling by other
producers and changes in demand may adversely affect Orca Ex-
ploration’s ability to market its gas production.
Uncertainties in estimating reserves
and Future net cash Flows
inherent
in estimating
There are numerous uncertainties
quantities of proved and probable reserves and cash flows to be
derived therefrom, including many factors beyond the control
of Orca Exploration. The reserve and cash flow information
contained herein represents estimates only. The reserves and
estimated future net cash flow from Orca Exploration’s properties
have been independently evaluated by McDaniel & Associates
Consultants Ltd. These evaluations
include a number of
assumptions relating to factors such as initial production rates,
production decline rates, ultimate recovery of reserves, timing
and amount of capital expenditures, marketability of production,
crude oil price differentials to benchmarks, future prices of oil and
natural gas, operating costs, transportation costs, cost recovery
provisions and royalties, TPDC “back-in” methodology and other
government levies that may be imposed over the producing life
of the reserves. These assumptions were based on price forecasts
in use at the date of the relevant evaluations were prepared and
many of these assumptions are subject to change and are beyond
the control of Orca Exploration. Actual production and cash flows
derived therefrom will vary from these evaluations, and such
variations could be material.
No provision has been recognized for future decommissioning
costs which are anticipated to be minimal as it is forecast that
there will still be commercial gas reserves once Orca Exploration
relinquishes the license in 2026. Orca Exploration expects that the
cost of complying with environmental legislation and regulations
will increase in the future. Compliance with existing environmental
legislation and regulations has not had a material effect on capital
expenditures, earnings or competitive position of Orca Exploration
to date. Although management believes that Orca Exploration’s
operations and facilities are in material compliance with such laws
and regulations, future changes in these laws, regulations or inter-
pretations thereof or the nature of its operations may require the
Company to make significant additional capital expenditures to
ensure compliance in the future.
Volatility of Oil and Gas Prices and markets
Orca Exploration’s financial condition, operating results and future
growth will be dependent on the prevailing prices for its natural gas
production. Historically, the markets for oil and natural gas have
been volatile and such markets are likely to continue to be volatile
in the future. Prices for oil and natural gas are subject to large fluc-
tuations in response to relatively minor changes to the demand for
oil and natural gas, whether the result of uncertainty or a variety
of additional factors beyond the control of Orca Exploration. Any
substantial decline in the prices of oil and natural gas could have
a material adverse effect on Orca Exploration and the level of its
natural gas reserves. Additionally, the economics of producing from
some wells may change as a result of lower prices, which could result
in a suspension of production by Orca Exploration.
No assurance can be given that oil and natural gas prices will be
sustained at levels which will enable Orca Exploration to operate
profitably. From time to time Orca Exploration may avail itself of
forward sales or other forms of hedging activities with a view to
mitigating its exposure to the risk of price volatility. The term of
the Company’s six largest gas supply contracts has been recently
extended for five years. The new contracts contain pricing caps
and floors that limit the industrial downside price to US$7.38/
mcf. The Company also entered into fixed price contracts with
TANESCO and Songas for the supply of Additional Gas to the
power sector. Therefore during 2008 the Company has taken very
positive steps in mitigating the exposure to price volatility.
The Songo Songo field was the first gas field to be developed
in East Africa and was followed by a commercial gas discovery
in the south of Tanzania at Mnazi Bay. The Company is the only
supplier of gas into the main demand centre of Dar es Salaam
and has therefore been able to negotiate industrial gas sales
contracts with gas prices that are at a discount to the lowest cost
alternative fuels in Dar es Salaam, namely HFO and coal.
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MANAGEMENT’S DISCUSSION & ANALYSIS
Orca Exploration Group Inc.
Title to Properties
reliance on Key Personnel
Orca Exploration is highly dependent upon its executive officers
and key personnel. The unexpected loss of the services of any
of these individuals could have a detrimental effect on Orca
Exploration. Orca Exploration does not maintain key life insurance
on any of its employees or officers.
controlling shareholder
W David Lyons, the Company’s non-executive Chairman, is the
sole controlling shareholder of Orca Exploration and holds ap-
proximately 99.5% of the outstanding Class A shares and ap-
proximately 15.9% of the Class B shares. Consequently, Mr. Lyons
holds approximately 20.9% of the equity (22.2% fully diluted) and
controls 62.5% of the total votes of Orca Exploration.
Although title reviews have been done and will continue to be
done according to industry standards prior to the purchase of
most oil and natural gas producing properties or the commence-
ment of drilling wells, such reviews do not guarantee or certify
that an unforeseen defect in the chain of title will not arise to
defeat the claim of Orca Exploration which could result in a
reduction of the revenue received by Orca Exploration.
acquisition risks
Orca Exploration intends to acquire natural gas infrastructure
and possibly additional oil and gas properties. Although Orca
Exploration performs a review of the acquired properties that it
believes is consistent with industry practices, such reviews are
inherently incomplete. It generally is not feasible to review in depth
every individual property involved in each acquisition. Ordinarily,
Orca Exploration will focus its due diligence efforts on the higher
valued properties and will sample the remainder. However, even an
in depth review of all properties and records may not necessarily
reveal existing or potential problems, nor will it permit a buyer to
become sufficiently familiar with the properties to assess fully their
deficiencies and capabilities. Inspections may not be performed on
every well, and structural or environmental problems, such as ground
water contamination, are not necessarily observable even when
an inspection is undertaken. Orca Exploration may be required to
assume pre-closing liabilities, including environmental liabilities, and
may acquire interests in properties on an “as is” basis. There can be
no assurance that Orca Exploration’s acquisitions will be successful.
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MANAGEMENT’S REPORT TO SHAREHOLDERS
Orca Exploration Group Inc.
Management’s Report to Shareholders
The accompanying consolidated financial statements of Orca Exploration Group Inc. are the responsibility of the Directors. The financial
and operating information presented in this annual report is consistent with that shown in the consolidated financial statements.
The consolidated financial statements have been prepared by management, on behalf of the Board, in accordance with the accounting
policies disclosed in the notes to the consolidated financial statements. Where necessary, management has made informed judgments
and estimates in accounting for transactions which were not complete at the balance sheet date. In the opinion of management, the
consolidated financial statements have been prepared within acceptable limits of materiality and are in accordance with International
Financial Reporting Standards appropriate in the circumstances.
Management, with the participation of the Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the
Company’s disclosure controls and procedures and has concluded that such disclosure controls and procedures are effective.
Management maintains appropriate systems of internal controls. Policies and procedures are designed to give reasonable assur-
ance that transactions are properly authorized, assets are safeguarded and financial records are properly maintained to provide
reliable information for the preparation of financial statements. An independent firm of Chartered Accountants, as appointed by the
Shareholders, examines the consolidated financial statements in accordance with International Financial Reporting Standards and
provides an independent professional opinion.
The Board of Directors carries out its responsibility for the financial reporting and internal controls principally through an Audit Com-
mittee. The committee has met with external auditors and Management in order to determine if Management has fulfilled its responsi-
bilities in the preparation of the consolidated financial statements. The consolidated financial statements have been approved by the
Board of Directors on the recommendation of the Audit Committee.
P. R. Clutterbuck
President & Chief Executive Officer
28 April 2009
Nigel Friend
Chief Financial Officer
28 April 2009
Auditors’ Report
report on the consolidated financial statements
We have audited the accompanying consolidated financial statements of Orca Exploration Group Inc. and its subsidiaries (the ‘Group’),
which comprise the consolidated balance sheet as at 31 December 2008 and 31 December 2007 and the consolidated income state-
ments, consolidated statement of cash flows and statements of changes in shareholders’ equity for the years then ended, a summary
of significant accounting policies and notes to the consolidated financial statements.
management’s responsibility for the financial statements
Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with
International Financial Reporting Standards. This responsibility includes: designing, implementing and maintaining internal controls
relevant to the preparation and fair presentation of the financial statements that are free from material misstatements, whether due
to fraud or error; selecting and applying appropriate accounting policies; and making accounting estimates that are reasonable in the
circumstances.
auditors’ responsibility
Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits
in accordance with the International Standards on Auditing. Those standards require that we comply with the relevant ethical require-
ments and plan and perform the audit to obtain a reasonable assurance whether the financial statements are free from material mis-
statement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The
procedures selected depend on our judgement, including the assessments of the risks of material misstatements of the financial state-
ments, whether due to fraud or error. In making those risk assessments, we consider internal controls relevant to the entity’s prepara-
tion and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances,
but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. An audit also includes evaluating
the appropriateness of accounting principles used and the reasonableness of accounting estimates made by management, as well as
evaluating the overall presentation of the financial statements.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.
Opinion
In our opinion, the consolidated financial statements give a true and fair view of the consolidated financial position of the Group as at 31
December 2008 and 31 December 2007, and of its consolidated financial performance and its statement of consolidated cash flows for the years
then ended in accordance with International Financial Reporting Standards.
Calgary, Canada
28 April 2009
COMMENTS BY AUDITORS FOR CANADIAN READERS ON INTERNATIONAL – CANADIAN REFERENCES
Canadian reporting standards may differ from International Standards on Auditing in the form and content of the auditors’ report,
depending on the circumstances. However, had this auditors’ report been prepared in accordance with Canadian reporting standards,
there would be no material differences in the form and content of this auditors’ report. Furthermore, an auditors’ report prepared in
accordance with Canadian standards on the aforementioned consolidated financial statements would not contain a qualification of
opinion.
Calgary, Canada
28 April 2009
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CONSOLIDATED FINANCIAL STATEMENTS
Orca Exploration Group Inc.
Consolidated Income Statements
Years ended 31 december
(thousands of US dollars except per share amounts)
nOTe
2008
2007
Revenue
cost of sales
Production and distribution expenses
Depletion expense
Impairment of exploration and evaluation assets
Administrative expenses
Net financing income/(charge)
(Loss) /profit before taxation
Taxation
(Loss)/profit after taxation
(Loss)/profit per share
Basic and diluted (US$)
See accompanying notes to the consolidated financial statements.
5
12
11
7
8
17
23,782
18,777
(1,477)
(4,716)
(9,520)
8,069
(14,686)
(439)
(7,056)
(2,467)
(9,523)
(0.32)
(1,193)
(4,476)
–
13,108
(10,708)
1,375
3,775
(2,030)
1,745
0.06
Consolidated Balance Sheets
as aT 31 december
(thousands of US dollars)
ASSETS
current assets
Cash and cash equivalents
Trade and other receivables
Exploration and evaluation assets
Property, plant and equipment
LIABILITIES
current liabilities
Trade and other payables
non current liabilities
Deferred income taxes
Deferred additional profits tax
SHAREHOLDERS’ EQUITY
Capital stock
Capital reserve
Accumulated (loss)/income
nOTe
2008
2007
9
10
11
12
13
8
15
16
10,586
13,196
23,782
648
60,818
61,466
85,248
16,515
8,236
24,751
6,881
61,157
68,038
92,789
14,055
17,452
5,510
971
20,536
66,537
3,715
(5,540)
64,712
85,248
3,205
588
21,245
66,538
1,023
3,983
71,544
92,789
See accompanying notes to the consolidated financial statements.
Contractual obligations and committed capital investment (Note 21)
Post balance sheet events (Note 22)
The consolidated financial statements were approved by the Board of Directors on 28 April 2009.
Director
Director
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CONSOLIDATED FINANCIAL STATEMENTS
Orca Exploration Group Inc.
Consolidated Statements of Cash Flows
Years ended 31 december
(thousands of US dollars)
CASH FLOWS FROM OPERATING ACTIVITIES
(Loss)/profit after taxation
Adjustment for:
Depletion and depreciation
Impairment of exploration and evaluation assets
Stock-based compensation
Deferred income taxes
Deferred additional profits tax
Interest income
Foreign exchange gain
Increase in trade and other receivables
Increase in trade and other payables
net cash flows from operating activities
CASH FLOWS USED IN INVESTING ACTIVITIES
Exploration and evaluation expenditures
Property, plant and equipment expenditures
Interest income
(Decrease)/increase in trade and other payables
net cash used in investing activities
CASH FLOWS FROM FINANCING ACTIVITIES
Normal course issuer bid
Shares issued
Foreign exchange gain
Proceeds from exercise of options
net cash flow from financing activities
decrease in cash and cash equivalents
cash and cash equivalents at the beginning of the year
cash and cash equivalents at the end of the year
See accompanying notes to the consolidated financial statements.
2008
2007
(9,523)
4,792
9,520
2,419
2,305
383
(145)
–
9,751
(4,960)
394
5,185
(3,014)
(4,453)
145
(3,791)
(11,113)
(1)
–
–
–
(1)
(5,929)
16,515
10,586
1,745
4,631
–
1,062
1,976
324
(628)
(414)
8,696
(3,961)
6,032
10,767
(6,322)
(46,836)
628
6,897
(45,633)
(220)
30,366
414
143
30,703
(4,163)
20,678
16,515
Statement of Changes in Shareholders’ Equity
(thousands of US dollars)
Note
Balance as at 1 January 2007
Shares issued
Options exercised
Stock-based compensation
Normal course issuer bid
Profit for the year
balance as at 31 december 2007
Shares issued
Options exercised
Stock-based compensation
Normal course issuer bid
Loss for the year
balance as at 31 december 2008
See accompanying notes to the consolidated financial statements.
capital stock
capital reserve
accumulated
(loss)/Income
15
34,469
31,971
143
–
(45)
–
66,538
–
–
–
(1)
–
66,537
16
1,182
(675)
–
691
(175)
–
1,023
–
–
2,692
–
–
3,715
2,238
–
–
–
–
1,745
3,983
–
–
–
–
(9,523)
(5,540)
Total
37,889
31,296
143
691
(220)
1,745
71,544
–
–
2,692
(1)
(9,523)
64,712
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Orca Exploration Group Inc.
Notes to the Consolidated Financial Statements
General Information
Orca Exploration Group Inc. (“Orca Exploration” or the “Company”) was incorporated on 28 April 2004 under the laws of the British Virgin
Islands. The Company is a participant in a gas-to-electricity project in Tanzania. The Company’s operations at the Songo Songo gas field
in Tanzania include the operation of six producing wells and two 45 MMscfd dehydration and refrigeration gas processing units on Songo
Songo Island on behalf of Songas Limited (“Songas”). Gas produced and sold from the Songo Songo field is classified as either Protected
Gas or Additional Gas. Protected Gas is 100% owned by Tanzania Petroleum Development Corporation (“TPDC”) and is sold to Songas
under a twenty year Gas Agreement primarily for use at the Ubungo power plant and the Wazo Hill cement plant. The Protected Gas is
principally used as feedstock for specified turbines and kilns. Gas sales in excess of the Protected Gas users’ requirements is classified as
Additional Gas. The Company has the exclusive right to explore, develop, produce and market all Additional Gas. Revenues from the sale
of Additional Gas, net of transportation tariff, are shared with TPDC in accordance with the terms of the Production Sharing Agreement
(“PSA”) until October 2026.
Basis of preparation
These consolidated financial statements are measured and presented in US dollars as the main operating cash flows are linked to this
currency through the commodity price. Management is required to make estimates and assumptions that affect the reported amounts of
assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts
of revenue and expenses during the period. Actual results could differ from these estimates.
1
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A) STATEMENT OF COMPLIANCE
The consolidated financial statements have been prepared in accordance with International Financial Reporting
Standards (“IFRS”) issued by the International Accounting Standards Board (“IASB”) and interpretations issued by the
Standing Interpretations Committee of the IASB. These principles differ in certain respects from those in Canada as
described in note 18.
B) BASIS OF CONSOLIDATION
i)
subsidiaries
The consolidated financial statements include the accounts of the Company and all its wholly owned subsidiar-
ies (collectively, the “Company”). Subsidiaries are those enterprises controlled by the Company. The following
companies have been consolidated within the Orca Exploration financial statements:
subsidiary
registered
Holding
functional currency
Orca Exploration Group Inc
British Virgin Islands
Parent Company
US dollar
Orca Exploration Ventures Inc
British Virgin Islands
100%
Orca Exploration Uganda (Holdings) Inc
British Virgin Islands
100%
Orca Exploration Uganda Inc
British Virgin Islands
100%
PAE PanAfrican Energy Corporation
PanAfrican Energy Tanzania Limited
Mauritius
Jersey
100%
100%
US dollar
US dollar
US dollar
US dollar
US dollar
ii) Transactions eliminated upon consolidation
Inter-company balances and transactions, and any unRealized gains arising from inter-company transactions, are
eliminated in preparing the consolidated financial statements.
57
C) FOREIGN CURRENCY
Foreign currency transactions are recorded at the rate of exchange prevailing at the date of the transaction. Monetary
assets and liabilities in foreign currencies are translated at period-end rates. Non-monetary items are translated at
historic rates, unless such items are carried at market value, in which case they are translated using the exchange
rates that existed when the values were determined. Any resulting exchange rate differences are taken to the income
statement.
D) ExPLORATION AND EVALUATION ASSETS, PROPERTY, PLANT AND EQUIPMENT
Exploration and evaluation assets
Exploration and evaluation costs are capitalized as intangible assets. Intangible assets includes lease and license
acquisition costs, geological and geophysical costs and other direct costs of exploration and evaluation which the
directors consider to be unevaluated until reserves are appraised as commercial, at which time they are transferred to
property, plant and equipment following an impairment review and depleted accordingly. Where properties are appraised
to have no commercial value or are appraised at values less than book values, the associated costs are treated as an
impairment loss in the period in which the determination is made.
Property, plant and equipment
Property, plant and equipment comprises the Company’s tangible natural gas assets, development wells, together with
leasehold improvements, computer equipment, motor vehicles and fixtures and fittings and are carried at cost, less any
accumulated depletion, depreciation and accumulated impairment losses. Cost includes purchase price and construc-
tion costs for qualifying assets. Depletion of these assets commences when the assets are ready for their intended use.
Only costs that are directly related to the discovery and development of specific oil and gas reserves are Capitalized.
The cost associated with tangible natural gas assets are amortised on a field by field unit of production method based
on commercial proven reserves. The calculation of the unit of production amortisation takes into account the estimated
future development cost of the field.
Impairment of exploration and evaluation assets, property, plant and equipment
At each balance sheet date, the Company reviews the carrying amounts of its property, plant and equipment and
intangible assets to determine whether there is any indication that those assets have suffered an impairment loss.
Individual assets are grouped together as a cash generating unit for impairment assessment purposes at the lowest
level at which there are identifiable cash flows that are independent from other group assets. In the case of exploration
and evaluation assets, this will normally be at the Company’s field level. If any such indication of impairment exists, the
Company makes an estimate of its recoverable amount. The recoverable amount is the higher of fair value less costs
to sell and value in use. Where the carrying amount of a cash generating unit exceeds its recoverable amount, the
cash–generating unit is considered impaired and is written down to its recoverable amount. In assessing the value in
use, the estimated future cash flows are adjusted for the risks specific to the cash-generating unit and are discounted
to their present value with a discount rate that reflects the current market indicators. Where an impairment loss sub-
sequently reverses, the carrying amount of the asset cash–generating unit is increased to the revised estimate of its
recoverable amount, but so that the increased carrying amount does not exceed the carrying amount that would have
been determined had no impairment loss been recognized for the cash–generating unit in prior years. A reversal of an
impairment loss is recognized as income immediately.
E) OPERATORSHIP
The Company operates the gas field, flow lines and gas processing plant on behalf of Songas at cost. The cost of operating
and maintaining the wells and flow lines is paid for by Orca Exploration and Songas in proportion to the respective
volumes of Protected Gas and Additional Gas sales. The costs of operating and maintaining the wells and flow lines
are reflected in the accounts to the extent that the costs were incurred to accomplish Additional Gas sales. The cost of
operating the gas processing plant and pipeline to Dar es Salaam is paid by Songas. When there are Additional Gas sales,
a transportation tariff is paid to Songas as compensation for using the gas processing plant and pipeline. This transpor-
tation tariff is netted off revenue.
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Orca Exploration Group Inc.
F) TRADE AND OTHER RECEIVABLES
Trade and other receivables are stated at their recoverable amount.
G) CASH AND CASH EQUIVALENTS
Cash and cash equivalents include cash on deposit and highly liquid investments with original maturities of three months or
less.
H) EMPLOYMENT BENEFITS
i)
Pension
The Company does not operate a pension plan, but it does make defined contributions to the statutory pension fund
for employees in Tanzania. Obligations for contributions to the statutory pension fund are Authorized as an expense
in the income statement as incurred.
ii) stock options
The share option plan allows Company officers, directors and key personnel to acquire shares at an exercise price
determined by the market value at the date of grant. When the options are exercised, equity is increased by the
amount of the proceeds received. The fair value of stock options is expensed to the income statement in accordance
with the specific vesting periods. The fair value of the options is calculated, on the grant date, using the Black-
Scholes option pricing model.
iii) stock appreciation rights
Stock appreciation rights are issued to certain key managers, officers and employees. The fair value of stock ap-
preciation rights is expensed to the income statement in accordance with the service period. The fair value of the
stock appreciation rights is revalued every reporting date with the change in the value expensed to the income
statement.
i) asset retirement obligations
No provision has been made for future site restoration costs since the Company has no legal or contractual
obligation under the PSA to restore the fields at the end of their commercial lives.
j) REVENUE RECOGNITION, PRODUCTION SHARING AGREEMENTS AND ROYALTIES
The Company recognizes revenue from natural gas sales when title passes to a customer. The Company conducts
operations jointly with the Tanzanian government and “parastatal entities” in accordance with production sharing
agreements (“PSA”). Under these agreements, the Company pays both its share and the parastatal’s share of operating,
administrative and capital costs. The Company recovers all the operating, administrative and capital costs including
the parastatal’s share of these costs from future revenues over several years (“Cost Gas”). The parastatal’s share of
operating and administrative costs, are recorded in operating and general and administrative costs when incurred and
capital costs are recorded in ‘Property, plant and equipment’. All recoveries are recorded as revenue in the year of
recovery. The Company is entitled to a share of production in excess of the Cost Gas (“Profit Gas”). Operating revenue
represents the Company’s share of Cost Gas and Profit Gas during the period, net of the transportation tariff.
K) ADDITIONAL PROFITS TAx
Under the terms of the PSA, in the event that all costs have been recovered with an annual return of 25% plus the
percentage change in the United States Industrial Goods Producer Price Index, an additional profits tax (“APT”) is payable
to the Government of Tanzania. This tax is considered to be a royalty and is netted against revenue. APT is provided for by
forecasting the total APT payable as a proportion of the forecast Profit Gas over the term of PSA license.
L) TAxATION
Income tax on the profit for the year comprises current and deferred tax. The Company is liable for Tanzanian income tax,
but this is recovered from TPDC through the profit-sharing arrangement. Where current income tax is payable, revenue
is adjusted for the tax and the income tax is shown as current tax. Deferred tax is provided using the balance sheet
asset and liability method, providing for temporary differences between the carrying amounts of assets and liabilities
for financial reporting purposes and the amounts used for taxation purposes. The amount of deferred tax provided is
based on the expected manner of realisation or settlement of carrying amounts of assets and liabilities using tax rates
substantively enacted at the balance sheet date. A deferred tax asset is recognized only to the extent that it is probable
that future taxable profits will be available against which the asset can be utilized. Deferred tax assets are reduced to
the extent that it is no longer probable that the related tax benefits will be realized.
M) SEGMENTAL REPORTING
The Company currently operates only in Tanzania.
O) DEPRECIATION
Depreciation for non-natural gas properties is charged to the income statement on a straight line basis over the
estimated useful economic lives of each class of asset. The estimated useful lives are as follows:
Leasehold improvement
Computer equipment
Vehicles
Fixtures and fittings
Over remaining life of the lease
3 years
3 years
3 years
P) NEW ACCOUNTING STANDARDS AND INTERPRETATIONS
Certain new accounting standards and interpretations have been published that are not mandatory for the 31 December
2008 reporting period. The Company’s assessment of the impact of these new standards and interpretations which have
not been adopted is set out below.
IAS 1 (Amendment), Presentation of Financial Statements: effective for accounting periods commencing on or after 1
January 2009. The revised standard requires the financial statements to clearly identify operating results attributable
to owners of the parent and non controlling interests. All of the companies consolidated within the Orca Exploration’s
financial statements are 100% owned by Orca Exploration. As a result the additional disclosure requirements around
non controlling interests, does not apply. The previous version of IAS 1 used the titles “income statement” and “balance
sheet” and “cash flow statement”. IAS 1 uses “statement of comprehensive income”, “statement of financial position”
and “statement of cash flow”. The change in terminology only applies to the annual statements for the year end 31
December 2009 and not the interim statements for 2009. Management’s assessment of IAS1 is that it will only impact the
presentation of financial information within the main financial statements.
The following standards are assessed not to have any impact on the Company’s financial statements:
•
•
•
•
•
IAS 23 (Amendment), Borrowing Costs: effective for accounting periods commencing on or after 1 January 2009;
IAS 27 (Amendment), Consolidated and Separate Financial Statements: effective for accounting periods commencing
on or after 1 July 2009;
IFRS 2 (Amendment), Share based payment Vesting Conditions and Cancellations: effective for accounting periods
commencing on or after 1 January 2009;
IFRS 3 (Amendment) Business Combinations: effective for accounting periods commencing on or after 1 July 2009;
IFRS 8, “Operating segments” (effective from 1 January 2009)
59
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Orca Exploration Group Inc.
2
CRITICAL ACCOUNTING ESTIMATES
In applying the Company’s accounting policies, which are described in note 1, management makes estimates and assumptions
concerning the future. The resulting accounting estimates will, by definition, vary to the actual results. The estimates and
assumptions that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities
within the next financial year are discussed below:
I) RESERVES
There are numerous uncertainties inherent in estimating quantities of proved and probable reserves and cash flows
to be derived therefrom, including many factors beyond the control of Orca Exploration. The reserve and cash flow
information contained herein represents estimates only. The reserves and estimated future net cash flow from Orca
Exploration’s properties have been independently evaluated by McDaniel & Associates Consultants Ltd. These evaluations
include a number of assumptions relating to factors such as initial production rates, production decline rates, ultimate
recovery of reserves, timing and amount of capital expenditures, marketability of production, crude oil price differentials
to benchmarks, future prices of oil and natural gas, operating costs, transportation costs, cost recovery provisions and
royalties, TPDC “back-in” methodology and other government levies that may be imposed over the producing life of the
reserves. These assumptions were based on price forecasts in use at the date of the relevant evaluations were prepared
and many of these assumptions are subject to change and are beyond the control of Orca Exploration.
Reserves are integral to the amount of depletion charged to the income statement.
II) ExPLORATION AND EVALUATION ASSETS
Under the Company’s accounting policy expenditures incurred on the exploration for, and evaluation of, reserves are
capitalized as intangible assets. These intangibles assets are then assessed for impairment when circumstances suggest
that the carrying amount may exceed its recoverable value. Such circumstances include but are not limited to:
•
•
•
•
•
•
the period for which the Company has the right to explore in the specific area has expired during the period, or will
expire in the near future, and is not expected to be renewed;
no further expenditure on exploration and evaluation is budgeted or planned;
no reserves have been encountered;
the evaluation of seismic data indicates that the reserves are unlikely to be of a commercial quantity;
the quantity of mineral reserves are deemed not to be of commercially viable quantities and the entity has decided
to discontinue further activities;
sufficient data exists to indicate that, although a development in the specific area is likely to proceed, the carrying
amount of the exploration and evaluation asset is unlikely to be recovered in full from successful development or
by sale.
The assessment for impairment involves estimates as to (i) the likely future commerciality of the asset and when such
commerciality should be determined, (ii) future revenues and costs associated with the asset, and (iii) the discount rate
to be applied to such revenues and costs for the purpose of deriving a recoverable value.
III) FAIR VALUE OF STOCK BASED COMPENSATION
All stock options issued or stock appreciation rights granted by the Company have to be valued at their fair value. In assessing
the fair value of the equity based compensation estimates have to be made as to i) the volatility in share price, ii) risk free rate
of interest and iii) the level of forfeiture. In the case of stock options, this fair value is estimated at the date of issue and is not
revalued, where as the fair value of stock appreciation rights is recalculated at each reporting period.
3
RISK MANAGEMENT
The Company, by its activities in oil and gas exploration, development and production, is exposed to the risk associated with the
unpredictable nature of the financial markets. The Company seeks to manage its exposure to these risks where ever possible.
I) FOREIGN ExCHANGE RISK
Foreign exchange risk arises when transactions and Authorized assets and liabilities of the Company are denominated in
a currency that is not the U.S. dollar functional currency.
The Company operates internationally and is exposed to foreign exchange risk arising from currency exposures to U.S.
dollars. The main currencies to which the Company has an exposure are: Tanzanian shillings, British pounds sterling and
Canadian dollars.
The majority of the expenditure associated with the operation of the gas distribution system is denominated in
Tanzanian shillings. The majority of the consultant’s contracts are denominated in British pounds sterling. All of the
capital stock, equity financing and any associated stock based compensation are denominated in Canadian dollars. All of
the operational revenue and the majority of capital expenditure are denominated in US dollars.
There are no forward exchange rate contracts in place.
II)
COMMODITY PRICE RISK
The Songo Songo gas field is the first gas field to be developed in East Africa. The Company has therefore been able to
negotiate industrial gas sales contracts with gas prices that are at a discount to the lowest cost alternative fuels in Dar
es Salaam, namely Heavy Fuel Oil (“HFO”). The price of HFO is exposed to the volatility in the market price of oil.
III) INTEREST RATE RISK
The Company currently does not have any debt or borrowings so is therefore not exposed to any interest rate risk.
IV) CREDIT RISK
All of the Company’s production is currently derived in Tanzania. The sales are made to the power sector and the industrial
sector. In relation to sales to the power sector, the Company has a short term contract with Songas for the supply of gas
to the Ubungo power plant and a contract with TANESCO to supply Wärtsilä power plant. The contracts with Songas and
TANESCO accounted for 49% of the Company’s operating revenue during 2008 and US$8.9 million of the receivables at
the year end. Songas itself is heavily reliant on the payment of capacity and energy charges by TANESCO for its liquidity.
TANESCO is dependent on the Government of Tanzania for some of its funding. Whilst some payments have been delayed,
the Company has subsequently received all the amounts due from Songas and TANESCO in respect of the amounts due at
31 December 2008. Sales to industrial sector are subject to an internal credit review to minimize the risk of non payment.
The Company does not anticipate any default with these customers.
V) LIQUIDITY RISK
Liquidity risk is the risk that the Company will not have sufficient funds to meet its liabilities. Cash forecasts identifying
liquidity requirements of the Company are produced on a quarterly basis. These are reviewed on a regular basis to
ensure sufficient funds exist to finance the Company’s current operational and investment cash flow requirements.
The Company has no financial liabilities other than the trade and other payables indentified in note 13 which are all due
within 12 months. The Company currently has a short term US$5 million overdraft facility. The Company currently has no
bank borrowings and there is scope for utilizing debt funding once the longer term contracts for the supply of gas to
the power sector are in place.
VI) CAPITAL RISK MANAGEMENT
The Company’s objectives when managing capital are to safeguard the Company’s ability to continue as a going concern
in order to provide returns for shareholders and benefits for other stakeholders and to maintain an optimal capital
structure to reduce the cost of capital. The Company currently has no borrowings.
61
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Orca Exploration Group Inc.
4
SEGMENTAL INFORMATION
The Company has a single class of business which is international exploration, development and production of petroleum and
natural gas. The Company currently operates in Tanzania having ceased its operations in Uganda during the year.
(Figures in US$’000)
external
revenue
segment
income/(loss)
Total assets
Total
liabilities
capital
additions
depletion &
depreciation
2008
Tanzania
Uganda
2007
Tanzania
Uganda
23,782
–
23,782
18,777
–
18,777
(3)
85,248
20,536
(9,520)
(9,523)
1,745
–
1,745
–
–
85,248
20,536
85,908
6,881
92,789
21,245
–
21,245
5,101
2,639
7,740
46,837
6,881
53,718
5
REVENUE
Years ended 31 december
Figures in US$’000
Operating revenue
Current income tax adjustment
Deferred additional profits tax
revenue
2008
23,916
249
(383)
23,782
4,792
9,520
14,312
4,631
–
4,631
2007
19,023
78
(324)
18,777
The revenue reported is the Company’s proportionate share of revenue as calculated in accordance with the accounting policy 1(j).
The Company’s total revenues for the year amounted to US$23,782,000 after adjusting the Company’s operating revenue of
US$23,916,000 by:
i)
US$249,000 for current income tax. The Company is liable for income tax in Tanzania, but the income tax is recoverable
out of TPDC’s Profit Gas when the tax is payable. To account for this, revenue is adjusted to reflect the current income tax
charge or loss.
ii) US$383,000 for the deferred effect of additional profits tax. This tax is considered a royalty and is netted against revenue.
6
PERSONNEL EXPENSES
The average number of employees during the year was 21 (2007: 15). The costs are as follows:
Years ended 31 december
(Figures in US$’000)
Wages and salaries
Social security costs
Other statutory costs
2008
1,434
288
385
2,107
2007
1,550
237
272
2,059
7
NET FINANCING INCOME/(CHARGE)
Years ended 31 december
Figures in US$’000
Finance income
Interest income
Foreign exchange gain
Finance charges
Overdraft charges
Foreign exchange loss
net financing income/(charge)
8
TAXATION
2008
2007
145
56
201
(62)
(578)
(640)
(439)
628
832
1,460
–
(85)
(85)
1,375
Under the terms of the Production Sharing Agreement with TPDC, the Company is liable to pay income tax at the corporate
rate of 30% on profits generated in Tanzania. The amount paid is then recovered in full from TPDC by adjusting their share of
profit gas.
The tax charge is as follows:
Years ended 31 december
(Figures in US$’000)
Current tax
Deferred tax
Tax rate reconciliation
Years ended 31 december
(Figures in US$’000)
(Loss)/profit before taxation
Provision for income tax calculated at the statutory rate of 30%
Add the tax effect of non-deductible income tax items:
Administrative and operating expenses
Stock-based compensation
Other income
Impairment of exploration and evaluation assets
Permanent differences
2008
162
2,305
2,467
2008
(7,056)
(2,117)
1,187
504
(22)
2,856
59
2,467
2007
54
1,976
2,030
2007
3,775
1,133
676
450
(331)
–
102
2,030
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Orca Exploration Group Inc.
As at 31 December 2008, there were temporary differences between the carrying value of the assets and liabilities for financial
reporting purposes and the amounts used for taxation purposes. Accordingly a deferred tax liability has been recognized for
the year ended 31 December 2008.
The deferred income tax liability includes the following temporary differences:
as aT 31 december
(Figures in US$’000)
Differences between tax base and carrying value of property,
plant and equipment
Provision for stock option bonuses
Income tax recoverable
Other liabilities
Additional profits tax
Tax losses
9
CASH AND CASH EQUIVALENTS
as aT 31 december
(Figures in US$’000)
Cash and cash equivalents
2008
6,338
(2)
221
(196)
(291)
(560)
5,510
2008
10,586
2007
3,542
(360)
230
(31)
(176)
–
3,205
2007
16,515
Included in the cash and cash equivalents is US$529,000 advanced from Songas under the terms of the Operatorship Agreement
to pay for the costs of operating the wells and gas processing plant. This amount is also included in trade and other payables.
10
TRADE AND OTHER RECEIVABLES
as aT 31 december
(Figures in US$’000)
Trade receivables
Prepayments
Other receivables
2008
1 1,896
950
350
13,196
2007
7,275
801
160
8,236
The Company’s exposure to credit, currency and interest risk related to trade and other receivables is disclosed in note 3.
11
EXPLORATION AND EVALUATION ASSETS
Figures in US’000
costs
As at 1 January 2008
Additions
as at 31 december 2008
depletion/depreciation
As at 1 January 2008
Impairment
as at 31 december 2008
net book Values
as at 31 december 2008
As at 31 December 2007
TANzANIA
Tanzania
Uganda
–
648
648
–
–
–
648
–
6,881
2,639
9,520
–
(9,520)
(9,520)
–
6,881
Total
6,881
3,287
10,168
–
(9,520)
(9,520)
648
6,881
The exploration and evaluation asset relates to initial evaluation of the Songo Songo West prospect which is pending the
determination of proven and probable reserves.
UGANDA
As a result of the seismic acquired in 2007, it was decided in June 2008 not to progress with the drilling of two exploration
wells. Accordingly, the Company did not exercise its option to acquire a 50% working interest in Exploration Area 5 in Uganda.
A total cost of US$9.5 million was subsequently recognized as an impairment during the year and written off in full to the
income statement. This included US$0.6 million of general administrative expenses (2007: US$1.2 million) that were capitalized
in the year in relation to the Ugandan exploration and evaluation asset.
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Orca Exploration Group Inc.
12
PROPERTY, PLANT AND EQUIPMENT
Figures in US’000
costs
As at 1 January 2008
Additions
Disposals
as at
31 december 2008
depletion/
depreciation
As at 1 January 2008
Charge for period
Depreciation
on disposals
as at
31 december 2008
net book Values
as at
31 december 2008
As at
31 December 2007
Tanzania
Leasehold
improvements
computer
equipment
Vehicles
Fixtures
& Fittings
68,362
4,370
–
72,732
7,356
4,716
–
12,072
60,660
61,006
156
29
–
185
156
–
–
156
29
–
164
43
–
207
84
42
–
126
81
79
139
–
(17)
122
68
34
(17)
85
37
70
41
11
–
52
41
–
–
41
11
–
Total
68,862
4,453
(17)
73,298
7,705
4,792
(17)
12,480
60,818
61,157
In determining the depletion charge, it is estimated by the independent reserve engineers that future development costs of
US$89.1 million (2007: US$128.4 million) will be required to bring the total proved reserves to production.
13
TRADE AND OTHER PAYABLES
as aT 31 december
(Figures in US$’000)
Trade payables
Accrued liabilities
Related party (note 20)
2008
11,799
2,256
–
14,055
2007
12,667
4,629
156
17,452
The Company’s exposure to credit, currency and interest risk related to trade and other payables is disclosed in note 3.
14
BANK FACILITY
The Company currently has a short-term undrawn US$5.0 million overdraft facility which expires in May 2009.
15
CAPITAL STOCK
a) Authorized
50,000,000 Class A Common Shares
No par value
50,000,000 Class B Subordinate Voting Shares No par value
The Class A and Class B shares rank pari passu in respect of dividends and repayment of capital in the event of
winding-up. Class A shares carry twenty votes per share and Class B shares carry one vote per share. The Class A shares
are convertible at the option of the holder at any time into Class B shares on a one-for-one basis. The Class B shares are
convertible into Class A shares on a one-for-one basis in the event that a take over bid is made to purchase Class A shares
which must, by reason of a stock exchange or legal requirements, be made to all or substantially all of the holders of Class
A shares and which is not concurrently made to holders of Class B shares.
b) Changes in the capital stock of the Company were as follows:
Thousands of shares
or US$’000
class a shares
As at 1 January
and 31 December
class b shares
2008
2007
authorized
Issued
Valuation
authorized
Issued
Valuation
50,000
1,751
983
50,000
1,751
983
As at 1 January
50,000
27,863
65,555
50,000
25,023
33,486
Issue of new stock
Stock options
exercised
Normal course
issuer bid
–
–
–
–
–
–
–
–
(1)
–
–
–
As at 31 December
50,000
27,863
65,554
50,000
2,700
31,971
160
143
(20)
27,863
(45)
65,555
Total Class A & B
shares as at 31
December
100,000
29,614
66,537
100,000
29,614
66,538
In April 2007, 0.2 million Class B shares were awarded to a newly appointed officer. These shares are held in escrow and they
vest to the officer in three equal installments starting 7 April 2007. At the time the shares were awarded they had a market
value of US$1.6 million (Cdn$1.7 million). The shares will be fully vested by 7 April 2009. An expense of US$0.6 million was
recorded in 2008 (2007: US$0.9 million).
In July 2007, 2.5 million Class B shares were issued at a price of Cdn$13.80 per share following the conclusion of a private
placement, resulting in gross proceeds of Cdn$34.5 million. A total of US$30.4 million net proceeds have been recognized in
capital stock. A large proportion of the funds were used for the completion of the SS-10 well in Tanzania and for the funding
of the venture in Uganda.
STOCK-BASED COMPENSATION
The stock option plan provides for the granting of stock options to directors, officers and employees. The exercise price of
each stock option is determined at the closing market price of the common shares on the day prior to the day of grant. Each
stock option granted permits the holder to purchase one common share at the stated exercise price. The Company records a
charge to the profit and loss account using the Black-Scholes fair valuation option pricing model. The valuation is dependent
on a number of estimates, including the risk free interest rate, the level of stock volatility, together with an estimate of the
level of forfeiture. The level of stock volatility is calculated with reference to the historic traded daily closing share price at
the date of issue.
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Orca Exploration Group Inc.
stock Options
Thousands of options or Cdn$
Outstanding as at 1 January
Granted
Forfeited
Exercised
2008
2007
Options
exercise Price
Options
exercise Price
2,847
1.00 to 13.55
–
(33)
–
–
12.00
–
2,022
1,185
(200)
(160)
2,847
1.00 to 6.80
8.70 to 13.55
6.80
1.00
1.00 to 13.55
Outstanding as at 31 December
2,814
1.00 to 13.55
The weighted average remaining life and weighted average exercise prices of options at 31 December 2008 were as follows:
exercise Price
(cdn$)
1.00
8.0 to 13.55
number Outstanding
as at 31 december
2008
Weighted average
remaining
contractual Life
number exercisable
as at 31 december
2008
Weighted average
exercise Price
(cdn$)
1,662
1,152
5.19
3.37
1,662
392
1.00
10.91
There were no new stock options issued during the year. A total charge of US$2.0 million has been recognized for the year in
relation to the stock options.
stock appreciation rights
2008
2007
Thousands of stock appreciation rights or Cdn$
Outstanding as at 1 January
sar
1,090
exercise Price
4.00 to 13.55
Granted (i)
Granted (i)
Granted (i)
Granted (ii)
Exercised (ii)
Outstanding as at 31 December
15
–
–
105
(400)
810
5.30
–
–
11.05
4.0
sar
400
300
300
90
–
–
exercise Price
4.00
8.00
8.70
13.55
–
–
8.0 to 13.55
1,090
4.00 to 13.55
(i)
(ii)
These stock appreciation rights have a term of 5 years and vest in three equal annual installments, the first third vesting on the
anniversary of the grant date. There is no maximum liability associated with these rights.
These stock appreciation rights have a liability of Cdn$3.00 per right or Cdn$0.3 million in total with a two year term. The stock
appreciation rights exercised in 2008 also had a maximum liability of Cdn$3.0 per right or Cdn$1.2 million in total.
The Company records a charge to the income statement using the Black-Scholes fair valuation option pricing model every
reporting period with a resulting liability being recognized in the balance sheet. In the valuation of these stock appreciation
rights at the reporting date, the following assumptions have been made: the risk free rate of interest equal to 3.50%, stock
volatility 110%, 0% dividend yield and a range of forfeiture from 0% to 33%.
As at 31 December 2008, a total liability of US$0.2 million (2007: US$1.9 million) has been recognized in relation to the stock
appreciation rights. A total credit of US$0.6 million has been recorded during 2008, as a result of the decline of the share price
during the year (2007: US$1.3 million charge).
16
CAPITAL RESERVE
The capital reserve is used to record two types of transactions:
(i)
To recognize the fair value of equity settled stock based compensation expensed in the year. In the case of the treasury
shares issued in 2007, the reserve has been used to recognize the unexpensed fair value of the treasury shares, as the
full fair value of the treasury stock issued has been recorded as capital stock.
(ii)
To account for the difference between the aggregated book value of the shares purchased under the normal course
issuer bid and the actual consideration.
17
LOSS PER SHARE
The calculation of basic loss per share is based on the net loss attributable to ordinary shareholders of US$9.5 million (2007:
US$1.7 million profit) and a weighted average number of Class A and Class B shares outstanding during the period of 29,614,423
(2007: 28,259,382).
In computing the diluted loss per share, the dilutive effect of the stock options was 1,425,253 (2007: 1,543,358) shares. These
are added to the weighted average number of common shares outstanding during the year resulting in a diluted weighted
average number of Class A and Class B shares of 31,039,676 for the year ended 31 December, 2008. No adjustments were
required to the reported earnings from operations in computing diluted per share amounts.
18
RECONCILIATION OF IFRS TO ACCOUNTING PRINCIPLES
GENERALLY ACCEPTED IN CANADA
The consolidated financial statements have been prepared in accordance with IFRS, which differ in some respects from
Canadian Generally Accepted Accounting Principles (“GAAP”). Any difference in accounting principles as they pertain to the
accompanying consolidated financial statements were immaterial except as described below:
A) TAxATION
On 31 August 2004, the Company was spun off from a predecessor company pursuant to a scheme of arrangement. Under
Canadian GAAP, a deferred tax liability has to be recognized for the taxable temporary differences arising from the initial
recognition of an asset or liability under any scenario. IFRS does not permit the setting up of a deferred tax liability
for all taxable temporary differences arising from the initial recognition of an asset or liability except in a business
combination.
B) STOCK-BASED COMPENSATION
There were 810,000 stock appreciation rights outstanding as at 31 December 2008 (see note 15). Under IFRS as these
rights are a cash-settled share-based transaction, the fair value of the rights is calculated using a Black-Scholes option
pricing model every reporting period. Under Canadian GAAP, the fair value is calculated using the intrinsic value method
whereby the rights are valued at the quoted market price less the rights price at each reporting period. Under both IFRS
and Canadian GAAP, the fair value is expensed over the service period of the rights.
69
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Orca Exploration Group Inc.
C) ExPLORATION AND EVALUATION ASSETS
Under IFRS 6 there is a requirement for separate disclosure of costs associated with exploration and evaluation assets.
There is no such requirement under Canadian GAAP and the costs are aggregated within property, plant and equipment.
As at 31 December
(Figures in US$’000)
Current assets
Exploration and
evaluation assets
Property, plant
and equipment
Current liabilities
Non current liabilities
Capital stock
Reserves
(Loss)/profit before taxation
19
OPERATING LEASES
as aT 31 december
(Figures in US$’000)
Less than one year
Between one and five years
2008
2007
IFrs
23,782
648
60,818
85,248
14,055
6,481
66,537
(1,825)
85,248
(7,056)
cdn
23,782
–
63,010
86,792
13,899
8,226
66,537
(1,870)
86,792
(7,140)
IFrs
24,751
6,881
61,157
92,789
17,452
3,793
66,538
5,006
92,789
3,775
2008
204
714
918
cdn
24,751
–
69,500
94,251
17,187
5,541
66,538
4,985
94,251
3,886
2007
102
394
496
The Company has entered into two five year rental agreements that expire on 30 November 2012 and 30 November 2013,
respectively, at a cost of approximately US$0.2 million per annum for the use of offices in Dar es Salaam.
20 RELATED PARTY TRANSACTIONS
One of the non executive Directors is a partner at a law firm. During the year, the Company incurred US$195,000 to this firm
for services provided. The transactions with this related party were made at the exchange amount.
21
CONTRACTUAL OBLIGATIONS AND COMMITTED CAPITAL INVESTMENT
CAPITAL INVESTMENT
re-rating of the songas processing plant
Orca Exploration is committed to paying Songas US$0.5 million on successful completion and operation of the gas processing
facilities at 90 MMscfd together with a further US$0.5 million on the first anniversary of the successful completion of the
project. The gas processing plant was re-rated from 70 Mmscfd to 90 MMscfd by Lloyds Register in January 2009. The re-rating
was approved by Songas in Q1 2009.
Wazo Hill cement plant
Orca Exploration signed a five year contract with Tanzania Portland Cement Company (“TPCC”), a subsidiary of Heidelberg
Cement, for the supply of gas to a new US$100 million kiln at its Wazo Hill plant in Dar es Salaam. In order to honour this
contract, Orca Exploration committed to install a pressure reduction station at Wazo Hill at a cost of US$0.7 million.
compressed natural gas
In Q3 2008, Orca Exploration ordered US$2.5 million of CNG facilities, consisting of a compressor, a vehicle dispenser and two
trailer filling facilities to deliver 0.7 MMscfd of CNG to industrial customers in Dar es Salaam. The facilities are expected to be
operational during Q2 2009. A total of US$2.3 million had been spent on this project by the end of 2008.
Funding
Management forecasts that the Company will be able to meet its 2009 capital expenditure program through the use of existing
cash balances and self-generated cash flows. The Company currently has no bank borrowings and there is scope for utilizing
debt funding once the longer term contracts for the supply of gas to the power sector are in place.
CONTRACTUAL OBLIGATIONS
Protected Gas
Under the terms of the original gas agreement for the Songo Songo project (“Gas Agreement”), in the event that there is a
shortfall/insufficiency in Protected Gas as a consequence of the sale of Additional Gas, then the Company is liable to pay the
difference between the price of Protected Gas (US$0.55/Mmbtu) and the price of an alternative feedstock multiplied by the
volumes of Protected Gas up to a maximum of the volume of Additional Gas sold (23.8 Bcf as at 31 December 2008).
The Gas Agreement has been amended by an initialled Amended and Restated Gas Agreement (“ARGA”). The ARGA provides
clarification of the Protected Gas volumes and removes all terms dealing with the security of the Protected Gas and the conse-
quences of any insufficiency to a new Insufficiency Agreement (“IA”). The IA specifies terms under which Songas may demand
cash security in order to keep them whole in the event of a Protected Gas insufficiency. Once the Insufficiency Agreement
is signed, it will govern the basis for determining security. Under the provisional terms of the IA, when it is calculated that
funding is required, the Company shall fund an escrow account at a rate of US$2/Mmbtu on all industrial Additional Gas sales
out of its and TPDC share of revenue, and TANESCO shall contribute the same amount on Additional Gas sales to the power
sector. The funds provide security for Songas in the event of an insufficiency of Protected Gas. The Company is actively
monitoring the reservoir and does not anticipate that a liability will occur in this respect.
back in
TPDC has indicated that they wish to exercise their right to ‘back in’ to the field development by contributing 20% of the costs
of the future wells including SS-10 in return for a 20% increase in the profit share percentage for the production emanating
from these wells. The implications and workings of the ‘back in’ are still to be discussed in detail with TPDC and there may
be the need for reserve modifications once these discussions are concluded. For the purpose of the reserves certification, it
has been assumed that they will ‘back in’ for 20% and this is reflected in the Company’s net reserve position. However, the
financial statements do not take account of any reimbursement for the SS-10 capital expenditure, pending the finalisation of
the terms of the ‘back in’.
22 POST BALANCE SHEET EVENTS
There are no post balance sheet events.
71
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Orca Exploration Group Inc.
23 DIRECTORS AND OFFICERS EMOLUMENTS
USD’000 except for
number of share options
directors
W. David Lyons (i)
Chairman
Peter R. Clutterbuck (i)
President and CEO
Nigel A. Friend (i)
Vice President, Executive
Officer and CFO
James Smith (i)
Vice President Exploration
Pierre Raillard
Vice President Operations
David W. Ross
Non Executive Director
John Patterson (i)
Non Executive Director
Year
base
bonus
Other
Total
stock options
Outstanding
stock
appreciation
rights
Treasury stock
2008
2007
2008
2007
2008
2007
2008
2007
2008
2007
2008
2007
2008
2007
15
23
393
452
353
334
408
350
359
241
–
–
67
49
–
–
135
–
95
–
92
125
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
15
23
528
452
448
334
500
350
484
241
–
–
67
49
1,000,000
1,000,000
490,000
490,000
–
–
–
–
265,000
90,000
265,000
90,000
–
–
–
–
–
–
300,000
300,000
66,667
300,000
300,000
133,333
325,000
325,000
75,000
75,000
125,000
125,000
–
–
–
–
–
–
–
–
–
–
–
–
(i)
The ‘Base compensation’ for W.D. Lyons, P.R. Clutterbuck, N. Friend, J. Smith, and J. Patterson are in respect of consultancy fees.
FORWARD LOOKING STATEMENTS
This disclosure contains certain forward-looking estimates that involve substantial known and unknown risks and uncertainties,
certain of which are beyond Orca Exploration’s control, including the impact of general economic conditions in the areas in which
Orca Exploration operates, civil unrest, industry conditions, changes in laws and regulations including the adoption of new environ-
mental laws and regulations and changes in how they are interpreted and enforced, increased competition, the lack of availability
of qualified personnel or management, fluctuations in commodity prices, foreign exchange or interest rates, stock market volatility
and obtaining required approvals of regulatory authorities. In addition there are risks and uncertainties associated with oil and gas
operations, therefore Orca Exploration’s actual results, performance or achievement could differ materially from those expressed in,
or implied by, these forward-looking estimates and, accordingly, no assurances can be given that any of the events anticipated by
the forward-looking estimates will transpire or occur, or if any of them do so, what benefits, including the amounts of proceeds, that
Orca Exploration will derive therefrom.
For further information please contact:
Nigel A. Friend, CFO
+255 (0)22 2138737
nfriend@orcaexploration.com
Peter R. Clutterbuck, CEO
+44 (0) 7768 120727.
prclutterbuck@orcaexploration.com
or visit the Company’s web site at www.orcaexploration.com
CORPORATE INFORMATION
BOARD OF DIRECTORS
73
W. DAVID LYONS
PETER R. CLUTTERBUCK
NIGEL A. FRIEND
PIERRE RAILLARD
Non-Executive Chairman
St. Helier
Jersey
President & Chief
Executive Officer
Haslemere
United Kingdom
Chief Financial Officer
London
United Kingdom
Vice President Operations
Dar es Salaam
Tanzania
jOHN PATTERSON
DAVID ROSS
jAMES SMITH
Non-Executive Director
Nanoose Bay
Canada
Non-Executive Director
Calgary
Canada
Vice President Exploration
Hurst
United Kingdom
OFFICERS
DAVID W. ROSS
Company Secretary
OPERATING OFFICE
REGISTERED OFFICE
INVESTOR RELATIONS
ORCA ExPLORATION
GROUP INC.
Barclays House, 5th Floor
Ohio Street, P.O. Box 80139
Dar es Salaam
Tanzania
Tel: + 255 22 2138737
Fax: + 255 22 2138938
INTERNATIONAL SUBSIDIARIES
PANAFRICAN ENERGY
TANzANIA LIMITED
Barclays House, 5th Floor
Ohio Street
P.O. Box 80139
Dar es Salaam
Tanzania
Tel: + 255 22 2138737
Fax: + 255 22 2138938
ORCA ExPLORATION
GROUP INC.
P.O. Box 3152,
Road Town
Tortola
British Virgin Islands
NIGEL A. FRIEND
Chief Financial Officer
Tel: + 255 22 2138737
nfriend@orcaexploration.com
www.orcaexploration.com
PAE PANAFRICAN
ENERGY CORPORATION
1st Floor
Cnr St George/Chazal Streets
Port Louis
Mauritius
Tel: + 230 207 8888
Fax: + 230 207 8833
ORCA ExPLORATION (VENTURES) INC.
ORCA ExPLORATION UGANDA (HOLDING) INC.
ORCA ExPLORATION UGANDA INC
P.O. Box 3152
Road Town
Tortola
British Virgin Islands
ENGINEERING CONSULTANTS
AUDITORS
LAWYERS
TRANSFER AGENT
MCDANIEL & ASSOCIATES
CONSULTANTS LTD.
Calgary
Canada
KPMG LLP
Calgary
Canada
and Calgary, Canada
BURNET, DUCKWORTH CIBC MELLON TRUST
& PALMER LLP
Calgary
TRUST COMPANY
Toronto, Montreal Canada
www.orcaexploration.com