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Focused on growing
a sustainable
integrated gas
business for Africa
Annual Report & Accounts 2019
Financial Highlights
Revenue
85.6$m
(2018: $57.8m)
+48%
Net cash flow
from operating activities
+21%
34.9$m
(2018: $28.8m)
Adjusted funds flow1
+124%
Net income attributable
to shareholders
+86%
43.2$m
(2018: $19.3m)
Cash and short-term
investments
138.7$m
(2018: $131.5m)
24.7$m
(2018: $13.3m)
+5%
Earnings per share
+87%
0.71$
(2018: $0.38)
Working capital
(including cash)
+27%
Gas sales (average)
+58%
63.1MMcfd
(2018: 39.9 MMcfd)
107.0$m
(2018: $84.2m)
Company gross conventional
natural gas reserves (2P)
-10%
Net present value (2P)
discounted at 10%
-4%
265Bcf
(2018: 293 Bcf)
283$m
(2018: $294m)
US dollar
Glossary
$
MMcfd Million standard cubic feet per day
Billion standard cubic feet
Bcf
Million US dollar
$m
Proved plus probable
2P
1 Please refer to Non-GAAP measures section of the MD&A for additional information.
Delivering economic growth and prosperity to Africa through the development of indigenous natural gas resourcesOrca Exploration Group Inc. // Annual Report & Accounts 2019
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01
In This Report
Strategic Report
At a Glance
CEO’s Statement
The Orca Difference
Tanzania
Corporate Social Responsibility
Our People
Company Operations
Gas Reserves
Board of Directors
Forward Looking Information
Management’s Discussion
& Analysis
Glossary
Financial Statements
Management’s Report to Shareholders
Independent Auditors' Report
Consolidated Statements
of Comprehensive Income
Consolidated Statements
of Financial Position
Consolidated Statements
of Cash Flows
Consolidated Statements
of Changes in Shareholders’ Equity
Notes to the Consolidated
Financial Statements
Corporate Information
02
04
07
08
10
20
22
30
32
34
36
61
62
63
65
66
67
68
69
90
For more information go to our website:
www.orcaexploration.com
Orca Exploration Group Inc. // Annual Report & Accounts 2019Strategic Report
02
AT A GLANCE
Creating the infrastructure
for a nation
Orca operates a license in Tanzania which
has a total area of approximately 170 km2.
The license is located on or in shallow
water around Songo Songo Island (“SSI”)
which lies 25 km off the coast of mainland
Tanzania and 200 km south of Dar es Salaam.
Read more about Company operations on page 22
Pemba Island
Tanga
Zanzibar
Dar es Salaam
Tanzania
Mafia Island
Tanzania
Size:
950,000 km2
Population:
60,000,000
Kilwa Kivinje
2
1
Significant
resource base
In addition to the Songo Songo
reserves, there is an estimated
50 trillion cubic feet of proven
gas resource deep offshore Tanzania.
Over the next decade, there is
scope for the country to become
both a significant exporter of liquefied
natural gas and a major consumer
of gas to meet economic growth.
We will grow with
Tanzania
In recent years, Tanzania has initiated
several significant transportation
(ports and railways) and energy
projects. Tanzania has had an average
annual growth rate of 6% to 7% over
the last decade and has the second
largest economy in East Africa, one
of the world’s fastest growing regions.
This new infrastructure will help
support the region’s industrial growth
and enhance the country’s position
as a major logistics hub in East Africa.
3
There is a growing
need for energy
Tanzania’s population has increased at
an annual rate of 3% per annum since
2004 and now stands at 60 million.
With increased urbanization and
industrial development, electricity
consumption is expected to continue
to grow at 7% per annum.
Orca Exploration Group Inc. // Annual Report & Accounts 2019 i
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Songo Songo
03
Highlights
Producing wells
5
Employees
111
Experience operating
the Songo Songo Gas
Field and related
infrastructure
15years
4
A strong track
record
Given Orca’s financial strength,
its 15 year record of successfully
operating the Songo Songo Gas Field
and downstream distribution network
in Dar es Salaam, the Company is well
placed to support Tanzania’s plans to
further develop its gas resources.
5
Experienced
leadership team
In 2019, the Board was enhanced
with the appointment of five non-
executive directors with extensive
experience of operating in Africa,
and in developing and financing
infrastructure projects.
6
Engaging with the
community
The Company has a successful
history of supporting education
and health projects on SSI and
in the neighboring districts.
Orca Exploration Group Inc. // Annual Report & Accounts 2019Strategic Report
04
CEO’S STATEMENT
Building a business that
provides for the future
Nigel Friend
Chief Executive Officer
Governance
We believe that one of the foundations
of a successful business is good corporate
governance and we always try to align ourselves
with best practices around the world.
The unprecedented disruption
to world markets caused by the
COVID-19 virus has created significant
business uncertainty. Orca entered
the period with a strong balance
sheet and growing gas production
in Tanzania. The Company has
implemented a number of measures
to protect its workforce and mitigate
the risk posed by the virus. We are
confident of emerging from this global
crisis well positioned for the future.
The unprecedented disruption to world
markets caused by the COVID-19 virus
and the collapse in oil prices have created
significant business uncertainty, particularly
in the energy sector. Orca entered this difficult
period with a strong balance sheet and growing
gas production in Tanzania and has taken
several measures to mitigate the risk posed
by the virus. The Company’s operations are
critical to Tanzania’s power generation and
we are working with our stakeholders and the
Government of Tanzania to ensure that supply
continues uninterrupted. We remain vigilant
and are taking all necessary steps to protect
the wellbeing of our employees and the wider
population.
Against this backdrop, the Company made
significant progress in 2019 to support its
strategy of prudent capital allocation and
sustainable growth, with a focus on becoming
one of the leading developers of gas resources
for domestic use in Africa. The Company’s
operations in Tanzania continue to expand and
we achieved record sales volumes averaging
63 million standard cubic feet per day (“MMcfd”)
over the year, a 58% increase on 2018.
From a leadership perspective, the Company
Board was enhanced with the appointment
of five non-executive directors with extensive
experience of operating in Africa, and in developing
and financing infrastructure projects. We also
assembled a new business development team
with technical and transactional experience to
review and evaluate proven gas opportunities.
At operational level, we streamlined the Company’s
management structure in Tanzania and increased
our technical assurance capabilities.
We remain a lean team and leverage local expertise
with international experience. In Tanzania, there are
102 employees of whom only two are expatriates.
At corporate level there are nine personnel
primarily focused on financial reporting, operational
support and business development.
Prudent Balance Sheet Management
During 2019, the Company continued careful
management of its capital and sought to buy back
shares when they were trading at a significant
discount to its net asset value. In June 2019, the
Company commenced a Normal Course Issuer Bid
(“NCIB”), through which it acquired 933,028 Class
B Shares at an average price of CDN$6.43/share
for an aggregate consideration of CDN$6 million.
This continued in Q1 2020, with the
announcement and execution of a CDN$50.0
million Substantive Issuer Bid (“SIB”). Through
the SIB auction process, a further 7,692,297 Class
B Shares were purchased at CDN$6.50/share.
As a consequence of the NCIB and SIB, the
Company’s outstanding shares as at March 31,
2020 comprised 1,750,495 Class A Shares and
24,864,960 Class B Shares.
Orca Exploration Group Inc. // Annual Report & Accounts 2019 05
MMcfd
49.8
The financial stability of the electricity utility,
Tanzania Electric Supply Company (“TANESCO”),
has continued during the year. TANESCO has
remained current with its payments for gas
consumed over the year and has repaid $11.0
million in relation to its arrears. Under accounting
conventions, the remaining arrears amount in
total to $47.5 million are fully provided against
as at December 31, 2019 and are not recognized
in the Company's balance sheet.
Additional gas sales
2019
2018
2017
2016
2015
13.3
13.0
12.6
12.5
11.4
Industrials
26.9
29.0
32.0
36.0
Power
Net income attributable to shareholders $m
13.3
2019
2018
2017
-2.5
2016
2015
2.2
1.5
Working capital
2019
2018
2017
2016
2015
84.2
69.6
72.0
32.5
TANESCO long-term receivables
(fully provided against)
2019
2018
2017
2016
2015
47.5
58.5
61.9
24.6
$m
107.0
$m
74.4
74.4
Gas Reserves Supporting Growing
Production Levels
As at December 31, 2019, the independent
reserves evaluator, McDaniel & Associates
Consultants Ltd (“McDaniel”) assessed that
the gross proved (1P) and probable (2P)
Songo Songo conventional natural gas
reserves available to the Company to the
end of the license period (October 2026)
are 234 billion cubic feet ("Bcf") and 265 Bcf
respectively. The net present value at 10%
discount rate of the 1P reserves is $237.1
million and the 2P reserves, $282.6 million.
The main Songo Songo field has additional
resources that are accessible should the
Company secure a license extension,
In May 2019, the Company’s subsidiary,
PanAfrican Energy Tanzania Limited signed a
long-term gas sales agreement with TPDC for up
to 20 MMcfd to be processed and transported
to Dar es Salaam through the Tanzanian
Government-owned, National Natural Gas
Infrastructure (“NNGI”). This was subsequently
increased to 30 MMcfd, with the increased
volumes being supplied on a reasonable
endeavors basis.
No Infrastructure Constraints
The Company’s security of gas supply to Dar es
Salaam is very strong. The Company is fortunate
that it has access to two infrastructure systems
to process the Songo Songo gas and transport
it to the power and industrial markets in Dar es
Salaam. The original Songas Limited ("Songas")
gas processing plant (which is operated by the
Company on behalf of Songas) and pipeline
facilities (“Songas Infrastructure”) has a current
capacity of approximately 97 MMcfd and the
NNGI on SSI has a capacity of 140 MMcfd,
of which only 18% is currently utilized. Hence,
there are no perceived infrastructure constraints
for the foreseeable future.
The Company also declared four quarterly
dividends in 2019, amounting in total to
CDN$0.23 per Class A Share, and per
Class B Share or $6.0 million in aggregate.
The Company’s Board intends to approve
a dividend policy during 2020.
With a robust balance sheet and
continuing gas production in
Tanzania to fuel critical services
and the growing economy, the
Company is well placed to meet
the challenges ahead and to take
advantage of growth opportunities
as and when they arise
Robust Financial Results
The Company continues to generate strong cash
flows from its Songo Songo gas asset in Tanzania.
2019 was an excellent year, with net cash flows
from operating activities of $34.9 million and
net income attributable to shareholders of $24.7
million. The Company exited 2019 with working
capital of $107.0 million, including cash and
investment in short-term bonds of $138.7 million.
The Company has limited exposure to oil price
fluctuation. All prices for gas sales to the power
sector and the Tanzania Petroleum Development
Corporation (“TPDC”) are fixed and unaffected.
Although the gas prices in our contracts with the
industrial sector track oil prices, the contracts
contain price caps and floors that limit the extent
of any fluctuations.
Strong Economic Activity in Tanzania
There is strong economic activity in Tanzania
driven by long-term strategic infrastructure
projects. The first phase of the 1,225 km
Standard Gauge Railway will connect Dar es
Salaam to Morogoro and Dodoma at 202 km
and ultimately extend to Uganda, Rwanda,
and the Democratic Republic of Congo. Other
signature projects include the completion of Dar
es Salaam’s new international airport, and the
construction of several new flyovers and bridges.
All of these projects require increased volumes of
gas, particularly in relation to cement production.
In addition, with a 30% electricity connectivity
rate and population growth that has averaged
3% per annum since 2004, additional generation
and transmission capacity are in high demand
and are central to the Government of Tanzania’s
development plans.
Orca Exploration Group Inc. // Annual Report & Accounts 2019Strategic ReportManagement’s Discussion & AnalysisFinancial Statements
06
CEO’S STATEMENT CONTINUED
This undeveloped energy demand
will only rise as Africa’s population is
expected to increase by more than
75% to 2.1 billion by 2040, and the
urban population is set to grow by
more than half a billion
During 2019, the Company successfully installed
a closed-loop refrigeration unit to maintain gas
at the requisite temperature through the Songas
Facilities. It is part of a wider project to maintain
gas supply on specification. The second phase
is to install compression and contracts are in
the process of being signed. Compression will
be installed on a turnkey basis at a forecast cost
of $38 million, and with a target commissioning
date of Q1 2022.
Making a Difference
The use of indigenous reliable gas and the
displacement of imported fuel has had a
significant beneficial impact on Tanzania,
economically, environmentally and socially. It is
estimated that gross production from the Songo
Songo field has saved the Tanzanian economy
around $10 billion by displacing the import of
more expensive fuel oil. The burning of gas also
creates approximately 30% less carbon dioxide
emissions than oil. The Company continues to
encourage the use of gas to displace diesel and
petrol where possible. Sales of Compressed
Natural Gas (“CNG”) for use in vehicles
is relatively small but gaining traction in
Dar es Salaam. During the course of 2020, it
is expected that several haulage fleets and bus
operators will start to convert their vehicles to
consume CNG, thus reducing Nitrogen Oxide
and particulate emissions in populated areas.
The Company is currently finalizing its
Environmental, Social and Governance
(“ESG”) policies, in line with best practice,
and continues to monitor progress in this
area. Our Tanzanian operations have been
recording and reporting CO2 and other
emissions from gas production since securring
a loan facility from the International Finance
Corporation in 2015/16. Through our
ESG processes, we intend to increase our
reporting range and standards and drive
down emission levels where we can.
The Company’s Corporate Social Responsibility
(“CSR”) program fundamentally focuses on
health and education, and in 2019 it continued
to deliver significant benefits to the local
population. Alongside our continuing educational
scholarship scheme (that will shortly see the
first ever students from SSI graduate from
university), CSR projects have included the
construction of a comprehensive medical facility
in Somanga Funga. This includes, amongst other
things, a maternity ward, operating theatres, an
optometrist examination room and a laboratory.
The facility fundamentally changes the access
to high quality medical care for around 12,000
people in the local area. The Company has also
commenced funding support to a local children’s
cancer charity.
A Focused Gas Strategy
In 2019, the Company completed a strategic
review that concluded that it was in its own best
interests and that of its shareholders to focus on
developing proven gas resources for domestic
consumption on the African continent.
Despite significant gas discoveries over the
past 10 years in countries such as Mozambique,
Tanzania, Senegal, Mauritania and Ghana, there
has been limited domestic gas infrastructure
development in Africa and as a result electricity
connectivity remains stubbornly low. It is
estimated that 580 million Africans do not
have access to electricity out of a total current
population of 1.2 billion. Developing greater gas
generation capacity, combined with renewable
electricity options, will help to alleviate this
social issue and reduce the burning of solid
biomass for cooking.
This undeveloped latent energy demand will
only increase as Africa’s population is expected
to rise by more than 75% to 2.1 billion by 2040,
and the urban population is set to grow by more
than half a billion.
Natural gas is considered a transitional fuel that
will facilitate and support the development of
renewable energy sources. It is expected that
projects focused on increasing the consumption
of natural gas in Africa will be well-supported,
given that it generates lower carbon emissions
compared to other thermal fuels and there
are significant social benefits from delivering
economic growth and prosperity to the continent.
With plentiful solar, hydro and natural gas
potential, Africa has a unique opportunity to
develop and diversify its energy supply in an
efficient and environmentally-sound manner.
The Company’s success has been built on the
development and operation of its Songo Songo
field in Tanzania, its midstream infrastructure
and downstream distribution network that
transports and distributes low pressure gas
to industrial consumers. This project remains
one of the few integrated gas projects in sub-
Saharan Africa. One of the Company’s objectives
moving forward is to replicate the success of this
project elsewhere on the continent. We believe a
focused strategy targeting the consolidation and
development of African gas assets can generate
accretive returns for our shareholders and improve
trading liquidity in the Company's shares.
Outlook
Q1 2020 saw lower demand for gas, as
hydroelectricity plants were able to run
at close to capacity as a consequence of
unusually high rainfalls. However, demand
is expected to pick up from the end of
May when the dry season commences.
However, there remains considerable
uncertainty as to the impact of the
COVID-19 virus on future gas demand
and the macro-economic climate in Tanzania.
The Company has been informed that the
Government of Tanzania has completed a review
of all the existing oil and gas Production Sharing
Agreements in country. It is expected that the
Government will propose amendments to the
terms, though the timing of these discussions
remain uncertain. We look forward to working
with all parties to ensure that the Company can
continue to develop the Songo Songo field and
help Tanzania meet its growing energy needs.
With a robust balance sheet and strong gas
production in Tanzania, Orca is well placed to help
fuel critical services and the growing economy,
overcome the current macro challenges and take
advantage of growth opportunities as and when
they arise. The prudent management of capital,
the development of our Tanzanian operations and
the diversification of our asset base remain at the
forefront of the Company’s strategy to grow and
generate further shareholder returns in 2020.
Nigel Friend
Chief Executive Officer
Orca Exploration Group Inc. // Annual Report & Accounts 2019 07
The Orca Difference
Orca’s focus on generating returns for shareholders by maintaining
a robust balance sheet, prudently managing its capital and growing
gas production in Africa sets the Company apart from its peers.
Returns to Shareholders
The Company continues to recognize the value of buying back shares
when they are trading at a significant discount to net asset value and in
June 2019, commenced an NCIB, through which it acquired 933,028 Class
B Shares at an average price of CDN$6.43 per share for an aggregate
consideration of CDN$6.0 million. This was enhanced by dividend returns
totaling $6.0 million declared during the year and an SIB in early 2020
which returned a further CDN$50.0 million to shareholders.
Making a Difference
The Songo Songo development project and the use of indigenous reliable
gas has had a significant economic impact on Tanzania. It has been
estimated that gross production from the Songo Songo field has saved
the Tanzanian economy around $10 billion by displacing the import of
more expensive fuel oil. This has been hugely beneficial to the economy
from a financial, social and environmental perspective.
A Focused Gas Strategy
Targeting near-term indigenous natural gas development or production
opportunities in Africa to meet forecast increases in demand and deliver
economic growth, prosperity and sustainable self-sufficiency. The Company
intends to maintain its involvement at all levels of the gas supply chain, in
order to leverage its expertise and deliver returns for shareholders.
Strong Balance Sheet
With minimal debt, significant cash reserves and a disciplined and
selective approach to capital allocation, the Company is well placed
to continue its impressive progress, both within Tanzania and in the
wider African continent.
For more on our Corporate Social Responsibility turn to pages 10 to 19
Orca Exploration Group Inc. // Annual Report & Accounts 2019Strategic ReportManagement’s Discussion & AnalysisFinancial Statements 08
TANZANIA
With an average annual growth rate of 6%
to 7% over the last decade, Tanzania has the
second largest economy in East Africa, one of
the world’s fastest-growing regions
The country’s Development Vision 2025
strategy is focused on industrialization and
job creation within the private sector and a
key part of this ambitious plan is to provide
sustainable energy to meet the demands of
an ever-growing population.
Energy Demand
Tanzania is the 6th most populous country in
sub-Saharan Africa and its population has nearly
doubled to almost 60 million in the last 20 years.
With a land area of 950,000 km² it is the world’s
23rd largest country, with a population density of
around 60 people per km².
Increasing the country’s energy supply to match
demand is a major priority. The population
of Tanzania’s largest city, Dar es Salaam, is
conservatively estimated to be between 5 million
and 6 million and is growing rapidly. To meet
such growing energy demand, infrastructural
development will require the simultaneous
mobilization of significant resources across
several areas of the country.
Gateway to East African Trade
Tanzania is well placed to contribute to East
Africa’s development as one of the world’s most
dynamic trade hubs, not least due to its coastal
location. Many of its neighboring countries have
no coastal access and rely on Tanzania to import
and export most of their goods.
Malawi produces a large quantity of copper and
cobalt for export, and imports manufactured
products from China and the Middle East.
Rwanda’s trading economy is growing at more
than 9% per year. The Democratic Republic of
Congo’s eastern region uses Tanzania’s roads
for most of its trading. As a member of the
East African Community and Southern African
Development Community, Tanzania is in a strong
position to shape the future of trade on the
continent.
Through the above factors, Tanzania’s transport
and logistics infrastructure is growing rapidly,
especially the main international corridors.
Railway projects, roads upgrades and airport
developments have all been undertaken in recent
years and transport and utilities infrastructure
projects with a value of $19 billion are being
planned. Some of the largest infrastructure
projects include:
• The East African Coastal Corridor
development project comprising
460 km of highway between Bagamoyo,
Tanzania and Mombasa, Kenya
• A 202 km single-track railway between the
cities of Dar es Salaam and Morogoro, with
an option for an extension to Mwanza, and
neighboring countries
• The Dar es Salaam Maritime Gateway Project;
a port upgrade doubling throughput capacity
• The Dar es Salaam Rapid Transit; a bus-based
mass transit system connecting the suburbs of
Dar es Salaam to the central business district.
Songo Songo’s Growing Role in Tanzania’s
Development
The Songo Songo gas project is well positioned
to support the development of the country’s
transportation, energy production, and economic
industrialization. A major priority moving forward
will be in developing the country's infrastructure
and resources to allow natural gas to meet future
power demand, a concept that is fast gaining
momentum as an abundant, effective, and
sustainable energy resource. As the International
Energy Agency (IEA) reports:
Orca Exploration Group Inc. // Annual Report & Accounts 2019 09
There have been a series of major discoveries in recent years. These
developments could fit well with Africa’s push for industrial growth and
its need for reliable electricity supply (constraining the expansion of
more polluting fossil fuels). Much will depend on the price at which gas
becomes available, the development of distribution networks (including
small-scale liquefied natural gas (LNG) distribution), the financing available
for infrastructure, and the strength of policy efforts to displace polluting
fuels. In our projections, Africa becomes a major player in natural gas as a
producer, consumer, and exporter. Gas demand in Africa doubles to 2040
in the Stated Policies Scenario.
Source: IEA
Total primary energy supply by source, United Republic of Tanzania 1990-2017
22,500
20,000
17,500
15,000
e 12,500
o
t
k
10,000
7,500
5,000
2,500
0
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
2012
2014
2016
Natural Gas Wind, solar etc.
Oil
Biofuels and Waste
Hydro
Coal
Tanzania primary energy demand and GDP in the Stated Policies Scenario, 2010-2040
60
50
40
30
20
10
0
1.5
1.25
1
0.75
0.5
0.25
0
T
r
i
l
l
i
o
n
d
o
l
l
a
r
s
(
2
0
1
8
)
2010
2018
2030
2040
Coal
Oil
Gas
Hydro
Solar PV
Other low-carbon
Bioenergy
GDP (right axis)
Source: IEA
Tanzania’s primary energy supply forecast is
aligned with an average increase in emerging
countries of 5% to 8% per year, and natural gas
will be a key component of this energy supply.
Sustainable Energy
As the diagrams illustrate, a natural gas energy
strategy will need to remain a priority for the
Government in order to meet future energy
demand for communities and across different
economic sectors.
A natural gas strategy is also a key pillar in
the country’s initiative to reduce its carbon
footprint. In line with United Nations guidelines,
Tanzania is working towards its own set of
Intended Nationally Determined Contributions
(“INDCs”) to mitigate climate change, for
full implementation by 2030. They include a
commitment to reduce greenhouse gas emissions
by 10% to 20% nationwide.
Tanzania’s INDCs include:
• Diversifying its energy portfolio to ensure
overall energy and economic security through
enhanced availability, affordability, and
reliability, while reducing its carbon emissions
over time
• Promoting the use of clean technologies for
power generation through renewable sources
such as geothermal, wind, solar, and renewable
biomass
• Expanding the use of natural gas for power
production, cooking, transport, and thermal
services by improving its natural gas supply
systems
• Developing low-emission transport systems
through mass rapid transport initiatives and
investments in air, rail, marine, and road
infrastructure
Tanzania has also implemented various other
policies, legislations, strategies, plans, and
programs to address climate change. These
include the National Communications on Climate
Change, National Adaptation Programme of
Action, and the Natural Gas Policy Act.
LECB Program
The project supports countries in formulating
their Nationally Appropriate Mitigation Actions
and in developing measurement, reporting, and
verification systems. It is currently supporting
Tanzania in refining its INDCs for submission to
the United Nations Framework Convention on
Climate Change.
Orca Exploration Group Inc. // Annual Report & Accounts 2019Strategic ReportManagement’s Discussion & AnalysisFinancial Statements
10
CORPORATE SOCIAL RESPONSIBILITY
Respecting our
social environment
Since the commencement of its operations in
Tanzania, the Company has sought to develop a
number of self-sustaining education and health
projects on SSI and in the surrounding region
SSI forms part of an island archipelago in Tanzania’s Lindi
region and more specifically within Kilwa District. Occupying
around 6 km2, it has a small, largely indigenous community of
around 7,000 people. The island plays a significant role in the
country’s oil and gas industry, but fishing and seaweed farming
remain its principal economic activities.
Stakeholder Engagement
Internal and external engagement on
material issues
Materiality Analysis
Analysis of material issues and
alignment with business strategy
Strategy Definition
Define principles, policies, reporting
and governance structure
Objective & Target Setting
Progress Review
Set sustainability goals and targets for
End of year review,
long-term value creation
reporting and refinement
Future Steps
Our next steps will include the further
refining of this list through consultation
with our employees, business partners
and other key stakeholders, so we can
deliver in the areas that matter most
Orca Exploration Group Inc. // Annual Report & Accounts 2019 11
Economic
Socio-economic
Social
Governance
& Approach
Eco-efficiency
Socio-environmental
Environmental
Economic
• Anti-bribery & anti-corruption
• Compliance
• Management systems & approach
• Market behavior & revenue
transparency
• Public policy & government
relations
• Risk & opportunity
• Value generation & distribution
Environmental
• Air emissions & quality
• Biodiversity
• Climate change & energy
• Decommissioning
• Effluents, emissions, spills,
resources & waste
• Emergency preparedness
Social
• Assets & land acquisition
• Asset integrity & process safety
• Cultural heritage
• Customer impact
• Cyber security
• Health, safety & security
• Labor practices & human rights
• Learning & development
• Local & indigenous communities
• Local content
• Supply chain management
• Workplace & social engagement
Governance & Approach
• Management approach
• Energy transition
• Sustainability
• Climate change
• Risk management
Stakeholder Engagement
Materiality Analysis
Strategy Definition
Internal and external engagement on
Analysis of material issues and
Define principles, policies, reporting
material issues
alignment with business strategy
and governance structure
Objective & Target Setting
Set sustainability goals and targets for
long-term value creation
Progress Review
End of year review,
reporting and refinement
Future Steps
Our next steps will include the further
refining of this list through consultation
with our employees, business partners
and other key stakeholders, so we can
deliver in the areas that matter most
Orca’s Materiality ScreenThe first step involved engaging external expertise to assist with identifying an initial list of potentially material environmental, social and governance features (e.g. emissions, health and safety etc.) and issues relevant to us, our business and our stakeholders.Orca Exploration Group Inc. // Annual Report & Accounts 2019Strategic ReportManagement’s Discussion & AnalysisFinancial Statements 12
CORPORATE SOCIAL RESPONSIBILITY CONTINUED
Building a better future for
the people of Songo Songo
When initiating the Company’s CSR program, the decision was
made to prioritize health and the education of young children
on SSI and the wider Kilwa District
Scholarships
The Company continues to run an annual
scholarship for SSI’s best students, with the
aim of improving the educational experience of
the children of SSI, thus enabling children to be
better equipped to integrate into the national
economy, become financially independent,
and to support their families and the wider
SSI community.
The scholarship funds the best SSI students
through a full secondary education program
in a selected school in Dar es Salaam. The
Company meets all travel costs, school fees,
boarding costs, uniform, textbooks and all other
school requirements. Since 2011, more than 45
students have benefited from this program, and
in academic year 2017/2018, five SSI students
went on to higher education.
Today, through the program, five students are
undertaking O (Ordinary) Level courses, three are
attending A (Advanced) Level courses, and seven
are in university or Higher Educational facilities.
To the best of the Company’s knowledge, no SSI
student had ever attended university prior to the
introduction of the scholarship program.
The benefit and motivation the Company’s
scholarship program has brought to the young
people of SSI has been remarkable.
The Company therefore decided to invest
across the educational spectrum through
a multifaceted program.
Kindergarten
The first stage was to construct a kindergarten.
It opened in September 2011 and comprised
two classrooms that could accommodate
135 students daily, functioning toilets, a
head-teacher’s office, library and play area.
Early learning for ages three to six sets the
foundation for improved educational performance
at primary level and above. The kindergarten
proved to be a fundamental first step in improving
the educational prospects for children within
SSI’s remote community, delivering a significant
increase in the availability of first stage education.
The reliable childcare provided by the kindergarten
staff also allowed more mothers to focus on
earning a living, and for girls, traditionally kept at
home to focus on household duties, to continue
with their own education. To date, more than
1,000 of the island’s children have attended
SSI kindergarten.
Support to the Secondary School
The Company also commenced a continuous
support program to the island’s Secondary
School, providing books and classroom
equipment.
Teacher Training
To ensure facilities were staffed to provide the
best available training standards, the Company
sponsored three local Songo Songo residents
to attend a two-year teacher training program
(2011-2012) at Montessori Msimbazi College in
Dar es Salaam. This included accommodation,
tuition fees, textbooks and return travel
to Dar es Salaam. In 2015, as part of the
Company’s commitment to sustainable projects,
the kindergarten was handed over to the
community and is now part of the SSI Primary
School. The facility now receives educational
support from the Government of Tanzania.
SSI students being presented with laptops and supplies
prior to commencing their funded university education
SSI kindergarten pupils
Orca Exploration Group Inc. // Annual Report & Accounts 2019 13
SSI Kindergarten
Pupils attending SSI kindergarten
150
130 129
122
120
116
95
73
52
67
2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
SSI kindergarten pupils
Orca Exploration Group Inc. // Annual Report & Accounts 2019Strategic ReportManagement’s Discussion & AnalysisFinancial Statements 14
CORPORATE SOCIAL RESPONSIBILITY CONTINUED
Girls' Dormitory
In the past, island culture has not always placed
the same emphasis on the education of females
as for males. Females have often been kept
from school or made to return home to focus
on domestic chores rather than schoolwork. To
address this, the Company constructed a girls’
dormitory, able to accommodate 55 students in a
learning-orientated environment. The dormitory
was handed over to the community in 2013 and
has seen 187 female students utilize the facility.
SSI Secondary School Science Laboratory
In 2015, the Company funded the construction
of a multi-purpose science laboratory for the
SSI Secondary School. This initiative was seen
as an important step in helping Kilwa District
Council achieve the national target set by the
former Tanzanian President Jakaya Kikwete,
which requires every secondary school to have a
science laboratory. To date, nearly 600 students
have used the laboratory. The Company also
donated 1,500 bags of cement to Kilwa District
Council to support construction of laboratories
in other schools in the area.
English Language Training
The Company has not confined its educational
program to SSI alone. Kilwa District also covers
part of the mainland in a rural area of Tanzania.
Until the passing of recent Government reforms
that guarantee free access to education for
all, many had limited opportunity to undertake
formal schooling. Where they did have such an
opportunity, primary education was delivered
in Kiswahili (Swahili language), while secondary
education was almost entirely in English. In
rural parts of Tanzania, children often have
very little exposure to the English language
and leave primary school with almost no
English competency. This means when they
start secondary education, they struggle
to learn and can often lag behind.
In 2011, the Company’s former Chairman, David
Lyons, undertook to change this situation and
privately funded trials to deliver an intensive
six-week language orientation program in
selected schools in Tanzania’s Mafia District,
to see whether pass rates could be improved.
To facilitate the delivery of the program, schools
were equipped with solar power systems and low
power IT and presentational equipment.
Girls' dormitory at SSI Secondary School
SSI Secondary School laboratory
Orca Exploration Group Inc. // Annual Report & Accounts 2019 15
It helped me pronounce words,
increase the speed in reading
and it helped my reading
Student, Micheni Secondary School
This course has helped me a lot.
I can now engage/capitalize on
my education
Mariamu Saidi Student,
Mibuyuni Secondary School
Phonics is the foundation we
need to read and write. If you
know how to sound out the
letter and then to blend sounds,
then any word can be read
Zainabu Ally Student,
Ilulu Secondary School
All of the methods of teaching used
should be continued since they
are all important to us. When you
talk about phonics, it helps us to
speak good English, and computer
programs help us to learn with
actions and for this reason we
cannot forget easily. It is short and
clear that all the methods used
in this course for teaching
us are important
Fatma Jumanne Student,
Ilulu Secondary School
Success Story:
Haji Omari Naoda
Haji is a 3rd year student studying a
Bachelor of Commerce in Marketing
at the University of Dodoma, the
Tanzanian capital.
Haji was raised by a single mother,
as his father passed away a few
months before he was born. His
mother is a housewife and a small-
scale seaweed farmer. Haji is the
last-born sibling and only boy in
the family. He has four sisters who
only completed primary school
education and are married and
residing on SSI.
In 2011, when the Company
introduced its scholarship program
for the best SSI students, Haji was
one of the first 10 beneficiaries. The
Company paid for Haji to attend
secondary school in Dar es Salaam
where he excelled. He went on to
do equally well at A-level, and in
2017 attained sufficient pass marks
to qualify for university. Throughout,
the Company has covered the costs
of Haji’s travel to and from SSI
during school breaks, all school fees,
boarding costs, uniform, textbooks
and all other school requirements.
Even with his obvious intellect, it
is highly unlikely Haji would have
followed this path without the
Company’s support.
Always eager to learn, in 2019 Haji
also completed an internship with the
Company in the Finance Department
in Dar es Salaam. Finance Manager,
Obeid Kitalima, said:
“I am very impressed with how
this man works. He has got a
very bright future ahead as he
has self-discipline and follows
instructions well.”
Haji is a role model for other
students on the island. When he is
on vacation, he uses his spare time
to volunteer and teach bookkeeping
and mathematics at the SSI
Secondary School. He is hopeful that
when he finishes his studies, he will
be able to get a good job so that he
can support his family.
In 2013, the Company adopted the program,
initially rolling it out into 10 schools in Kilwa
District, and a further six in Mafia District. Since
then, the Company has grown the program
across 27 schools in Kilwa District, training
nearly 14,000 students in the process. Part-way
through the roll-out, the Company moved away
from training international volunteer teachers
to deliver the courses, and started training local
teachers. A total of 220 local teachers have
now been trained since the program’s inception.
The local schools are now largely self-sufficient
in delivering the training, with the Company
providing IT upgrades and monitoring of the
delivery of training when required.
The English Language orientation program has
had a significant impact on the educational
standards and subsequent graduation rates
throughout Kilwa District. An average of 82% of
Form 2 students have passed in Division IV or
above in the past five years, with 28% passing
in Division III or above – the grades required to
stand a reasonable chance of entering higher
education. 66% of Form 4 students passed in
Division IV or above, with 18% passing above
Division III. From a baseline of 3% and 1.24%
in 2010 and 2011 respectively, to today, the
improvement in numbers graduating with good
grades has been considerable.
Students who have undertaken the training have
clearly enjoyed the experience and recognized
the value it has brought to their own educational
prospects.
Desk Donation
In 2015, His Excellency Dr. John Joseph Pombe
Magufuli, President of Tanzania, wanted to
ensure that all school children had desks in the
classroom, a resource sadly lacking in many
parts of the country at the time, with a reported
shortage totaling 1.4 million. Desk donation
campaigns were encouraged countrywide.
In June 2016, the Company donated 800
three-person desks for primary schools in Kilwa
District. The handover ceremony took place
at Masoko Primary School with Kilwa District
Commissioner Hon. Juma Njwayo as guest
of honor. The support allows approximately
2,400 students every year to access education
in comfortable conditions that are conducive
to effective learning. The contractor who was
awarded this large carpentry task was also
from Kilwa, boosting the local economy in
the process.
Orca Exploration Group Inc. // Annual Report & Accounts 2019Strategic ReportManagement’s Discussion & AnalysisFinancial Statements 16
CORPORATE SOCIAL RESPONSIBILITY CONTINUED
Ensuring a proper
healthcare service
As with education, in many of Tanzania’s
remote communities, timely access to good
quality healthcare is by no means guaranteed.
The country’s health system is developing,
but many hospitals and medical centers are
privately run and unaffordable to most.
Similarly, they tend to be located in and around
district or regional centers. Villagers often have
limited access to transport options, so they
may have to travel long distances to receive
treatment. Suitable accommodation at the other
end is also not guaranteed. Receiving long-term
treatment can often be costly and impractical,
and for some it is just not possible.
In Kilwa District, the Company has made
significant investments to develop accessible,
clean, well equipped and properly staffed
medical centers in the areas that need them
most. Projects were selected on the basis of
genuine need with guarantees from district
councils that the facilities would be properly
maintained. Recent projects include:
Nangurukuru Dispensary
Nangurukuru is a business center of Kilwa
District Council, situated in the Kivinje Singino
ward (one of 23 ‘wards’ or ‘areas’ within Kilwa
District). It is around 30 km from the district
center and approximately 300 km from Dar
es Salaam, with a population of approximately
19,000. For a long time, there were no health
services in the area at all, placing many of the
vulnerable and weak at considerable risk. This
was especially applicable to pregnant mothers
who would often walk more than 10 km to
receive treatment or assessment. To overcome
this, and to their immense credit, the community
decided to construct a dispensary for themselves.
They managed it up to lintel level but struggled
to complete the facility.
Recognizing the endeavors of the community, in
2014 the Company funded the completion of the
community dispensary, including construction of
an outpatient department, a maternal and child
health ward, maternity wing, incinerator, and
public toilets to serve the facility.
The dispensary has had a significant positive
effect on the local community, providing easily
accessible medical support to locals and transit
passengers commuting from Kilwa to southern
regions, and also to pregnant mothers, children
and the sick and injured in the region. Since
inauguration, the facility has treated nearly
15,000 patients.
Nangurukuru Dispensary
Staff Housing, Nangurukuru
Maternity Waiting Home at Kilwa Kivinje
Orca Exploration Group Inc. // Annual Report & Accounts 2019 17
Staff Housing at Nangurukuru
The Company also constructed housing through
two residential buildings to accommodate
medical staff working at the newly constructed
Nangurukuru Dispensary. This means the
dispensary can remain open for longer hours,
provide 24-hour service in special circumstances
and deliver services to a far greater number of
people. The project was delivered by a local
construction firm using local labor and locally
sourced building materials, ensuring that the
economic benefit and new skills were retained
by the community.
Maternity Waiting Home
In a bid to support the district’s effort to reduce
child mortality, the Company constructed and
fully furnished a maternity waiting home at the
Kilwa District Hospital. This inpatient facility is
close to a fully staffed hospital where pregnant
ladies defined as high risk, or with complications,
can prepare for their delivery in clean and
comfortable surroundings. They can also be
quickly transferred to the nearby hospital with
access to the highest level of care and treatment
available in the area. To-date, over 300 expectant
mothers have used the facility.
Children Cancer Initiative
It is crucial that a child with cancer is within no
more than a day's travel from an appropriate
treatment site, to provide the best possible
chance of survival. Late presentation,
misdiagnosis and inability to pay for travel are
all factors that impact the chance of a sick child
becoming well again. Yet, before the start of
national efforts to bring about significant change
in the neglected field of child cancer diagnosis
and treatment, only 10% of Tanzanian children
with cancer were able to reach treatment
facilities. Of those, nine out of ten died. In overall
terms, a cancer diagnosis was fatal for almost
every child in the country.
In 2004, Tanzania’s first children’s cancer ward
was opened, and within three years cure rates
for Burkitt Lymphoma, at the time the country’s
most common children’s cancer, improved by
more than 70%.
In the ensuing years, through a combination of
Government, NGO, charity and volunteer medical
professional initiatives, diagnosis and treatment
have gone from strength to strength, although
typically focused in the Dar es Salaam region.
In 2011, Tumaini La Maisha (TLM), a children’s
cancer charity, was established in Tanzania.
TLM (Hope for Life), is a Tanzanian based NGO
dedicated to providing free and curative care
for all children with cancer and wider family
support. In partnership with the Government
of Tanzania, it provides both clinical and
non-clinical supportive services.
Children at TLM celebrating the donation made by the Company
The Company has donated
$20,000 to TLM to ensure that
the vital treatment that has saved
the lives of so many Tanzanian
children is not interrupted during
the uncertain times of COVID-19.
The donation will assist TLM in
sustaining its incredible, lifesaving
work, by ensuring medical supplies
remain available.
In 2016, TLM launched a National Expansion
Plan of Paediatric Oncology Care (centrally
coordinated) to other regions of the country.
Several collaborations have now been formed
with centers across Tanzania, who now enjoy free
access to chemotherapy, diagnostic pathology
services, transport and procurement.
In October 2019, the Company signed a
memorandum of understanding with TLM to
support the delivery of pediatric oncology
services in Sokoine Referral Hospital in Lindi
region. In what is intended to be a long-term
relationship with the charity, the Company’s
support will fund the establishment of a new
treatment site, which the Company believes will
make a substantial contribution to the continued
success of increasing survival rates of childhood
cancer in Tanzania. The Company intends to
support one location in year one, two in year two
and three in year three. By the end of year three,
each new location should be self-sufficient,
whereupon the Company alongside TLM will
identify new locations where it can offer support.
Orca Exploration Group Inc. // Annual Report & Accounts 2019Strategic ReportManagement’s Discussion & AnalysisFinancial Statements 18
CORPORATE SOCIAL RESPONSIBILITY CONTINUED
Ongoing construction
projects
Somanga Health Center
The remote area of Somanga comprises five villages with a population of
approximately 10,000. The distance to Kilwa District Hospital is 62 km.
Localized medical facilities were considered critical, and in 2019 the
Company commenced construction of the Somanga Health Center,
one of its largest healthcare projects to-date.
The facility will be extremely well equipped and the Government of
Tanzania will contribute X-ray machines, surgery equipment, beds,
mortuary equipment and laboratory equipment. The completed facility
will allow all community members, plus an estimated additional 2,000
people from the surrounding area, to access a broad range of high-quality
healthcare. The Company expects to hand over the project in Q2 2020.
Orca Exploration Group Inc. // Annual Report & Accounts 2019 19
Mortuary Building – Kinyonga District
Hospital, Kilwa Kivinje
The Kinyonga District Hospital at Kilwa Kivinje is a referral center that
receives patients from health centers and clinics in rural and urban areas
of the wider Kilwa District. The hospital is located close to the main road
that leads from Mtwara in the south to Dar es Salaam in the north.
It is approximately 360 km from Dar es Salaam and 200 km from the
Lindi Regional Hospital. The catchment area for Kinyong is therefore vast,
making it a vital support hub for a large swathe of the district community,
and for travelers who use the main road from Dar es Salaam to Mtwara
and Ruvuma regions. For many years, the hospital has had a dilapidated
mortuary facility with poor infrastructure which made it unfit for purpose.
Recognizing the health and compassionate requirements for an operable
mortuary, the Company is funding the construction of a modern facility,
which is due for completion in Q2 2020.
District Pharmacy Block –
Kilwa Kivinje
The Government of Tanzania recently directed that each council
establishes a pharmacy to ensure the availability of reliable medicines
for community members receiving service at all district hospitals and
health centers. In line with this, the Company has recently funded the
construction of a pharmacy block at Kilwa Kivinje.
The project is expected to reduce incidences of medicine deficiency in
district hospitals and health centers, provide easier access to medicines,
create employment, and generate revenues to improve other healthcare
services, including infrastructure for rehabilitation. The Company expects
to hand over the project in Q2 2020.
Orca Exploration Group Inc. // Annual Report & Accounts 2019Strategic ReportManagement’s Discussion & AnalysisFinancial Statements 20
OUR PEOPLE
A talented and
committed workforce
The Company has invested significant time and
resource into complying with Tanzania's rapidly
emerging regulatory requirements, while ensuring
preservation of its rights and entitlements provided
with the PSA framework
Until recently, the oil and gas industry in Tanzania
lacked the regulations and governing laws often
found elsewhere. In these circumstances, the
Company adopted internationally recognized
oilfield standards and ensured compliance with
the Songo Songo agreements. Over the past few
years however, the Tanzanian petroleum legal
framework has been developed in an effort to
bring the sector in line with current international
standards. In response the Company has
employed a locally recruited, legally trained
Compliance Officer.
Tanzanian Workforce and Staff Development
As the first gas operator in Tanzania, the
Company has fully recognized its responsibility
to train and develop a competent Tanzanian
workforce that could eventually take on major
management and technical roles. The Company
also sought to develop a support sector capable
of sustaining wider industry in Tanzania. To do
this, the Company adopted a Recruit, Train,
Mentor, Enable and Support approach to
eventually transition from an expatriate-heavy
organization to one that is largely Tanzanian-led.
Amongst the many new regulations that have
been introduced, the Petroleum (Local Content)
Regulations 2017 are amongst the most
developed and far-reaching. The regulations have
established minimum levels for employment of
Tanzanians, participation of Tanzanian companies
in projects, and procurement of local goods and
services. Companies must always seek to employ
qualified Tanzanians first, award contracts to
Tanzanian service providers, even if they are
marginally more expensive than international
bidders, and procure from Tanzanian suppliers if
the goods are available in-country. With highly
punitive measures available to the regulators in
the event of a breach, and in recognition of the
importance of developing Local Content, the
Company makes every effort to remain compliant.
Indeed, almost 20 years since the Songo
Songo agreements were signed, the Company
has in many ways exceeded the requirements
established under the Local Content Regulations,
particularly in the area of local employment.
Recruiting
From the outset, the Company’s recruitment
strategy was to hire a strong mix of experienced
expatriates to work alongside a range of
the brightest Tanzanian engineers and other
professionals with appropriate educational
backgrounds, who could be trained and
developed to eventually lead the Company
across a range of the most challenging
disciplines. The Company has always firmly
believed in leaving a legacy in Tanzania. It has
sought local staff who it believes can excel,
not just in Tanzania but within the wider global
industry.
Building such a team was not straightforward.
Relevant experience within the country
was limited, and being a nascent industry
in Tanzania, those with the right potential
were understandably nervous of joining the
organization. However, the Company’s previous
successes, as well as its strong ethical approach
to employment and operations, eventually
started to attract the right people and the
team began to develop.
Training
Understandably, a great deal of time and
resource had to be placed into training local
employees to operate independently, or with
decreasing levels of expatriate guidance.
Following recruitment, the Company initially
focused on developing a robust engineering team
with the ability to participate across the range of
disciplines found in an upstream to downstream
gas company.
Plant maintenance, subsurface analysis, well
services, downstream construction, maintenance
and repair were just some of the disciplines
the Company concentrated on. It also placed
increasing emphasis on the support services
and skills required to sustain the operation. It
undertook HR, logistics, oil and gas accounting,
HSE and project management training at
a variety of international and local training
organizations.
The Company’s people investment has been
significant. With more than $1.2 million spent on
staff training in the past seven years alone, it has
provided some of the best oil and gas industry-
related education available.
Mentoring and Enabling
Over time, and with focused training as
described, the Company was able to start
placing Tanzanians into many leadership or
demanding technical roles, with expatriates
mentoring them on a daily basis. Tanzanian
staff continued to have the benefit of enabling
support from international consultants and
service providers when undertaking the most
technically demanding of jobs, where such
support was warranted.
Supporting
Through the Mentoring and Enabling process,
the Company was able to reduce expatriate
supervision and take on more of a supporting
role, often from locations outside of Tanzania.
The benefit of experience was still available
to the team, but in most cases Tanzanians led
everyday operations, with the ability to reach
back for advice where necessary.
Today, after 15 years of operations, the Company’s
training and development approach has been highly
successful. The team in Tanzania now numbers 102
employees, of which only two are expatriates. All
departments, with the exception of operations, are
managed by Tanzanians, most of whom have been
with the Company for more than 10 years, and
some since operations commenced.
Orca Exploration Group Inc. // Annual Report & Accounts 2019 21
Bizimana Ntuyabaliwe MBA
Sabas Oisso
Bizimana started his career in the telecoms industry back in 2002
as a Junior Accounts Officer responsible for stocks, sales and cost
of sales, bank reconciliations and deferred income reconciliation.
After four years and internal promotions, he saw greater opportunity
elsewhere and in January 2006 he joined Coca Cola Kwanza Tanzania
Limited as an Assistant Finance Manager, where his responsibilities
included reviewing weekly and monthly bank reconciliations, ensuring
appropriate actions on outstanding balances, and supervising fixed
assets accounting in compliance with International Financial and
Reporting Standards. After only 10 months, he was promoted to
Regional Finance Manager, Mbeya Region, responsible for the
region’s finance competency including property, plant and
equipment, accounts receivables, accounts payables, bank
and cash, settlement and procurement.
In January 2008, Bizimana joined the Company as a young Management
Accountant. He says he chose to join the Company because:
“By then, in 2008, the oil and gas industry was a new growing industry
with a lot of prospects for the country. I wanted to be part of that
good story. At that time and even now, the Company was the leading
gas field operator in the country with already signed gas sales
agreements with TANESCO and several industries in Dar es Salaam.”
Bizimana was quickly recognized as a rising star within the organization,
and in 2011 was promoted to Business Analyst, reporting to Deputy
General Manager. In 2012, he was promoted again to Commercial
Manager, with greater responsibility, including the management of
legal and documents control, procurement and Local Content.
As Commercial Manager, Bizimana developed a deep understanding
of the Company’s major contracts and agreements with senior
stakeholders down to smaller customers. His knowledge, inquisitive
mind and willingness to challenge conventional thinking set him aside
from many of his peers, and in 2019 he was promoted to Deputy
Managing Director in Tanzania, a role he fills today.
Bizimana is clear he made the right choice in joining the Company
in 2008. He says:
“My intuition regarding the potential of the Company, and my potential
within the Company, did not let me down. My current promotion
means so much for my career. Having occupied different positions
in the Finance and Commercial departments, I consider the promotion
to the position of Deputy Managing Director as a big step higher
in my life and my career. I appreciate the trust and the confidence
put in me by the Company. It’s an opportunity for me to learn more
about the operations in the Company. When I look back at the level
I joined the Company at, and what I have been able to achieve
now, it is evident that the Company values what I do, and that my
commitment and loyalty is recognized by the management. I believe
my promotion from relatively junior levels serves as motivation for
other staff to see the sky is the limit.”
Sabas is the Company’s Downstream Manager in Tanzania. He joined
the Company in September 2014 as Projects and Process Engineer,
having completed his Bachelor’s Degree in Petroleum Engineering from
the University of Dodoma. It was his first job after graduating.
Sabas quickly showed potential and took a prominent role in several
projects, including MEG Regeneration System maintenance, connection
of SS-11 well to SS-3 well jumper lines, design and fabrication of
wellhead spools, coflex pipe relocation, and interconnection of SS-11
well and SS-12 well to the NNGI. Sabas proved he was capable of
leading these projects across a full range of responsibilities, from design,
drafting of drawings, outlining technical specifications and tendering, to
ordering and procurement of materials, tools, equipment, consumables
and personnel. He required minimum supervision, and quickly stood out
as a dedicated, talented engineer and a great asset to the Company.
Sabas’ consistent performance caught the eyes of management, and
in 2018 he was promoted to the role of Downstream Manager. This
was a significant challenge for such a young engineer. Not only did
he find himself thrust into a senior leadership role, almost immediately
he was required to build a team, establish equipment and materials,
and take on full responsibility for all downstream operations from a
foreign service company that had led the work for almost 14 years.
Of course, Sabas was supported by management, but he quickly started
to establish himself as a manager in his own right. He took to the role
with enthusiasm and confidence, and the transition from contractor to
an entirely Tanzanian in-house team has been carried out seamlessly.
Sabas and his team carry significant responsibility, ensuring the supply
of natural gas to existing customers, and the Company’s CNG mother
station and daughter stations, in a safe and efficient manner with no
significant downtime. His rise to a senior management position has been
meteoric, but indicative of what can be achieved within the Company.
Sabas says:
“I had been lucky enough to do a 6-month internship at the Company
during my college studies and I liked what the Company did. Then,
after graduating I applied for the role of Projects and Process Engineer
and met the Managing Director on my second recruitment interview
to briefly discuss my career within the Company. I knew then that this
would be the right company in which to start my career.
The promotion to the role of Downstream Operation Manager means
so much to me. The trust and confidence the Company has placed in
me with such big responsibility is huge, so I will honor this by doing
the best job I can. The promotion has given me obvious social and
financial rewards, which I am proud of. I am confident I can and will
grow further in the industry and the Company, and that this is not the
end of my career journey.”
Orca Exploration Group Inc. // Annual Report & Accounts 2019Strategic ReportManagement’s Discussion & AnalysisFinancial Statements 22
COMPANY OPERATIONS
Songo Songo
The Company, through its subsidiary PanAfrican Energy
Tanzania, is the holder of the Songo Songo license. This
comprises two discovery blocks covering approximately
170 km2 and contains the Songo Songo Gas Field which
is partly onshore and partly offshore SSI.
Natural gas was discovered on the license by
AGIP in 1974 when well SS-1 was drilled north
of SSI in an area now known as Songo Songo
North, and gas was tested in two intervals.
However, the well was plugged and abandoned,
and the permit relinquished to the TPDC.
In 1976, TPDC embarked upon a campaign
to further explore and appraise the Songo
Songo structure; drilling a further eight wells
on and around the field and in 1978, acquired
450 km of 2D seismic data. Further drilling
occurred in 1981 and 1982 and in 1991, Ocelot
International Inc., a predecessor of the Company,
entered into an agreement with TPDC to
evaluate the economic viability of developing the
Songo Songo Gas Field to generate electricity.
An extensive well test program and a minor
reconditioning program were conducted in 1997
on five of the wells and the results were used to
prepare a full-field reservoir model. After further
studies confirmed sufficient quantities of gas
to supply a gas-to-electricity project, a formal
development plan was submitted in May 2001.
The project agreements, including a Production
Sharing Agreement (“PSA”), were ultimately
signed by the Company in October 2001, and
gas production commenced in June 2004 from
five of the wells originally drilled by TPDC (wells
SS-3, SS-4, SS-5, SS-7 and SS-9). The Company
subsequently drilled a further three wells: SS-10
in 2010, SS-11 in 2012 and SS-12 in 2016.
The PSA defines the gas produced from the
Songo Songo Gas Field as “Protected Gas” and
“Additional Gas”. The Protected Gas is owned by
TPDC and is sold under a 20-year gas agreement
(until July 31, 2024) to Songas. Songas utilizes the
Protected Gas to fuel its gas turbine electricity
generators and for onward sale to the Tanzania
Portland Cement Company (“TPCC”) and for
village electrification.
Protected Gas is capped at a maximum of
45 MMcfd per day. The Company receives no
revenue for the Protected Gas delivered to Songas
and operates the original wells and gas processing
plant on a ‘no gain no loss’ basis. Under the PSA,
the Company has the right to produce and market
all gas in the Songo Songo Block in excess of the
Protected Gas requirements (“Additional Gas”)
until the PSA expires in October 2026.
Orca Exploration Group Inc. // Annual Report & Accounts 2019 23
Songo Songo Infrastructure
Tubing Size
Material
Status
Tie-in location and production
potential
Songas
infrastructure
MMcfd
NNGI MMcfd
Well
SS-3
SS-4
SS-5
SS-7
SS-9
SS-10
SS-111
SS-12
27/8"
27/8"
41/2"
41/2"
41/2"
5"
51/2"
41/2"
Carbon Steel
Suspended
Carbon Steel
Shut-in
13% Chrome
Producing
13% Chrome
Shut-in
13% Chrome
Producing
Carbon Steel
Producing
13% Chrome
Producing
13% Chrome
Producing
Total
–
–
27
–
24
29
–
–
80
1 SS-11 is tied into both Songas Infrastructure and the NNGI. It is currently tied into the Songas
Infrastructure where production is limited to 24 MMcfd.
–
–
–
–
–
–
52
40
92
172
The Company is evaluating the merits of
conducting workovers on well SS-3 and well
SS-4 (both onshore wells) in 2020. The Company
is planning to recomplete the SS-10 well with
chrome tubing during 2020 to address the
gradual corrosion of the existing carbon steel
completions. Well SS-7 is an offshore well and
will remain shut-in until a suitable opportunity is
identified to efficiently address production issues
as part of a wider development plan.
As at December 31, 2019 well SS-11 is tied
into both the Songas Infrastructure and the
NNGI but aligned and supplying gas only to the
Songas Infrastructure. Well SS-12 is only tied
into the NNGI. The facilities for the connection
of well SS-10 to the NNGI are available and the
connection can be completed when required.
It is currently anticipated that well SS-10 will
be realigned and interconnected as and when
further volumes to the NNGI are required.
Upstream Operations
Production Facilities
Gas currently produced from the Songo Songo
field can be processed and transported to market
through two separate infrastructure systems
namely the:
• Songas Infrastructure; and
• NNGI.
The Songas Infrastructure consists of a gas
processing plant with a current capacity of
110 MMcfd, a 12” sub-sea export line from
SSI to the mainland and a 16” landline north
to Dar es Salaam. The maximum capacity
of the pipeline system is 102 MMcfd. The
Company operates the gas processing
facilities on behalf of Songas.
The NNGI is the gas processing and pipeline
infrastructure that is owned and operated by
TPDC and was commissioned in 2016. On SSI,
the NNGI consists of a 140 MMcfd gas processing
facility that connects to a 24” offshore pipeline
with a capacity of 196 MMcfd. On the mainland,
this feeds in to a 784 MMcfd capacity 36” pipeline
that transports the gas to Dar es Salaam.
At the end of 2018, the Company entered into an
arrangement that allowed the sale of Additional
Gas through the NNGI to meet emergent power
and industrial demand, and in 2019 signed a Long-
term Gas Sales Agreement with TPDC to supply
20 MMcfd to the NNGI. This was subsequently
increased to 30 MMcfd.
All wells, with the exception of SS-12, are tied in
to the Songas Infrastructure whilst SS-12 is tied
into the NNGI gas processing facility in the south
of the island. SS-11 is tied into both plants and
capable of flowing to both simultaneously. All
wells are tied in via either 4” or 6” flowlines.
2019 Production
Protected Gas delivered to Songas averaged
40 MMcfd during the year.
Additional Gas production averaged 63 MMcfd,
of which 13 MMcfd was supplied to industrial
customers and the balance of 50 MMcfd was sold
to the power sector. These volumes represent
a substantial increase over 2018 Additional Gas
production which averaged 40 MMcfd.
In November 2019, the Company achieved its
highest daily production of 132.4 MMcfd.
Current Well Status and Deliverability
As at December 31, 2019 the Company had a
well production potential of 172 MMcfd, limited
by processing and transportation infrastructure,
and by contract, to approximately 135 MMcfd.
Well SS-3 is currently suspended and well SS-4
and well SS-7 have been shut-in. Limited sand
production has been identified in well SS-4 and
well SS-7.
Orca Exploration Group Inc. // Annual Report & Accounts 2019Strategic ReportManagement’s Discussion & AnalysisFinancial Statements 24
COMPANY OPERATIONS CONTINUED
Sustaining production
Until well SS-12 began producing through the NNGI on SSI in December 2018,
production had been limited to 97 MMcfd due to a combination of Songas
Infrastructure capacity limitations and reservoir pressure decline.
During 2019, the Company commenced or completed several further initiatives
aimed at sustaining and increasing gas production from its current capacity of
135 MMcfd to approximately 172 MMcfd. These included:
Generator Optimization
The Songas Infrastructure includes three 365 kilowatt
(“kW”) dual fuel gas engine generators that are intended
to operate in a 2n+1 configuration. These met the plant’s
original power demand and retained spare capacity for
unscheduled downtime or maintenance. However, over
the course of 15 years of operation, the generators have
lost some capacity whilst power demand, particularly
following installation of refrigeration, has increased. To
counter this, in 2019 the Company carried out major
overhauls on two of the three generators and ran an
onsite tuning program for all three units and they now
generate 716 kW with two units or 1,075 kW using all
three units.
Flowline Decoupling
The configuration of the existing infrastructure was
reviewed to unlock additional production. SS-10 well and
SS-11 well currently have 6” flowlines coupled to the
4” flowlines of SS-4 well and SS-3 well and this creates
a bottleneck. By connecting SS-10 well and SS-11
well directly to the inlet manifold via a 6” flowline, an
additional 10 MMcfd of production will be unlocked.
The $1.3 million project will be completed in Q2 2020.
Orca Exploration Group Inc. // Annual Report & Accounts 2019 25
Planned Compression for the Songas Infrastructure
To further sustain the delivery of gas to Dar es Salaam
at required specification and pressures, in December
2019 the Company signed a Letter of Intent with an
international engineering company to carry out detailed
engineering and design for the next phase: the addition
of compression facilities. The Company expects to sign
contracts with the same company in Q2 2020. The total
contract value is expected to be in the region of $38
million and the compression system is expected to be
fully functional by the end of Q1 2022.
Refrigeration for the Songas Infrastructure
The Company is required to deliver gas to the Songas
power generation plant in Dar es Salaam at more than
50 barg (the arrival pressure). This necessitates an inlet
pressure of 110 barg and temperatures of no more than
20°C (68°F) at the start of the 225 km pipeline system
that transports the gas from SSI. After 15 years of
production, the declining reservoir pressures have made
the delivery specifications difficult to achieve.
To address this, in June 2019 the Company finalized the
installation and commissioned an $8.5 million closed loop
mechanical refrigeration system.
Orca Exploration Group Inc. // Annual Report & Accounts 2019Strategic ReportManagement’s Discussion & AnalysisFinancial Statements 26
COMPANY OPERATIONS CONTINUED
Downstream Network
Downstream Operations
Distribution and Marketing
After the gas has been processed on SSI and
transported to Dar es Salaam, the majority of
Additional Gas marketed by the Company is
supplied directly through 16” and 8” high pressure
pipelines to the Songas and TANESCO power
plants at Ubungo and Tegeta. This supply and
subsequent power generation was East Africa’s
first gas-to-electricity project. The balance of
the gas is supplied to a large cement factory
at Wazo Hill and more than 40 industrial
customers through a 50 km low-pressure
ring-main distribution system in Dar es Salaam.
The customers cover a range of industries
including steel, glass, textiles, beverages, tobacco,
cooking oils, flour and other products from arable
farming, a prison, the hotel industry, cleaning
products, cement and paper. The gas is also used
by the Company’s customers for the generation
of captive power. This low-pressure network is
owned and operated by the Company.
Natural gas now accounts for 60% to 70% of
Tanzania’s total generated power, with hydro-
power responsible for the remainder. Other than
very isolated regions, the use of liquid fuels to
generate power has been entirely displaced. This
can vary during the country's long and short rains
when hydro power can be increased significantly.
The Company supplies gas directly to three of
the six major power stations connected to the
national grid, and indirectly to the remaining
three via well-head sales of gas to TPDC into
the NNGI. The Company estimates that the
power generated from gas provided by the
Songo Songo field has resulted in cost savings
to Tanzania (compared to liquid fuels) estimated
at more than $10 billion over the last 15 years.
2019 Downstream Activities
2019 was an active year for the Company’s
downstream operation. Over the course of the
past 15 years, the downstream ring-main and
supporting infrastructure was installed by a
third-party contractor, with support from a small
number of local Company employees. However,
at the end of 2018 the Company took on sole
responsibility for all downstream operations; a
14-strong downstream team was recruited and
an office was established in Ubungo, at the heart
of the ring-main. However, this coincided with
the progress of a number of strategic projects
as part of the country’s drive towards upgrading
infrastructure and transportation links. Two of
those projects were the construction of the Dar
es Salaam to Morogoro section of the Standard
Gauge Railway ("SGR") through the center of
Dar es Salaam, and the construction of multiple
Bus Rapid Transport (“BRT”) lanes throughout
the city. These jointly had a significant impact
on the long-established wayleaves for the gas
distribution ring-main.
Orca Exploration Group Inc. // Annual Report & Accounts 2019 27
The 202 km Dar es Salaam to Morogoro phase
of the SGR is the most critical section of the
overall 1,224 km construction, accounting for
33 million cubic meters of excavation work,
the installation of 96 pieces of 6,500 meter-
long bridge and overpasses, 460 culverts,
as well as the construction of stations and
maintenance facilities. When the five-part line
is completed, it will connect Uganda, Rwanda,
Democratic Republic of Congo and Tanzania,
and provide access to the Indian Ocean for all
related countries. The Company was required
to relocate multiple sections of the ring-main
to accommodate construction and installation,
often at short notice, and working with SGR
contractors on designs and safety requirements
to avoid further conflicts. Simultaneously the
downstream team had to manage the relocation
of parts of the ring-main with minimum
disruption to the industrial customers.
The BRT has been in construction since 2012
and when completed will be 130 km long,
providing a bus mass transport system that
connects the suburbs of Dar es Salaam to the
city’s central business district. Whilst waiting
for BRT project engineers to confirm certain
routes through the city, the Company was
unable to obtain rights of way to construct
an extension of the downstream ring-main to
a new customer. Consequently, the Company
supplied the customer with CNG after procuring
76 new CNG cylinders and installing them on
an existing trailer, commencing supply to the
customer in mid-2019.
Compressed Natural Gas
In 2008 the Company commenced the
planning an installation of a CNG central
station and distribution network in Dar es
Salaam. The aim was to supply gas to off-grid
companies and to create new markets through
the conversion to CNG of petrol-driven domestic
and service vehicles.
By 2010, the project was operational and by
2014, the Company was selling CNG via a virtual
pipeline to a hotel, five industrial customers and
to a growing number of cars and minibus drivers.
Although the pilot project was successful, the
operation was subsequently reduced following
the construction by TPDC of a transmission line
that provided gas to the industrial customers.
In addition, the cost of converting vehicles for
domestic use was prohibitively high and the
economic and environmental benefits of running
CNG vehicles was not widely publicized nor
understood.
Tanzania Portland Cement Company
One of the first and largest industrial
customers supplied by the Company is
TPCC located at Wazo Hill, approximately
25 km north of Dar es Salaam.
TPCC is part of the multinational
Heidelberg Cement Group. It uses the
gas to heat kilns as part of its production
process, displacing the use of expensive
heavy Fuel Oil (“HFO”) in the process. In
doing so, the cost savings it has achieved
have allowed TPCC to increase production
from 600,000 tonnes to more than
1,000,000 tonnes per annum.
TPCC have stated:
“The decision by the company to switch to
natural gas has had a huge effect on the
business. The supply is far more reliable,
the heating effect more consistent and
the management of inventory far simpler.
It has completely cut out fuel theft and
made management of the business and
operations easier. But, for a company such
as TPCC, an equally important benefit
of using natural gas is the impact on our
carbon emissions. We take the matter
very seriously. In 2019 our consumption
of gas was in the order of 2,800TJ,
resulting in around 159,000 tonnes of CO2
emissions. If we had used HFO like we
used to, we would have emitted almost
218,000 tonnes of CO2. The difference
of almost 60,000 tonnes is considerable.”
Orca Exploration Group Inc. // Annual Report & Accounts 2019Strategic ReportManagement’s Discussion & AnalysisFinancial Statements 28
COMPANY OPERATIONS CONTINUED
Kioo Limited
Another long-standing customer, and one
of the first to make the switch to gas was
Kioo (Kiswahili for glass). Kioo started
using gas for industrial heating in 2005.
According to Kioo’s General Manager, it has
expanded operations to almost three times
its original size since then, and in 2011
Kioo also started using natural gas
for power generation. The company stated:
“Natural gas availability gave us the
consistency to confidently expand. We
have grown from one furnace to build
a second furnace and from depending
entirely on fluctuating TANESCO
power to installing two gas generators
to create our own highly reliable gas
fired power. For glass production, energy
reliability is the most important factor.
Any fluctuation on power or furnace
burning will result in a massive loss
for the company.
Any unplanned intervention has a serious
impact on the business. Our business
is a continuous process and variations
affect us a lot. Although we have back-up
arrangements, they take time to kick in
and we lose several hours of production
which cannot be retrieved as we already
run 24x7. The natural gas supplied by
the Company is very reliable, a lower
price than HFO and more environmentally
friendly. The response times shown by the
Company, and its first-class service and
maintenance plans have also helped us
so much.
We at Kioo are committed to protecting
the environment. We are controlling
Nitrogen Oxides and Sulphur Oxides
levels as much as possible. We have
recently rebuilt both furnaces with latest
technology and we will during the year do
measurements to cross-check the results.”
However, 2019 saw the reinvigoration of the
Company’s CNG strategy following the addition of
an industrial customer who is now supplied with
CNG, and an increasing number of domestic and
service vehicles converting to CNG and utilizing
the central filling station at Ubungo. These
vehicles include a sizeable proportion of the Uber
vehicle fleet in Dar es Salaam. The Company has
also entered into negotiations with a number of
traditional fuel suppliers to establish CNG filling
stations at key locations throughout the city and is
in discussion with several major haulage firms with
a view to converting their existing fleets to run on
CNG or dual-fuel. These discussions continue and
the Company expects to sign agreements with
one or more of the haulage firms during 2020.
A reduction in conversion costs, greater access
to filling stations, greater awareness of the cost
benefits, and crucially, greater incentives to
convert to CNG, are all essential. The Company is
examining ways to achieve each of these and in
2020 will be developing a comprehensive CNG
strategy for implementation in Tanzania.
Growth Opportunities
Demand for natural gas in Tanzania is set to grow
significantly. Annual growth in energy demand
is currently averaging between 7% and 9%,
while the Government of Tanzania has stated
its intention to increase power generation from
its current installed capacity of approximately
1,520 MW to more than six times that amount
by 2025. While hydro, wind and solar energy
will be part of Tanzania’s future energy mix, the
country’s vast natural gas resources suggest
thermal power generation will contribute
significantly. Several new gas-fired power
generation facilities are already in various
stages of implementation.
Similarly, industrial demand is expected to
continue growing. Limited in recent years by
capacity constraints in the gas distribution
systems, the establishment of the NNGI, able to
transport up to 784 MMcfd to Dar es Salaam
and other areas, has transformed the landscape.
New markets and new industrial zones are
being established in the country, while the rapid
development of the nation’s infrastructure is also
expected to accelerate demand. Similarly, situated
on Africa’s east coast, with several deep-water
ports and with well-established road networks
into the continental interior, Tanzania, and Dar
es Salaam in particular, is well placed for large
scale strategic industries looking to serve not
only domestic markets, but also international
markets in Africa, India and beyond.
The country’s growth is likely to fall into three main
areas: regional exports, domestic power generation
and domestic industrial expansion.
Orca Exploration Group Inc. // Annual Report & Accounts 2019 29
Regional Exports
The country is in discussions with its regional
partners regarding the export of gas volumes
to neighboring countries such as Kenya.
Domestic Power Generation
Alongside the construction of the Nyerere Hydro
Power Project (Stiegler’s Gorge) which is expected
to generate 2,115 MW when completed, there
are numerous projects at various stages of
implementation including:
• Kinyerezi 1 Extension – Kinyerezi 1 is a 150
MW gas fired power generation plant near
Dar es Salaam and is adjacent to the 240
MW Kinyerezi 2 plant. The plan is to expand
Kinyerezi 1 by a further 180 MW, of which
150 MW will be gas fired and the project is
60% complete with gas consumption expected
from the end of 20201.
• Songas Expansion – Songas is developing plans
to expand its generation plant by a further 65
MW. The project may be online in 20212.
• Mtwara Power Plant – A feasibility study is in
progress for the construction of a 300 MW
power plant in Mtwara, in southern Tanzania3
• Somanga Funga Power Plant – A feasibility
study is in progress for the construction of a
330 MW power plant in Somanga Funga, on
the mainland directly opposite SSI3
• Zuzu Power Plant – A recent study by the
Japanese International Cooperation Agency
(“JICA”) recommended conversion of the Zuzu
diesel power plant to a combined cycle gas
turbine plant comprising 2 x 50 MW units4
Domestic Industrial Expansion
Tanzania, and Dar es Salaam in particular, is very
well situated to attract new industries and many
existing industries are also seeking to expand their
operations. The Company is at various stages
of discussions and negotiations to establish gas
sales agreements with new industrial customers
and conservatively expects to add one to two
customers per annum. In addition, an increasing
number of industrial customers are seeking gas for
captive power generation, to overcome instability
issues from national supply.
Source:
1 Discussions with, and widely reported by, Ministry of Energy, TANESCO, TPDC, construction contractors, media.
http://csi.energy/project/kinyerezi-i-extension-power-plant-185mw/.
2 Direct discussions with Globeleq and Songas Management.
3 Discussions with Songas and TPDC, and referenced in several public presentations by both.
4 Presentation issued by JICA and publicly presented during a recent forum announcing the next stage of JICA's
work with the Government of Tanzania.
Orca Exploration Group Inc. // Annual Report & Accounts 2019Strategic ReportManagement’s Discussion & AnalysisFinancial Statements 30
GAS RESERVES
Reserves
Songo Songo Conventional Natural Gas Reserves (Bcf)
Independent reserves evaluation
Proved producing
Proved developed non-producing
Proved undeveloped
Total proved (1P)
Probable
Gross1
2019
Net2
234.4
144.5
–
–
234.4
30.9
–
–
144.5
17.3
Gross
227.6
33.5
–
261.1
31.7
2018
Net
142.3
18.8
–
161.1
17.8
Total proved and probable (2P)
265.3
161.8
292.8
178.9
1 Gross equals the gross reserves that are available for the Company based on its effective ownership interest.
2 Net equals the economic allocation of the gross reserves to the Company as determined in accordance with the PSA.
Net Present Value ($’millions)
Proved producing
Proved developed non-producing
Proved undeveloped
Total proved (1P)
Probable
5%
282.0
–
–
282.0
53.9
10%
237.1
–
–
237.1
45.5
2019
15%
202.3
–
–
202.3
38.9
5%
272.0
35.4
–
307.4
51.1
10%
225.5
26.2
–
251.7
42.7
2018
15%
190.3
19.8
–
210.1
36.1
Total proved and probable (2P)
335.9
282.6
241.2
358.5
294.4
246.2
2019 Independent Evaluation
The Company’s natural gas reserves as at
December 31, 2019 for the period to the end
of its license in October 2026 were evaluated
by McDaniel & Associates Consultants Ltd.
(“McDaniel”) independent petroleum engineering
consultants in accordance with the definitions,
standards and procedures contained in the
Canadian Oil and Gas Evaluation Handbook
and National Instrument 51-101 – Standards of
Disclosure for Oil and Gas Activities (“NI 51-101”).
The independent reserves evaluation prepared
by McDaniel (the “McDaniel Report”) is dated
February 20, 2020 with the effective date of
December 31, 2019. A Reserves Committee of
the Board of Directors reviews the qualifications
and appointment of the independent reserves
evaluator and reviews the procedures for
providing information to the evaluators.
Reserves included herein are stated on a company
gross basis (92.07%) unless noted otherwise.
All the Company’s reserves are conventional
natural gas reserves and are located in Tanzania.
Additional reserves information required under
NI 51-101 are included in Orca’s reports relating
to reserves data and other oil and gas information
under NI 51-101, which have been filed on its
profile on SEDAR at www.sedar.com.
On a gross company basis there has been an
10% decrease in Songo Songo’s 1P reserves with
a total Additional Gas production of 14.6 Bcf
during the year. There has been a 10% decrease
in the 2P reserves on a gross company basis.
There has been a 4% decrease in the 2P
present value at a 10% discount basis from
$294.4 million to $282.6 million. The decrease
is predominately the result of the reduced
time remaining to the end of the license offset
by a reduction in forecasted capital costs for
compression.
For the purpose of calculating the Gross
reserves, McDaniel has assumed in its 2P case
that 67 Bcf (2018: 81 Bcf) or an average of
14.0 Bcf per annum will be required to meet
the demands of the Protected Gas users from
January 1, 2020 to July 31, 2024. During 2019
the Protected Gas users consumed 14.6 Bcf
(2018: 14.4 Bcf).
Orca Exploration Group Inc. // Annual Report & Accounts 2019
Forecast Gas Prices and Sales Volumes1
1P
Additional
Gas Price
$/mcf
4.02
4.06
4.18
4.30
4.32
4.31
4.44
2020
2021
2022
2023
2024
2025
2026
1 McDaniel Report.
1P
Gross Gas
Volumes
MMcfd
79.5
95.9
94.3
92.7
108.1
130.6
124.1
2P
Additional
Gas Price
$/mcf
4.04
4.09
4.21
4.37
4.46
4.53
4.73
2P
Gross Gas
Volumes
MMcfd
83.8
105.6
114.1
116.1
130.9
139.6
127.8
31
2020 Subsurface Work Program
At the end of 2019, the Company commissioned
a third-party company to carry out petrophysical
and modular formation dynamics on the Songo
Songo field, and further seismic re-evaluation
covering the core area, northern and eastern
section and the Songo Songo West prospect.
The work program includes:
• Undertaking a quality control exercise over the
seismic dataset to check for inconsistencies
• Verifying the well to seismic calibration and
ties against previous 2D seismic lines
• Re-interpretation of the seismic Two-Way-
Time (“TWT”) horizon picking and fault
interpretation of the Top Neocomian (main
reservoir) and the Intra Neocomian Z3 horizon.
• Generation of alternative picks for the Top
Neocomian to assist in evaluating Gross Rock
Volume (”GRV”) uncertainty
• Undertaking depth conversion of the seismic
TWT interpretation
• Generating GRVs for the full range of depth
maps to establish the distribution of GIIP
• Construction of a Petrel static model using
the selected Top Neocomian base case depth
map and fault interpretation
Due for completion in Q2 2020, the work is
expected to provide greater certainty over
the field structure and gas-in-place, increased
understanding of the Songo Songo North area
of the field, and whether further data capture
might be necessary to determine future
development options.
Orca Exploration Group Inc. // Annual Report & Accounts 2019Strategic ReportManagement’s Discussion & AnalysisFinancial Statements
32
BOARD OF DIRECTORS
An international team
providing diligent leadership
David W. Ross
Chairman and
Non-Executive Director
Nigel Friend
Chief Executive Officer
Dr Frannie Léautier
Non-Executive Director,
Chair of ESG Committee
Ebbie Haan
Non-Executive Director,
Chair of Reserves Committee
Appointed: 2004
Location: Canada
Appointed: 2018
Location: United Kingdom
Appointed: 2019
Location: United States
Appointed: 2019
Location: Netherlands
David Ross has extensive
experience in international
tax law and is a partner in the
Calgary-based law firm of Burnet
Duckworth & Palmer. He has served
as Secretary to the Board since the
Company was formed in 2004.
Committee Membership
A RC
Ebbie Haan has a strong track
record in negotiating transactions
and executing business
development opportunities. Ebbie
spent 26 years at Royal Dutch
Shell where he held various
leadership positions and in 2008
was appointed Managing Director
of Sasol Petroleum International,
before being appointed Chief
Growth Officer for Maersk Oil.
Since 2018 he has run his own
advisory firm. Ebbie has both
an undergraduate degree and a
Masters in Geology from Utrecht
University.
Committee Membership
E R S
Nigel Friend has over 25 years'
experience in the international
energy sector. At KPMG in London,
he led the corporate finance
department that project-managed
several significant corporate
acquisitions and privatizations. In
the 1990’s he led Enron Europe’s
investment in an onshore gas field
in the Thrace Basin in Turkey. At
PanOcean Energy Corporation,
he coordinated the spinout of the
Company’s Tanzania natural gas
business unit to shareholders and
the listing of East Coast Energy.
He was a Board Director and Chief
Financial Officer of Orca between
2004 and 2012. More recently,
he jointly founded a company
that is developing new modular
technologies designed to facilitate
the monetization of natural gas.
Nigel Friend is a qualified Chartered
Accountant and holds a BSc (Hons)
in Industrial Economics from
Nottingham University.
Committee Membership
E R
Dr Léautier is a globally respected
development expert and has
extensive African and global
experience in the public and private
sectors. She is the Founder and
Managing Partner of the Fezembat
Group and was previously Senior
Vice President of the African
Development Bank, where she
led efforts to improve the bank’s
overall operational effectiveness.
Other roles include: Chief
Operating Officer for the Trade
and Development Bank based in
Nairobi, Infrastructure Director,
World Bank, Vice President and
Head of the World Bank Institute.
Dr Léautier holds a PhD in
Infrastructure Systems and a
Masters in Transportation from
the Massachusetts Institute of
Technology.
Committee Membership
A E
Committee Membership Key:
A Audit Committee
E ESG Committee
RC Remuneration/
Compensation Committee
R Reserves Committee
S Special Committee
Orca Exploration Group Inc. // Annual Report & Accounts 2019
33
Board Stats
Diversity
Linda Beal
Non-Executive Director,
Chair of Audit Committee
and Special Committee
Appointed: 2019
Location: United Kingdom
Male
Female
Jay Lyons
Non-Executive Director
Locations
Appointed: 2019
Location: Canada
Linda Beal was a tax partner with
PricewaterhouseCoopers in the
UK for 16 years and then with
Grant Thornton UK LLP. Linda has
significant experience of advising
natural resources groups operating
in Africa and internationally. Linda is
also a non-executive director at San
Leon Energy PLC, Kropz PLC, and
Aminex PLC.
Jay Lyons is a private investor with
considerable experience in the oil
and gas industries of Canada and
the United States. He has worked in
a range of roles for both private and
public companies in the upstream
and downstream sectors.
Committee Membership
R S
Committee Membership
A S
Experience
• Oil & Gas
• Finance
• Developing Economies
• Engineering
• Infrastructure
• Management
• Mergers & Acquisitions
• Project Finance
Carole Wainaina
Non-Executive Director,
Chair of Remuneration Committee
Appointed: 2019
Location: Kenya
Carole Wainaina is a well-respected
senior executive with global
experience in the public and
private sectors. Carole served as
the Assistant Secretary General for
Human Resources of the United
Nations and prior to this, held a
number of senior roles at Coca-
Cola and Royal Phillips, where she
worked in a number of countries
including several in Africa. Carole
is currently the Chief Operating
Officer for Africa50 and holds a
Bachelor of Business Administration
Degree from the University of
Southern Queensland.
Committee Membership
RC
Orca Exploration Group Inc. // Annual Report & Accounts 2019Strategic ReportManagement’s Discussion & AnalysisFinancial Statements
34
FORWARD-LOOKING INFORMATION
This annual report contains forward-looking statements
or information (collectively, "forward-looking statements")
within the meaning of applicable securities legislation.
More particularly, this annual report contains,
without limitation forward looking statements
pertaining to the Company's beliefs regarding
its position for growth; statements regarding
approving a dividend policy; statements regarding
the Company's access to infrastructure and
infrastructure constraints; the procurement
and installation of compression on the Songas
Facilities; the outcome of the Company's strategy
of maximising the potential of its Tanzanian
asset, diversifying its asset base, and increasing
the liquidity of its equity; the expected increase
in demand for gas; the Company's belief that
it is positioned to meet increases in demand;
the impact of the COVD-19 pandemic on the
demand for and price of natural gas, volatility
in the financial markets, disruptions to global
supply chains and the Company's business,
operations, access to customers and suppliers,
availability of employees to carry out day-to-day
operations and other resources; the outcome
of the Government of Tanzania's review of all
oil and gas production sharing agreements in
Tanzania; the Company's beliefs regarding its
position to overcome current macro-economic
challenges; the Company's intention to maintain
involvement at all levels of the gas supply chain;
the Company's plans to recomplete the SS-10
well and timing for realigning and interconnecting
the SS-10 well; the estimated cost and timing for
completion of the flowline decoupling project;
the Company's expectations regarding signing
agreements with haulage firms; the Company's
ability to enter into gas sales agreements with new
industrial customers; and the expected timing
for completing the Songo Songo work program.
In addition, statements relating to "reserves"
are by their nature forward-looking statements,
as they involve the implied assessment, based
on certain estimates and assumptions that the
reserves described can be profitably produced in
the future. The recovery and reserve estimates
of the Company's reserves provided therein are
estimates only and there is no guarantee that
the estimated reserves will be recovered. As a
consequence, actual results may differ materially
from those anticipated in the forward-looking
statements. Although management believes that
the expectations reflected in the forward-looking
statements are reasonable, it cannot guarantee
future results, levels of activity, performance
or achievement since such expectations are
inherently subject to significant business,
economic, operational, competitive, political and
social uncertainties and contingencies.
Orca Exploration Group Inc. // Annual Report & Accounts 2019 35
Non-GAAP Measures
Throughout this Annual Report we use the
term "adjusted funds flow from operations"
represents net cash flows from operating
activities less interest expense and before
changes in non-cash working capital. This is
a performance measure that management
believes represents the company's ability to
generate sufficient cash flow to fund capital
expenditures and/or service debt. "Adjusted
funds flow from operations" has been
calculated by management and does not
have a standardized prescribed meaning
under generally accepted accounting principles
in Canada and may not be comparable with
the calculation of similar measurements by
other entities. Please see the disclosure
under the heading "Non-GAAP Measures" in the
Company's MD&A for the year ended December
31, 2019 filed on www.sedar.com and contained
in the Company's annual report for a discussion
of such non-GAAP measures.
These forward-looking statements involve
substantial known and unknown risks and
uncertainties, certain of which are beyond the
Company's control, and many factors could cause
the Company's actual results to differ materially
from those expressed or implied in any forward-
looking statements made by the Company.
Additionally, such forward looking statements
are based on certain assumptions made by the
Company in light of its experience and perception
of historical trends, current conditions and
expected future developments, as well as other
factors the Company believes are appropriate
in the circumstances. Please see the disclosure
under the headings "Business Risks" and
"Forward Looking Statements" in the Company's
Management's Discussion and Analysis ("MD&A")
for the year ended December 31, 2019 filed on
www.sedar.com and contained in the Company's
annual report for a discussion of such risks,
uncertainties, and assumptions.
The forward-looking statements contained in this
annual report are made as of the date hereof and
the Company undertakes no obligation to update
publicly or revise any forward-looking statements
or information, whether as a result of new
information, future events or otherwise, unless
so required by applicable securities laws.
Oil and Gas Advisory
The Company's conventional natural gas reserves
as at December 31, 2019 disclosed herein were
evaluated by McDaniel in accordance with the
definitions, standards and procedures contained in
the COGE Handbook and NI 51-101 – Standards
of Disclosure for Oil and Gas Activities. The
independent reserves evaluation prepared by
McDaniel had an effective date of December 31,
2019 and preparation date of February 20, 2020.
The recovery and reserves estimates of the
Company's conventional natural gas reserves
provided herein are estimates only and there is
no guarantee that the estimated reserves will be
recovered. Actual reserves may be greater than or
less than the estimates provided herein.
"BOEs" may be misleading, particularly if
used in isolation. A BOE conversion ratio of
six thousand cubic feet of natural gas to one
barrel of oil equivalent (6Mcf: 1 Bbl) is based
on an energy equivalency conversion method
primarily applicable at the burner tip and does not
represent a value equivalency at the wellhead.
As the value ratio between natural gas and crude
oil based on the current prices of natural gas and
crude oil is significantly different from the energy
equivalency of 6:1, utilizing a conversion on a 6:1
basis may be misleading as an indication of value.
Orca Exploration Group Inc. // Annual Report & Accounts 2019Strategic ReportManagement’s Discussion & AnalysisFinancial Statements 36
MANAGEMENT’S DISCUSSION & ANALYSIS
THIS MANAGEMENT’S DISCUSSION AND ANALYSIS (“MD&A”) OF OUR FINANCIAL CONDITION AND RESULTS OF OPERATIONS
SHOULD BE READ IN CONJUNCTION WITH THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS AND NOTES FOR THE YEAR ENDED
DECEMBER 31, 2019. THIS MD&A IS BASED ON THE INFORMATION AVAILABLE ON APRIL 28, 2020. ALL AMOUNTS ARE REPORTED
IN US DOLLARS (“$”) UNLESS OTHERWISE NOTED.
THIS MD&A CONTAINS NON-GAAP MEASURES AND FORWARD-LOOKING INFORMATION. READERS ARE CAUTIONED THAT THIS
MD&A SHOULD BE READ IN CONJUNCTION WITH THE DISCLOSURE BELOW UNDER THE HEADINGS “NON-GAAP MEASURES”,
“FORWARD-LOOKING INFORMATION AND STATEMENT” AND “GLOSSARY” INCLUDED AT THE END OF THIS MD&A.
Nature of Operations
The principal asset of Orca Exploration Group Inc. (“Orca” or the “Company”) is its interest in the Production Sharing Agreement (“PSA”) with the Tanzanian
Production Development Corporation (“TPDC”) and the Government of Tanzania (“GoT”) in the United Republic of Tanzania. This PSA covers the
production and marketing of certain gas from the Songo Songo license offshore Tanzania. The PSA defines the gas produced from the Songo Songo Gas
Field as “Protected Gas” and “Additional Gas”. The Protected Gas is owned by TPDC and is sold under a 20-year gas agreement (until July 31, 2024) to
Songas Limited (“Songas”). Songas is the owner of the infrastructure that enables the gas to be treated and delivered to Dar es Salaam, which includes a
gas processing plant on Songo Songo Island (the “Songas Infrastructure”).
Songas utilizes the Protected Gas as fuel for its gas turbine electricity generators and for onward sale to customers. The Company receives no revenue
for the Protected Gas delivered to Songas and operates the original wells and gas processing plant on a ‘no gain no loss’ basis. Under the PSA, the
Company has the right to produce and market all gas in the Songo Songo Block in excess of the Protected Gas requirements (“Additional Gas”) until the
PSA expires in October 2026.
The Tanzanian Electric Supply Company Limited (“TANESCO”) is a parastatal organization wholly owned by the GoT with oversight by the Ministry for
Energy (“MoE”). TANESCO is responsible for the majority of electricity generation, transmission and distribution throughout Tanzania. Natural gas has
become an integral component of TANESCO’s power generation fuel mix as a more reliable source of supply over seasonal hydropower and a more cost-
effective alternative to liquid fuels. The Company currently supplies Additional Gas directly to TANESCO by way of the Portfolio Gas Supply Agreement
(“PGSA”) between the Company, TANESCO and TPDC and indirectly through the supply of Protected Gas and Additional Gas to Songas, which in turn
generates and sells power to TANESCO. Subject to meteorological conditions and increased use of hydro power generation, the gas the Company currently
supplies to Songas and TANESCO via the Songas Infrastructure and the National Natural Gas Infrastructure (“NNGI”), generates approximately 48% of the
electrical power and approximately 70% of the gas utilized for power generation in Tanzania.
In May 2019 the Company signed a new long-term gas sales agreement (“LTGSA”) with TPDC, which replaces the side letter agreement entered into in
December 2018. The Company commenced supplying gas to TPDC under the LTGSA in September 2019. The LTGSA initially provided for the supply of
up to 20 million standard cubic feet per day (“MMcfd”) of natural gas to the TPDC operated NNGI on Songo Songo Island where it is processed before
being transported to Dar es Salaam for power and industrial use. On September 25, 2019 the Company reached an agreement with TPDC to increase the
maximum daily quantity of Additional Gas that can be supplied under the LTGSA to 30 MMcfd. Prior to signing the LTGSA, the processing and distribution
of natural gas volumes had been restricted by infrastructure limitations at the Songas Infrastructure.
In addition to supplying gas to TPDC, Songas and TANESCO, the Company has developed 42 contracts to supply gas to Dar es Salaam’s industrial market.
Orca Exploration Group Inc. // Annual Report & Accounts 2019 37
Financial and Operating Highlights for the Three Months and Year Ended December 31, 2019
(Expressed in $’000 unless indicated otherwise)
2019
2018
Three Months
ended December 31
% Change
Q4/19 vs
Q4/18
Year
ended December 31
2019
2018
% Change
Ytd/19 vs
Ytd/18
70.8
13.1
57.7
7.77
3.44
4.24
2.73
23,212
12,339
0.36
5,156
0.15
13,560
0.39
2,679
44.8
13.0
31.8
8.44
3.68
5.06
2.63
13,460
2,751
0.09
4,085
0.12
6,398
0.18
2,628
58%
1%
81%
(8)%
(7)%
(16)%
4%
72%
349%
289%
26%
25%
112%
117%
2%
63.1
13.3
49.8
7.97
3.43
4.38
2.63
85,595
24,718
0.71
34,873
1.00
43,213
1.24
5,836
39.9
13.0
26.9
8.26
3.68
5.17
2.76
57,766
13,270
0.38
28,752
0.82
19,255
0.55
5,843
58%
2%
85%
(4)%
(7)%
(15)%
(5)%
48%
86%
87%
21%
22%
124%
125%
0%
As at
December 31, December 31,
2018
2019
% Change
OPERATING
Daily average gas delivered and sold (MMcfd)
Industrial
Power
Average price ($/mcf)
Industrial
Power
Weighted average
Operating netback ($/mcf)1
FINANCIAL
Revenue
Net income attributable to shareholders
per share – basic and diluted ($)
Net cash flows from operating activities
per share – basic and diluted ($)
Adjusted funds flow from operations(1)
per share – basic and diluted ($)
Capital expenditures
Working capital (including cash)
Cash and cash equivalents
Investments in short-term bonds
Long-term loan
Outstanding shares (‘000)
Class A
Class B
Total shares outstanding
106,972
93,899
44,756
54,057
1,750
32,557
34,307
84,182
64,660
66,837
53,900
1,750
33,506
35,256
27%
45%
(33)%
0%
0%
(3)%
(3)%
(1)%
(10)%
(3)%
(10)%
(6)%
(4)%
Weighted average Class A and Class B Shares (‘000)
34,931
35,256
RESERVES
Additional Gas Gross Recoverable Reserves (Bcf)
Proved
Probable
Proved plus probable
Net Present Value, discounted at 10% ($ million)2
Proved
Proved plus probable
234
31
265
237
283
261
32
293
252
294
1
2
Please refer to Non-GAAP measures section of the MD&A for additional Information.
In accordance with the PSA with the TPDC and the GoT in the United Republic of Tanzania, the Company is able to recover income tax and consequently there is no significant difference
between the NPV of reserves on a before and after tax basis. Any capitalized terms otherwise not defined within the Financial and Operating Highlights are defined in the MD&A.
Orca Exploration Group Inc. // Annual Report & Accounts 2019Strategic ReportManagement’s Discussion & AnalysisFinancial Statements
38
MANAGEMENT’S DISCUSSION & ANALYSIS CONTINUED
Financial and Operating Highlights for 2019 and Q4 2019
• During 2019 the Company completed the installation of a closed loop, mechanical refrigeration unit within the Songas Infrastructure. The refrigeration
unit has enabled the Company to increase the volumes that can be processed and transported to Dar es Salaam through the Songas Infrastructure to
100 MMcfd. This is in addition to volumes delivered through the NNGI under the LTGSA signed in May 2019 with TPDC. The LTGSA was amended in
September 2019 to increase the volumes to be supplied through the NNGI from the initially agreed 20 MMcfd up to a maximum daily quantity of 30
MMcfd, with volumes between 20 MMcfd and 30 MMcfd supplied on a best endeavors basis until such times as compression is installed on the Songas
infrastructure.
• In December 2019 the Company signed a Letter of Intent (“LoI”) for $5.7 million to complete, amongst other works, detailed engineering and design
of a compression system to be installed on the Songas Infrastructure. The LoI will be followed by full lump-sum turnkey contracts for installation of
compression with an estimated total value of $38 million including the LoI work. Compression is currently planned for installation prior to the end of
Q1 2022 and will allow production volumes to be maintained at 135 MMcfd with the possibility to expand well deliverability to 172 MMcfd by
increasing the amount of gas being delivered through the NNGI.
• Revenue for Q4 2019 increased by 72% and by 48% for the year over the comparable prior year period. The increases are primarily due to increased
sales to TANESCO, new sales to TPDC under the LTGSA, a greater percentage of profit share and a positive current income tax adjustment as a
consequence of higher revenues. Gas deliveries for the quarter and the year increased 58% over the comparable prior year period. The increase
in gas volumes is primarily the result of increased nominations of gas volumes by TANESCO and TPDC through the NNGI. The increase in volumes
was partially offset by a 16% decrease in the weighted average price for Q4 2019 and a decrease in the weighted average price for the year of
15% compared to the same prior year period.
• Net income attributable to shareholders increased 349% for Q4 2019 and 86% for the year over the comparable prior year period. The increases are
primarily due to the increase in revenue partially offset by the increase in depletion expense due to increased gas volume deliveries.
• Net cash flows from operating activities for Q4 2019 increased by 26% and by 21% for the year over the comparable prior year period. The increases
are primarily a result of the increase in net income and the positive impact on cash flow when adjusting net income by the increase in depletion being
offset by the decrease in the cash inflow associated with changes in non-cash working capital compared to the prior year period. The decrease in cash
flow associated with non-cash working capital is primarily due to the increase in prepayments and a decrease in trade and other payables.
• Adjusted funds flow from operations for Q4 2019 increased 112% and 124% for the year over the comparable prior year period. The increases are
mainly due to the increase in net cash flows from operating activities adjusted for the change in non-cash working capital.
• Capital expenditures increased by 2% for Q4 and by 0% for the year over the comparable prior year period. The capital expenditures for 2019
include costs for the completion of the refrigeration unit for the Songas Infrastructure and capitalized lease costs in accordance with IFRS 16.
• The Company once again exited the year in a stable financial position with $107.0 million in working capital (December 31, 2018: $84.2 million), cash
and short-term investments of $138.7 million (December 31, 2018: $131.5 million) and long-term debt of $54.1 million (December 31, 2018: $53.9
million). The intention is to hold the short-term investments to maturity. The short-term investments are highly liquid by their nature and may readily
be transferred to cash when necessary.
• Total proved conventional natural gas reserves at December 31, 2019 decreased 10% to 234 Bcf from 261 Bcf and total proved plus probable
conventional natural gas reserves (“2P”) decreased 10% to 265 Bcf from 293 Bcf compared to the prior year. The decrease is due to Additional Gas
production in 2019 of 21 Bcf (2018: 14.6 Bcf) and lower forecasted sales over the remaining life of the license. The net present value of estimated
future cash flows from 2P reserves at a 10% discount rate (“NPV10”) decreased by 4% to $282.6 million from $294.4 million in the previous year.
This is mainly the result of the decrease in the time remaining to the end of the license offset by a reduction in forecasted capital costs. The reserves
and estimated future cash flows are based on forecasted Additional Gas sales volumes of 79.5 MMcfd for 2020 compared to actual results of 63.1
MMcfd for 2019. Under the terms of the PSA, the Company is required to pay Tanzanian income tax but this is recovered through the profit sharing
arrangements with TPDC. Income tax has no material impact on the cash flows emanating from the PSA and accordingly there is no significant difference
between the net present value of reserves on a before and after tax basis.
• As at December 31, 2019 the current receivable from TANESCO was $ nil (December 31, 2018: $ nil). TANESCO’s long-term trade receivable as at
December 31, 2019 was $47.5 million with a provision of $47.5 million compared to $58.5 million (provision of $58.5 million) as at December 31, 2018.
Subsequent to December 31, 2019 the Company has invoiced TANESCO $4.9 million for 2020 gas deliveries and TANESCO has paid the Company
$18.1 million.
• On October 18, 2019 the Company announced it completed its normal course issuer bid (“NCIB”) for the purchase of its Class B subordinate voting
shares (“Class B Shares”). Under the NCIB the Company repurchased 933,028 Class B Shares at a weighted average price of CDN$6.43 per Class B
Share for aggregate consideration of CDN$6.0 million being the maximum aggregate consideration authorised under the NCIB. The Class B Shares
repurchased under the NCIB have been canceled.
• On November 28, 2019 the Company declared a dividend of CDN$0.06 per share on each of its Class A common voting shares (“Class A Shares”)
and Class B Shares for a total of $1.5 million to the holders of record as of December 31, 2019 paid on January 31, 2020.
• On January 24, 2020, the Company announced the authorization of a substantial issuer bid, the outcome of its strategic review process and focused
strategy to grow an integrated gas business in Africa. The announcement followed the work of a special committee of the directors appointed on
July 25, 2019 to review strategic alternatives.
• On February 25, 2020 the Company declared a dividend of CDN$0.06 per share on each of its Class A Shares and Class B Shares for a total of
$1.2 million to the holders of record as of March 31, 2020 to be paid on April 30, 2020.
• On March 12, 2020 the Company announced the final results of the substantial issuer bid where it took up and paid for 7,692,297 Class B Shares at
CDN$6.50 per Class B Share. The aggregate purchase of Class B Shares totaled CDN$50.0 million representing 23.6% of Orca’s issued and outstanding
Class B Shares and 22.4% of the total number of Orca’s issued and outstanding shares.
• On April 7, 2020 the Company announced its intention to amend the NCIB for purchase of its Class B Shares initiated in June 2019. Additional
purchases made pursuant to the NCIB will not exceed 700,000 Class B Shares (subject to a maximum aggregate purchase limit of CDN$3.85 million)
representing not more than 5% of the issued and outstanding Class B Shares as at June 14, 2019 (33,505,915 Class B Shares) less 933,028 Class B
Shares already purchased under the NCIB. The NCIB will be in effect until June 14, 2020.
Orca Exploration Group Inc. // Annual Report & Accounts 2019 39
Oil and Gas Advisory
The Company’s conventional natural gas reserves as at December 31, 2019 disclosed herein were evaluated by McDaniel & Associates Consultants Ltd.
(“McDaniel”), independent petroleum engineering consultants, in accordance with the definitions, standards and procedures contained in the Canadian Oil
and Gas Evaluation Handbook (“COGE Handbook”) and National Instrument 51-101 – Standards of Disclosure for Oil and Gas Activities (“NI 51-101”).
The independent reserves evaluations prepared by McDaniel had an effective date of December 31, 2019 and preparation date of February 20, 2020.
The recovery and reserve estimates of the Company’s conventional natural gas reserves provided herein are estimates only and there is no guarantee
that the estimated reserves will be recovered. Actual reserves may be greater than or less than the estimates provided herein.
Operating Volumes
The gross daily volume average in 2019 and for Q4 2019 increased 58% over the comparable prior year periods. The increase in gross sales volume was
primarily due to increased sales of natural gas through the NNGI, initially to TANESCO through a side letter agreement and then to TPDC with the signing
of the new LTGSA.
The Company’s gross sales volumes were split between the Industrial and Power sectors as detailed in the table below:
Gross sales volume (MMcf)
Industrial sector
Power sector
Total volumes
Gross daily sales volume average (MMcfd)
Industrial sector
Power sector
Gross daily sales volume average total
Three Months ended
December 31
Year ended
December 31
2019
2018
2019
2018
1,206
5,309
6,515
13.1
57.7
70.8
1,194
2,929
4,123
13.0
31.8
44.8
4,836
18,183
23,019
13.3
49.8
63.1
4,733
9,839
14,572
13.0
26.9
39.9
Industrial Sector
There was a small increase of 1% in Industrial sales volumes for Q4 2019 and 2% for the year over the comparable prior year period. The increase
is a result of reduced maintenance time at a cement plant in 2019 and increased consumption by industrial customers throughout 2019.
Power Sector
Power sector sales volumes increased by 81% for Q4 2019 and 85% for the year over the comparable prior year period. The increase was primarily
due to increased gas sales through NNGI to TANESCO and TPDC.
Protected Gas Volumes
Protected Gas volumes for the year increased by 1% to 14,571 MMcf (39.9 MMcfd) compared to 14,390 MMcf (39.4 MMcfd) for the year ended
December 31, 2018. Protected Gas volumes decreased by 5% to 3,693 MMcf (40.1 MMcfd) in the quarter from 3,902 MMcf (42.4 MMcfd) in
Q4 2018. The Company receives no revenue for Protected Gas volumes however the volumes are required to calculate total gas produced from
the reservoir and the allocation of certain production, distribution and transportation expenses between Protected Gas and Additional Gas.
Orca Exploration Group Inc. // Annual Report & Accounts 2019Strategic ReportManagement’s Discussion & AnalysisFinancial Statements
40
MANAGEMENT’S DISCUSSION & ANALYSIS CONTINUED
Commodity Prices
The commodity prices achieved in the different sectors during the year are detailed in the table below:
$/mcf
Average sales price
Industrial sector
Power sector
Weighted average price
Three Months ended
December 31
Year ended
December 31
2019
2018
2019
2018
7.77
3.44
4.24
8.44
3.68
5.06
7.97
3.43
4.38
8.26
3.68
5.17
Industrial Sector
The average Industrial sales price decreased by 8% for Q4 2019 and by 4% for the year over the comparable prior year period. The decrease in prices
is primarily due to the underlying decrease in the price of heavy fuel oil against which most of the industrial customer contracts are priced.
Power Sector
The average sales price for Q4 2019 and for the year decreased 7% from the comparable prior year period. The decrease is primarily due to the increase
in gas volumes sold through the NNGI to TANESCO and TPDC at wellhead gas prices compared to gas volumes sold through the Songas Infrastructure
which include a processing and transportation tariff. Although the average gas price for the three and twelve months ended December 31, 2019 is
less than the comparative prior year periods, the Company’s sales margins to the Power sector actually increased slightly year on year due to increased
deliveries through the NNGI for which the Company does not pay processing and transportation tariffs.
Revenue
Under the terms of the PSA the Company is responsible for invoicing, collecting and allocating the revenue from Additional Gas sales (See “Principal Terms
of the PSA and Related Agreements”).
The Company is entitled to recover all costs incurred on the exploration, development and operations of the project (“Cost Gas revenue”) up to a maximum
of 75% of the net field revenue (gross field revenue less the tariff for processing and pipeline infrastructure) prior to allocating the remaining net field revenue
between TPDC and the Company (“Profit Gas revenue”). Any costs not recovered in a period are carried forward for recovery out of future revenues. Once
the Cost Gas revenue has been recovered, TPDC is able to recover any pre-approved marketing costs. Currently there are no pre-approved marketing costs
for TPDC.
The average Additional Gas sales volumes for the quarter and the year ended December 31, 2019 were above 50 MMcfd which entitled the Company
to a 55% share of Profit Gas revenue. The average Additional Gas volumes for the quarters ended September 30 and December 31, 2018 were above
40 MMcfd which entitled the Company to a 40% share of Profit Gas revenues. Average Additional Gas volumes for the quarters ended March 31, 2018
and June 30, 2018 were below 40 MMcfd which entitled the Company to a 35% share of Profit Gas revenues.
The Company was allocated a total of 75% of the net field revenue for the quarter ended December 31, 2019 (Q4 2018: 64%) and 69% for the year
ended December 31, 2019 (year ended December 31, 2018: 65%).
Orca Exploration Group Inc. // Annual Report & Accounts 2019
41
The reconciliation of gross field revenue to Company operating revenue and revenue is detailed below:
$’000
Industrial sector
Power sector
Gross field revenue
TPDC share of revenue
Company operating revenue
Current income tax adjustment
Revenue
Three Months ended
December 31
Year ended
December 31
2019
9,374
18,245
27,619
(6,347)
21,272
1,940
23,212
2018
10,077
10,774
20,851
(6,686)
14,165
(705)
13,460
2019
38,530
62,329
100,859
(28,334)
72,525
13,070
85,595
2018
39,095
40,395
79,490
(25,056)
54,434
3,332
57,766
Operating revenue increased 50% for Q4 2019 and 33% for the year over the comparable prior year period. The increase for the quarter and the year
ended December 31, 2019 is primarily a result of increased sales to TANESCO, new sales to TPDC under the LTGSA combined with higher Profit Gas
entitlement.
Operating revenue is adjusted by the current income tax to calculate revenue presented on the Consolidated Statements of Comprehensive Income.
The Company is liable for income tax in Tanzania, but under the terms of the PSA, TPDC’s share of revenue is adjusted for the tax payable. To account
for this, revenue includes the current income tax charge grossed up at 30%.
The Company’s revenue for Q4 2019 increased by 72% and increased 48% for the year over the comparable prior year period. The increases are primarily
a consequence of increased sales to TANESCO and new sales to TPDC under the LTGSA, a greater percentage of profit share and a positive current
income tax adjustment due to higher revenues.
Production, Distribution and Transportation Expenses
Included in operating costs are well maintenance costs, allocation of PSA license costs, regulatory fees, insurance, certain costs associated with evaluation
of the reserves and costs of personnel not recoverable from Songas. Costs are allocated between Protected Gas (recoverable from Songas) and Additional
Gas in proportion to their respective sales during the period.
The production, distribution and transportation costs are detailed in the table below:
$’000
Operating costs
Tariff for processing and pipeline infrastructure
Ring-main distribution costs
Production, distribution and transportation expenses
Three Months ended
December 31
Year ended
December 31
2019
361
2,576
542
3,479
2018
246
2,347
734
3,327
2019
1,310
8,404
2,151
2018
1,120
8,508
2,750
11,865
12,378
Operating Netbacks
The operating netback per mcf before general and administrative expenses, tax and Additional Profits Tax (“APT”) is detailed in the table below
(see “Non-GAAP measures”):
$/mcf
Gas price – Industrial
Gas price – Power
Weighted average price for gas
TPDC Profit Gas entitlement
Production, distribution and transportation expenses
Operating netback
Three Months ended
December 31
Year ended
December 31
2019
7.77
3.44
4.24
(0.97)
(0.54)
2.73
2018
8.44
3.68
5.06
(1.62)
(0.81)
2.63
2019
7.97
3.43
4.38
(1.23)
(0.52)
2.63
2018
8.26
3.68
5.17
(1.56)
(0.85)
2.76
The operating netback in Q4 2019 increased by 4% compared to Q4 2018 and decreased by 5% for the year compared to 2018. The increase in Q4 2019
is mainly due to the reduction in the TPDC share of revenue due to their reduced Profit Gas entitlement. The decrease for the year is primarily a result of
the decrease in the weighted average gas price of gas supplied as a consequence of the change in sales mix between Industrial and Power sectors which
has been partially offset by: (i) the reduction in the TPDC Profit Gas entitlement; and (ii) decreased tariff for processing and pipeline infrastructure as a
consequence of increased volumes through the NNGI.
Orca Exploration Group Inc. // Annual Report & Accounts 2019Strategic ReportManagement’s Discussion & AnalysisFinancial Statements
42
MANAGEMENT’S DISCUSSION & ANALYSIS CONTINUED
General and Administrative Expenses
General and administrative expenses are detailed in the tables below:
$’000
Employee and related costs
Office costs
Marketing and business development costs
Reporting, regulatory and corporate
Three Months ended
December 31
Year ended
December 31
2019
1,409
1,052
536
561
3,558
2018
1,268
1,585
202
280
3,335
2019
6,188
4,438
1,921
1,850
2018
6,084
5,230
427
1,086
14,397
12,827
General and administrative expenses are split between head office and Tanzania. The majority of general and administration expenses relate to office
and management costs that support our operations in Tanzania and are cost recoverable under the PSA.
$’000
Tanzania
Corporate
Three Months ended
December 31
Year ended
December 31
2019
2,176
1,382
3,558
2018
1,933
1,402
3,335
2019
8,214
6,183
2018
7,900
4,927
14,397
12,827
General and administrative expenses averaged $1.2 million per month during Q4 2019 (Q4 2018: $1.1 million) and $1.2 million per month over the year
(2018: $1.1 million). The increase between periods is primarily due to business development and legal costs related to the strategic review undertaken by
the Company and the NCIB completed in the latter part of 2019.
Stock Based Compensation
The breakdown of the costs incurred in relation to stock based compensation is detailed in the table below:
$’000
Stock appreciation rights (“SARs”)
Restricted stock units (“RSUs”)
Stock based compensation (recovery)
Three Months ended
December 31
Year ended
December 31
2019
559
155
714
2018
(362)
(57)
(419)
2019
2,015
440
2,455
2018
2,440
2,203
4,643
As at December 31, 2019 a total of 2,321,833 SARs were outstanding compared to 645,000 SARs as at December 31, 2018. A total of 2,168,500 new
SARs were issued during the year ended December 31, 2019 with exercise prices ranging from CDN$5.00 to CDN$6.65. The SARs issued vest over
three years in three equal annual installments and expire on December 31, 2022. A total of 405,000 SARs with exercise prices ranging from CDN$2.30
to CDN$3.87 were exercised during the year ended December 31, 2019 resulting in a total cash payout of $1.1 million. A total of 86,667 SARs with an
exercise price of CDN$5.00 were forfeited during the year ended December 31, 2019.
As at December 31, 2019 a total of 234,700 RSUs were outstanding compared to 87,500 at December 31, 2018. A total of 217,700 of new RSUs
were issued during the year ended December 31, 2019 with an exercise price of CDN$0.01. A total of 62,500 RSUs were exercised during the year
ended December 31, 2019 resulting in a total cash payout of $0.3 million. A total of 8,000 RSUs with an exercise price of CDN$0.01 were forfeited
during the year.
As SARs and RSUs are settled in cash, they are re-valued at each reporting date using the Black-Scholes option pricing model with the resulting liability
being recognized in trade and other payables. In the valuation of SARs and RSUs at the reporting date, the following assumptions have been made: a risk
free rate of interest of 1.0%, stock volatility of 30.1% to 40.9%, 0% dividend yield, 5% forfeiture and a closing price of CDN$6.05 per Class B Share.
As at December 31, 2019 a total accrued liability of $2.5 million (December 31, 2018: $1.6 million) has been recognized in relation to SARs and RSUs.
The Company recognized an expense for the year of $2.5 million (2018: $4.6 million) as stock based compensation. The relatively larger amount of stock
based compensation expense in the year ended December 31, 2018 was primarily a result of the sale of the non-controlling interest in PAE PanAfrican
Energy Corporation (“PAEM”) in Q1 2018 and the corresponding increase in share price and exercise of awards.
Orca Exploration Group Inc. // Annual Report & Accounts 2019
43
Depletion and Depreciation
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 proved reserves. As at December 31, 2019 the estimated proved reserves remaining to be produced over the term
of the PSA license were 234 Bcf (December 31, 2018: 261 Bcf). A depletion expense increase is a result of the increased volumes given there was little
increase in the average depletion rate of $0.63/mcf for 2019 compared to $0.62/mcf for 2018.
$’000
Oil and gas natural interests
Office and other
Right-of-use assets
Finance Income and Expense
Finance income is detailed in the table below:
$’000
Interest income
Investment income
Reversal of provision for doubtful accounts
Three Months ended
December 31
Year ended
December 31
2019
4,566
30
47
2018
3,222
42
–
2019
15,005
135
189
4,643
3,264
15,329
2018
9,495
165
–
9,660
Three Months ended
December 31
Year ended
December 31
2019
237
416
7,546
8,199
2018
126
423
2,560
3,109
2019
666
2,199
11,044
13,909
2018
625
1,084
17,427
19,136
The 2018 trend which saw TANESCO making payments in excess of amounts owed for gas delivered, continued in 2019. The Company: (i) recognized
all amounts invoiced for gas deliveries in 2019 of $50.6 million as revenue (2018: 31.7 million); and (ii) with payments during the year of $61.6 million
(2018: $43.3 million) recognized $11.0 million during the year (2018: $11.6 million) as finance income relating to the amounts collected during 2019 that
were applied towards the long-term TANESCO arrears previously provided for. In 2018 additional amounts were recognized that had been previously
provided for: (i) $4.3 million of finance income was for payments in excess of gas deliveries for prior years that had been previously recorded as deferred
income; (ii) a recovery of a Songas receivable of $1.2 million; and (iii) recovery of $0.3 million of VAT receivable relating to an Italian entity.
As at December 31, 2019 the Company had $44.8 million invested in US dollar short-term bonds with maturity dates from February 2020 to July 2020
and a range of interest rates from 1.375% to 2.75% (December 31, 2018: $66.8 million with maturity dates from March 2019 to December 2019 and
a range of interest rates from 0.875% to 2.125%). The investment income for the year includes interest earned of $1.4 million (2018: $0.6 million) and
amortization of the discount on the acquisition of the bonds of $0.8 million (2018: $0.5 million). The investment income for Q4 2019 includes accrued
interest of $0.3 million (Q4 2018: $0.2 million) and amortization of the discount on the acquisition of the bonds of $0.1 million (Q4 2018: $0.2 million).
The Company’s intent is to hold the bond investments to maturity. The bonds are highly liquid by their nature and may readily be liquidated into cash if
necessary. To date, there have been no sales of bond investments prior to their maturity.
Finance expense is detailed in the table below:
$’000
Base interest expense
Participation interest expense
Lease interest expense
Interest expense
Net foreign exchange loss
Indirect tax
Three Months ended
December 31
Year ended
December 31
2019
1,481
120
44
1,645
9
303
1,957
2018
1,591
342
–
1,933
87
328
2,348
2019
6,164
2,071
44
8,279
289
1,298
9,866
2018
6,249
4,745
–
10,994
695
3,689
15,378
Orca Exploration Group Inc. // Annual Report & Accounts 2019Strategic ReportManagement’s Discussion & AnalysisFinancial Statements
44
MANAGEMENT’S DISCUSSION & ANALYSIS CONTINUED
Finance Income and Expense continued
Base and participation interest expense relate to the long-term loan (“Loan”) from the International Finance Corporation (“IFC”). Base interest on the
Loan is payable quarterly at 10% per annum on a ‘pay-if-you-can-basis’ using a formula to calculate the net cash available for such payments as at
any given interest payment date. In addition, the Loan initially included an annual variable participation interest equating to 7% of the net cash flows
from operating activities less net cash flows used in investing activities of its subsidiary, PanAfrican Energy Tanzania Limited (“PAET”), in respect of
any given year. The current rate is 6.4% as a prepayment of $2.6 million was made in January 2018 associated with the sale of a 7.9% interest in PAEM
(see “Non-Controlling Interest”). Such participation interest will continue until October 15, 2026 regardless of whether the Loan is repaid prior to its
contractual maturity date.
The base interest expense decreased slightly as a long-term loan repayment of $4.8 million was made during Q4 2019. The participation interest expense
was lower in 2019 as a result of the prepayment in 2018.
Net foreign exchange gains and losses are the result of transactions in foreign currencies being 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.
These foreign exchange losses and gains are recorded in finance expense.
The indirect tax is for VAT associated with invoices to TANESCO for interest on late payments and invoices under the take or pay provisions within the
PGSA. The decline in indirect taxation is primarily a result of no invoice being issued under the take or pay provisions of the PGSA as TANESCO took the
required volumes during the contract year to June 20, 2019. In 2018 a take or pay invoice of $16.6 million was issued. These invoices are not recognized
in the financial statements as they do not meet revenue recognition criteria with respect to assurance of collectability.
Tax
Income Tax
The income tax charges are detailed in the table below:
$’000
Current tax
Deferred tax expense
Three Months ended
December 31
Year ended
December 31
2019
1,747
1,223
2018
53
926
2019
10,657
2,326
2018
4,588
1,016
Under the terms of the PSA with TPDC and the GoT, the Company is liable for income tax in Tanzania at the corporate tax rate of 30%. However, the PSA
provides a mechanism by which income tax payable is recovered from TPDC by reducing TPDC’s share of Profit Gas revenue and increasing the allocation
to the Company. This is reflected in the accounts by increasing the Company’s share of revenue by an amount equivalent to income taxes payable grossed
up by 30%.
As at December 31, 2019 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 $15.2 million (December 31, 2018: $12.8 million). The deferred tax has no impact on cash flow until it becomes a current income tax, at which
point the tax is paid and recovered from TPDC’s share of Profit Gas.
Additional Profits Tax
$’000
APT
Three Months ended
December 31
Year ended
December 31
2019
1,304
2018
876
2019
6,587
2018
3,014
Under the terms of the PSA, APT is payable when the Company has recovered its costs plus a specified return out of Cost Gas revenues and Profit Gas
revenues. As a result: (i) no APT is payable until the Company recovers its costs out of Additional Gas revenues plus an annual operating return under the
PSA of 25% plus the percentage change in the United States Industrial Goods Producer Price Index (“PPI”); and (ii) the maximum APT rate is 55% of the
Company’s Profit Gas when costs have been recovered with an annual return of 35% plus the percentage change in PPI.
The timing and the effective rate of APT depends on the realized value of Profit Gas which in turn depends on the level of expenditure. The Company
provides for APT by annually forecasting the total APT payable in the future as a proportion of the forecast Profit Gas over the term of the PSA.
The forecast takes into account the timing of future development capital spending. As at December 31, 2019 the current portion of APT payable
was $11.9 million (December 31, 2018: $ nil) with a long-term APT payable of $32.3 million (December 31, 2018: $37.6 million).
The effective APT rate for the quarter of 16.8% (Q4 2018: 19.7%) has been applied to Company Profit Gas of $7.8 million (Q4 2018: $4.5 million),
and an average effective APT rate of 19.0% (2018: 19.4%) has been applied to Company Profit Gas of $34.6 million (2018: $15.5 million) for the year
ended December 31, 2019. Accordingly, $1.3 million (Q4 2018: $0.9 million) and $6.6 million (2018: $3.0 million) have been recorded for the quarter
and for the year ended December 31, 2019, respectively.
Orca Exploration Group Inc. // Annual Report & Accounts 2019
Working Capital
Working capital as at December 31, 2019 was $107.0 million (December 31, 2018: $84.2 million) and is detailed in the table below:
$’000
Cash and cash equivalents
Investment in short term bonds
Trade and other receivables
Songas
TPDC
Industrial customers and other receivables
Provision for doubtful accounts
Prepayments
Trade and other payables
TPDC share of Profit Gas revenue(1)
Songas
Other trade payables and accrued liabilities
Current portion of long-term debt
Current portion of Additional Profits Tax
Tax payable
Working capital
45
2018
64,660
66,837
15,862
1,217
148,576
As at December 31
2019
93,899
44,756
8,985
–
11,044
(4,167)
40,260
1,785
17,589
4,760
8,763
7,284
10,287
(4,167)
33,134
2,354
12,673
–
11,940
22,167
6,752
167,574
60,101
501
60,602
106,972
–
64,394
–
64,394
84,182
1 The balance of $33.1 million payable to TPDC is the liability for TPDC’s share of Profit Gas revenue primarily related to unpaid gas deliveries to TANESCO, net of $4.9 million previously
recorded as tax recoverable. The majority of the settlement of this liability is dependent on receipt of payment from TANESCO for arrears. A total of $22.3 million was paid to TPDC in
2019 for their allocation of profit share which includes the payments received for arrears. The balance of the accrual relates to the profit share associated with trade receivables and
the difference between profit share percentages used to record the accrued liability at the time of delivery of the gas to TANESCO versus the profit share percentage used at the time
payment was received. The settlement of this accrual is dependent on the collection of the arrears and resolving other compensation issues with the GoT relating to forced reduction
deliveries and sales of gas to TANESCO. In February 2020 an additional $1.8 million was paid to TPDC for profit share.
Financial Instruments
Current financial instruments of the Company include cash and cash equivalents, investment in short term bonds, trade and other receivables, trade
and other payables and tax payable. The carrying values of the financial instruments approximate fair values due to their relatively short periods to maturity.
There are no restrictions on the movement of cash from Jersey, Mauritius or Tanzania, and the majority of the Company’s cash and investment
in short-term bonds is currently held outside of Tanzania.
Working Capital Requirements
The Company expects to have sufficient cash flow from operating activities to maintain adequate working capital to cover both short-term and long-term
obligations, including forecast debt and interest payments ($7.8 million) and capital expenditure ($44.5 million) for 2020. The Company does not expect
to incur any losses from debtors in 2020.
The Company is adapting to the recent outbreak of the novel coronavirus (“COVID-19”) and the related economic and social disruption, volatility
in financial markets, potential disruption to global supply chains, and the ability to directly and indirectly staff the Company’s day to day operations.
The current challenging economic climate may lead to further adverse changes in cash flows, working capital levels and/or debt balances, which may
also have a direct impact on the Company’s operating results and financial position. These and other factors may adversely affect the Company’s
liquidity and ability to generate income and cash flows in the future. The current volatility in commodity prices and uncertainty regarding the timing
for recovery creates inherent challenges with the preparation of financial forecasts.
Orca Exploration Group Inc. // Annual Report & Accounts 2019Strategic ReportManagement’s Discussion & AnalysisFinancial Statements
46
MANAGEMENT’S DISCUSSION & ANALYSIS CONTINUED
Working Capital continued
TANESCO Receivable
As at December 31, 2019 the current receivable from TANESCO was $ nil (December 31, 2018: $ nil). During the year the amounts received
from TANESCO continued to be in excess of the revenue recognized for gas sales to TANESCO. The TANESCO long-term trade receivable as at
December 31, 2019 was $47.5 million with a provision of $47.5 million compared to $58.5 million (with a provision of $58.5 million) as at
December 31, 2018. Subsequent to December 31, 2019 the Company has invoiced TANESCO $4.9 million for 2020 gas deliveries and TANESCO
has paid the Company $18.1 million.
The following table details the total amounts receivable from TANESCO that do not meet revenue recognition criteria and therefore are not recorded
in the consolidated financial statements:
$‘000
Total amounts invoiced to TANESCO
Unrecognized amounts not meeting revenue recognition criteria(i)
Provision for doubtful accounts
As at December 31
2019
2018
118,861
121,393
(71,407)
(47,454)
(62,895)
(58,498)
–
–
i The amount includes invoices for interest on late payments and invoices relating to differences between gas contracted for delivery versus gas taken by TANESCO.
Capital Expenditures
The capital expenditures in 2019 and 2018 primarily relate to the refrigeration project for the Songas Infrastructure (does not include increases from
capitalized leases).
$’000
Pipelines and infrastructure
Other capital expenditures
Three Months ended
December 31
Year ended
December 31
2019
1,007
7
1,014
2018
2,561
67
2,628
2019
4,153
18
4,171
2018
5,744
99
5,843
Capital Requirements
There are no contractual commitments for exploration or development drilling or other field development, either in the PSA or otherwise agreed, which
would give rise to significant capital expenditure at Songo Songo. Any significant additional capital expenditure in Tanzania is discretionary.
The current Development Program includes well workovers at an estimated cost of $13.1 million. A total of $2.9 million was incurred on the refrigeration
project in 2019 (2018: $4.2 million). The refrigeration unit installation was completed in September 2019 with final acceptance scheduled for 2020 subject
to correcting some minor faults. The refrigeration unit is operational and has enabled the Company to increase the volumes that can be processed and
transported to Dar es Salaam through the Songas Infrastructure to 100 MMcfd.
To sustain current levels of production beyond 2020, it will be necessary to install compression facilities to maintain throughput of the Songas facilities
over the remaining term of the PSA. Failure to add compression will lead to a significant reduction in production as field pressure declines below the level
required to deliver gas to the Dar es Salaam power sector and industrial customers. On December 23, 2019 a Letter of Instruction was signed with an
international contractor with significant presence and experience in Tanzania to commence detailed engineering and design for the compression project.
A fixed-price turnkey contract for the project is expected to be signed in Q2 2020. It is expected that compression will be operational by the end of
Q1 2022 and will cost approximately $38 million of which $34.2 million is forecast to be spent in 2020.
The Company is evaluating the merits of conducting three onshore workovers, wells SS-3, SS-4 and SS-10. Wells SS-3 and SS-4 are owned by Songas
and are currently suspended and shut-in respectively. A decision on the timing and scope of the workovers is subject to the approval by the Board of
Directors and agreement with Songas; this is expected to be taken by the end of Q2 2020. Part of the forecast workover cost of $13.1 million is expected
to be recovered from Songas. The Company is also looking at alternatives to plug and abandon wells SS-3 and SS-4 or possible sidetracking to improve
production rates.
At the date of this report, the Company has no significant outstanding contractual commitments and no outstanding orders for long lead items related
to any capital programs.
Orca Exploration Group Inc. // Annual Report & Accounts 2019
Long-term Receivables
$‘000
VAT Songas workovers
Lease deposit
47
As at December 31
2019
2,205
45
2,250
2018
2,205
219
2,424
In 2017, based on agreement with TPDC, the Songas share of workover costs of $14.5 million was transferred to the cost pool to recover the costs via the
PSA cost recovery mechanism. This resulted in $2.2 million relating to VAT on the workovers that had already been paid being reclassified as a long-term
receivable. The Company continues to take action to collect the workover costs. Amounts not collected will be pursued through the mechanisms provided
in the agreements with Songas.
Long-term Loan
In 2015 PAET took out the Loan of $60 million with the IFC. The Loan was fully drawn down in 2016.
The Loan is to be paid out through six semi-annual payments of $5 million starting April 15, 2022 and one final payment of $25.2 million due on April 15,
2025. The Company may voluntarily prepay all or part of the Loan but must simultaneously pay any accrued base interest costs related to the principal
amount being prepaid. The Loan is an unsecured subordinated obligation of PAET and was initially guaranteed by the Company to a maximum of $30
million. The initial guarantee may only be called upon by IFC at maturity in 2025 and, subject to IFC approval and receipt of all required regulatory
approvals, the Company, at its discretion, may issue shares in fulfillment of all or part of the guarantee obligation in 2025. Pursuant to the sale of the
non-controlling interest in the parent company of PAET, PAEM, the Company agreed with the IFC to reduce the outstanding amount of the loan by the
percentage interest sold of 7.9% ($4.8 million) on the fourth anniversary of the first drawdown. PAET made this payment on October 16, 2019.
Dividends and distributions from PAET to the Company are restricted at any time whenever amounts of interest, principal or participating interest are due
and outstanding. All amounts under the Loan have been paid when due.
Outstanding Shares
The Class A Shares are convertible at any time at the option of the holder into Class B Shares on a one-for-one basis. Subject to the terms and conditions
of conversion specified in the memorandum of association and articles of association of the Company, the Class B Shares are convertible into Class A
Shares on a one for one basis if an offer is made to purchase Class A Shares that: (i) must, by reason of applicable securities legislation or the requirements
of a stock exchange on which the Class A Shares are listed, be made to all or substantially all of the holders of Class A Shares; and (ii) is not made
concurrently with an offer to purchase Class B Shares that is identical to the offer to purchase Class A Shares and that has no condition attached other
than the right not to take up and pay for shares tendered if no shares are purchased pursuant to the offer for Class A Shares. The conversion right does
not come into effect under certain events specified in the memorandum of association of the Company, including, without limitation, the prior delivery to
the Company’s transfer agent and to the Secretary of the Company of a certificate signed by one or more shareholders owning more than 50% of the then
outstanding Class A Shares.
There were 34,307,752 shares outstanding as at December 31, 2019. As at the date of this report there were a total of 1,750,495 Class A Shares and
24,864,960 Class B Shares outstanding following the completion of the substantial issuer bid of CDN$50.0 million on March 5, 2020.
Cash Flow Summary
$’000
Operating activities
Net income
Non-cash adjustments
Interest expense
Changes in non-cash working capital(1)
Net cash flows from operating activities
Net cash used in investing activities
Net cash from (used in) financing activities
Increase (decrease) in cash
1
See Consolidated Statements of Cash Flows
Three Months ended
December 31
Year ended
December 31
2019
2018
2019
2018
12,862
8,244
1,645
(17,595)
5,156
(1,057)
23,592
27,691
2,910
4,847
1,933
(5,605)
4,085
(2,471)
1,444
3,058
26,346
27,911
8,279
13,563
21,919
10,994
(27,663)
(17,724)
34,873
(4,285)
(1,339)
29,249
28,752
(5,051)
(81,665)
(57,964)
The Company’s net cash flows from operating activities for Q4 2019 increased 24% and by 21% for the year over the comparable prior year period.
The increases are mainly due to an increase in revenue between periods and a decrease in stock based compensation. The yearly result for 2018 reflected
the exercise of significant share awards following completion of the sale of a non-controlling interest in PAEM in Q1 2018. The decrease in cash used in
financing activities is primarily a result of an additional investment in short-term bonds in Q1 2018 compared to bonds maturing in Q3 2019 which were
not reinvested in short-term bonds.
Orca Exploration Group Inc. // Annual Report & Accounts 2019Strategic ReportManagement’s Discussion & AnalysisFinancial Statements
48
MANAGEMENT’S DISCUSSION & ANALYSIS CONTINUED
Related Party Transactions
The Chairman of Orca’s Board of Directors is counsel to a law firm that provides legal advice to the Company and its subsidiaries. Fees for the services
provided by this firm totaled $0.2 million during Q4 2019 (Q4 2018: $ nil) and $0.4 million for the year (2018: $0.3 million). As at December 31, 2019
the Company had a total of $0.2 million (December 31, 2018: $0.04 million) recorded in trade and other payables in relation to the related party.
Normal Course Issuer Bid and Dividends
On June 10, 2019 Orca was authorised by the TSXV to purchase up to 1.0 million Class B Shares pursuant to the NCIB for the 12-month-period
commencing on June 14, 2019 and ending on June 14, 2020. Between June 24, 2019 and October 17, 2019, Orca purchased for cancellation 933,028
Class B Shares at a weighted average price of CDN$6.43 per Class B Share for aggregate consideration of approximately CDN$6.0 million, the maximum
consideration authorised under the NCIB. Purchases pursuant to the NCIB were by way of open market transactions on the TSXV and/or other exchanges
and alternative trading systems.
On April 6, 2020 Orca was authorised by the TSXV to amend its NCIB commenced on June 14, 2019 to allow it to purchase additional Class B Shares
through the facilities of the TSXV and alternative trading systems in Canada. Purchases made pursuant to the NCIB will not exceed 700,000 Class B
Shares, representing not more than 5% of the issued and outstanding Class B Shares as at June 14, 2019 (33,505,915 Class B Shares) less 933,028 Class
B Shares already purchased under the NCIB. Purchases pursuant to the NCIB will be made by Mackie Research Capital Corporation (“Mackie”) pursuant to
an automatic purchase plan in order to allow repurchases of Class B Shares during Orca’s self-imposed blackout periods. Purchases will be made by Mackie
based on the parameters prescribed by the TSXV and applicable securities laws and the terms of the parties’ written agreement. The NCIB will cease on
the earlier of: (a) the date on which Orca shall have acquired all of the Class B Shares sought pursuant to the NCIB; and (b) the date that is 12-months
following the commencement of the NCIB which started June 14, 2019, unless terminated earlier in accordance with the automatic share purchase plan,
and upon prior notice being given to the TSXV.
The acquisition price of the Class B Shares purchased for cancellation under the NCIB will not exceed the market price of the securities at the time of
acquisition. The funds available to acquire the Class B Shares will come from Orca’s working capital and cash flow. Shareholders may obtain a copy of
the notice regarding the NCIB filed with the TSXV from Orca without charge.
Dividend Summary
Declaration date
February 25, 2020
November 28, 2019
September 17, 2019
May 29, 2019
January 22, 2019
January 18, 2018
Record date
March 31, 2020
December 31, 2019
September 30, 2019
June 30, 2019
March 31, 2019
January 31, 2018
Payment date
April 30, 2020
January 31, 2020
October 31, 2019
July 31, 2019
April 30, 2019
February 7, 2018
Consolidation
The companies which are being consolidated for the purposes of this MD&A are:
Company
Orca Exploration Group Inc.
Orca Exploration Italy Inc.(1)
Orca Exploration Italy Onshore Inc.(1)
PAE PanAfrican Energy Corporation
PanAfrican Energy Tanzania Limited
Incorporated
British Virgin Islands
British Virgin Islands
British Virgin Islands
Mauritius
Jersey
Orca Exploration UK Services Limited
United Kingdom
1 To be wound up during 2020.
Amount per share (CDN$)
0.06
0.06
0.06
0.06
0.05
0.60
Holding
Parent Company
100%
100%
92%
92%
100%
Orca Exploration Group Inc. // Annual Report & Accounts 2019 49
Non-Controlling Interest
On January 16, 2018 the Company sold 7.9% (7,933 Class A common shares) of PAEM to a wholly owned subsidiary of Swala Oil & Gas (Tanzania)
plc. (“Swala”) for $15.4 million cash (net of closing adjustments) and $4.0 million of Swala convertible preference shares (“Preference Shares”) pursuant
to a share purchase agreement. The Preference Shares were issued to the Company on June 18, 2018 and entitle the Company to a 10% per annum
distribution payable 15 days after each quarter end commencing from the closing date, January 16, 2018. Payment of the quarterly distributions is at the
discretion of Swala based on funds available, however, the liability accrues if any amount is unpaid when due. If any distributable amount remains unpaid at
December 31, 2021, the Company may demand settlement and Swala is obligated to comply by transferring and returning the Class A common shares of
PAEM sold to Swala. The aggregate value of these shares will equal the amount of the outstanding distributions. As at December 31, 2019 the Company
has not received any distributions or recorded any amount receivable related to the Preference Shares.
Swala is obligated to redeem 20% of the Preference Shares for cash annually starting from December 31, 2021 until all shares are redeemed. If at any time
Swala does not redeem in cash the required number of Preference Shares, Swala is obligated to redeem the Preference Shares by transferring and returning
the Class A common shares of PAEM sold to Swala. The aggregate value of these Class A common shares will equal the amount of any outstanding
redemption.
The share purchase agreement provided Swala with the right to acquire up to a maximum of 40% of the outstanding Class A common shares of PAEM
based on the same terms and conditions. The Company terminated this right on March 31, 2019.
A reconciliation of the non-controlling interest is detailed below:
$’000
Balance, beginning of year
Recorded at the date of disposition
Share of post-disposition income
Dividends paid
Balance, end of year
During the year PAEM paid a dividend of $1.0 million (2018: $1.0 million) to Swala.
Contingencies
Taxation
Amounts in $’millions
Area
Period
Reason for dispute
Principal
Interest
Pay-As-You-Earn
(“PAYE”) tax
Withholding tax
(“WHT”)
2008-16
2005-16
PAYE tax on grossed-up amounts in staff
salaries which are contractually stated as net.
WHT on services performed outside of
Tanzania by non-resident persons.
Income tax
2008-16
VAT
2008-16
Deductibility of capital expenditures and
expenses (2009, 2012, 2015 and 2016),
additional income tax (2008, 2010, 2011
and 2012), tax on repatriated income (2012),
deemed branch dividend (2015 and 2016),
foreign exchange rate application (2013 and 2015)
and underestimation of tax due (2014).
Output VAT on imported services and
SSI Operatorship services.
1.2
5.7
35.2
2.8
44.9
0.3
2.6
15.7
2.9
21.5
As at December 31
2019
(513) –
–
1,628
(952)
163
As at December 31
2019
Total
1.5(1)
8.3(2)
50.9(3)
5.7(4)
66.4
2018
178
293
(984)
(513)
2018
Total
0.3
1.7
42.6
5.5
50.1
During 2019 and following completion of audits for the years ended December 31, 2015 and December 31, 2016, Tanzania Revenue Authority (“TRA”)
issued assessments for $15.1 million with regards to corporation tax, withholding tax, VAT, excise duty and payroll tax. With the exception of $0.1 million
of VAT and WHT on rent which the Company has conceded, the Company has objected to the other components of the assessment and requested
a waiver of the deposit required to allow a dispute of the assessment and is awaiting a TRA response. The Company has also objected to several
other assessments from TRA demanding deposits to allow the dispute to be made and is awaiting Tax Revenue Appeal Board (“TRAB”) hearing dates.
Management, with advice from its legal counsels, has reviewed the Company’s position on the objections and appeals related to the disputed
amounts and has concluded that no provision is required with regard to these matters and that the maximum potential exposure is $66.4 million
(December 31, 2018: $50.1 million).
Orca Exploration Group Inc. // Annual Report & Accounts 2019Strategic ReportManagement’s Discussion & AnalysisFinancial Statements
50
MANAGEMENT’S DISCUSSION & ANALYSIS CONTINUED
Contingencies continued
The process of appealing assessments issued by TRA start by initially filing an appeal with TRA. If this is not successful, claims can be taken to higher
authorities starting with the TRAB, followed by an appeal to the Tax Revenue Appeals Tribunal (“TRAT”) and finally to the Court of Appeal of Tanzania
(“CAT”). Below is a summary of the status of the various assessments:
(1) (a) 2008-10 ($0.3 million): Subsequent to December 31, 2019 the Company lost an appeal with CAT on the principal amount and now intends to file an application for judicial
review at CAT;
(b) 2015-16 ($1.2 million): The Company has objected to an assessment and is awaiting a TRA response;
(2) (a) 2005-2009 ($1.6 million): In 2018 the CAT ruled in favor of the Company that no WHT was required on services performed outside Tanzania by non-resident persons.
Waiting to see whether TRA will file an application to object to the CAT ruling;
(b) 2010 ($0.1 million): The Company filed a Statement of Appeal with TRAT and is awaiting a hearing date. The Company has also filed an application for stay of execution with TRAT
in response to the TRA demand notice for payment of the amount in dispute and is awaiting a hearing date;
(c) 2015-16 ($6.6 million): The Company objected to several assessments in Q4 2019 issued by TRA with regards to withholding tax. The Company has objected to these assessments
and is awaiting a TRA response;
(3) (a) 2008 ($0.6 million): The Company has objected to a TRA assessment that did not recognize a tax loss carried forward and is awaiting a response;
(b) 2009 ($2.6 million): The Company has filed an application for review of a CAT judgment and is awaiting a hearing date ($1.8 million). The Company objected to an amended
assessment from TRA ($0.8 million) for being time-barred and arbitrary and is awaiting a TRA response;
(c) 2010 ($2.4 million): The Company is awaiting a judgment from a TRAB hearing held in 2019;
(d) 2011 ($1.9 million): The Company is awaiting a judgment from TRAB ($1.7 million). The Company is also awaiting a TRA response on an objection of an assessment ($0.2 million);
(e) 2012 ($15.5 million): The Company has objected to TRA assessments with respect to understated revenue, timing of deductibility of capital expenditures, expenses and tax on
repatriated income. The Company is awaiting a CAT hearing date for waiver of a deposit payment required to file its objection;
(f)
2013 ($8.7 million): The Company filed an objection to TRA assessment ($0.2 million) and is awaiting a response. The Company has objected to two assessments as being time-barred
and without merit ($8.5 million) and is in the process of appealing to CAT that a deposit is required to file the objection;
(g) 2014 ($11.4 million): The Company filed an objection to a TRA assessment ($3.3 million) and is in the process of appealing to CAT that a deposit is required to file the objection.
TRA issued two additional assessments for the year for corporation tax of $5.0 million and tax on repatriated income of $3.1 million. The Company has objected to the assessments
and is awaiting a TRA response;
(h) 2015-16 ($7.8 million): The Company filed objections to TRA assessments and is awaiting a response;
(4) (a) 2008-2010 ($5.4 million): The Company has filed an appeal of a TRA assessment and is awaiting a TRAT judgment;
(b) 2015-16 ($0.3 million): The Company has filed an objection to a TRA assessment and is awaiting a response.
In 2016 TRA introduced significant changes in relation to the income tax treatment of the extractive sector with separate new chapters in Part V of
the Income Tax Act 2004 (“ITA, 2004”) for mining and for petroleum to be effective commencing in 2018. Further changes were subsequently made
by the Written Laws (Miscellaneous Amendments) Act, 2017 (“WLMAA, 2017”) and in particular section 36(a)(ii) of the WLMAA, 2017. The WLMAA,
2017 amended section 65M and 65N of the ITA 2004 to exclude cost oil/cost gas from inclusion in both income and expenditure. The Company is
still evaluating the tax effects of the changes as there are a number of uncertainties and ambiguities as to the interpretation and application of certain
provisions of the WLMAA, 2017. In the absence of guidance on these matters, the Company has used what it believes are reasonable interpretations and
assumptions in applying the WLMAA, 2017 for purposes of determining its tax liabilities and the results of operations, which may change as it receives
additional clarification and implementation guidance. The Company does not expect a significant impact from the changes as it is able to recover taxes
payable from the TPDC Profit Gas entitlement under the terms of the PSA.
Accounting Policies and Changes
New Accounting Policies
IFRS 16: Leases
Effective January 1, 2019 the Company adopted IFRS 16 using the modified retrospective approach, and therefore the comparative information has not
been restated and continues to be reported under IAS 17 and IFRIC 4. The implementation of the new policy has not resulted in any material changes to
the Company’s financial statements.
On adoption of IFRS 16 the Company elected to apply the practical expedient of retaining the assessment of which transactions are leases. IFRS 16
was applied only to contracts that were previously identified as leases. Contracts that were not identified as leases under IAS 17 and IFRIC 4 were not
reassessed as to whether or not there is a lease. Therefore, the definition of a lease under IFRS 16 was applied only to contracts entered into or changed
after January 1, 2019.
The Company recognizes a right-of-use asset and a lease liability at the lease commencement date. The right-of-use asset is initially measured at cost,
which comprises the initial amount of the lease liability adjusted for any lease payments made at or before the commencement date, plus any initial direct
costs incurred and an estimate of costs to dismantle and remove the underlying asset or to restore the underlying asset or the site on which it is located,
less any lease incentives received.
The right-of-use asset is depreciated using the straight-line method from its commencement date to the earlier of the end of the useful life of the
right-of-use asset or end of the lease term. The estimated useful lives of right-of-use assets are determined on the same basis as those of property,
plant and equipment. In addition, the right-of-use asset is periodically reduced by impairment losses, if any, and adjusted for certain re-measurements
of the lease liability.
Orca Exploration Group Inc. // Annual Report & Accounts 2019
51
Accounting Policies and Changes continued
The lease liability is initially measured at the present value of the minimum lease payments that are not yet paid at the commencement date,
discounted using the interest rate implicit in the lease or, if that rate cannot be readily determined, the Company’s incremental borrowing rate
for that asset. Generally, the Company uses its incremental borrowing rate as the discount rate. The lease liability is subsequently increased by
the interest cost on the lease liability and decreased by lease payments made. It is remeasured when there is a change in future lease payments
arising from a change in an index or rate, a change in estimate of the amount expected to be payable under a residual value guarantee, changes
in the assessment of whether a purchase or extension option is reasonably certain to be exercised or a termination option is reasonably certain
not to be exercised.
As a result of adopting IFRS 16, the Company has recorded right-of-use assets and lease liabilities related to contracts which previously had been
off-balance sheet and classified as operating leases under IAS 17.
Operating Leases
The Company has three rental agreements for offices, one located in Dar es Salaam, Tanzania, one in Winchester, UK and one in London, UK. A new
agreement for the office in Dar es Salaam was entered into on November 1, 2019 and expires on October 31, 2023 at an annual rent of $0.4 million.
The Winchester lease expires on September 25, 2022 at an annual rental of $0.2 million per annum. The Winchester office is currently vacant as the
Company was trying to sublet and is now considering options for utilizing the office space. The lease of the London office was initially for a 12-month
period and was renewed on February 1, 2020 at $0.2 million per annum for a further six months. The cost of the London office lease is recognized in
the general and administrative expenses.
Short-Term Leases and Leases of Low Value Assets
The Company has elected not to recognize right-of-use assets and lease liabilities for short term leases that have a term of twelve months or less and
leases of low value assets. The Company recognizes the lease payments associated with these leases as an expense when incurred, over the lease term.
Future Accounting Changes
The following pronouncements from the IASB will become effective or were amended for financial reporting periods beginning on or after January 1, 2020
and have not yet been adopted by the Company.
On October 22, 2018, the IASB issued “Definition of a Business (Amendments to IFRS 3)” aimed at resolving the difficulties that arise when an entity
determines whether it has acquired a business or a group of assets. The amendments are effective for business combinations for which the acquisition date
is on or after the beginning of the first annual reporting period beginning on or after January 1, 2020.
On October 31, 2018, the IASB issued “Definition of Material (Amendments to IAS 1 and IAS 8)” to clarify the definition of ‘material’ and to align the
definition used in the Conceptual Framework and the standards themselves. The amendments are effective for annual reporting periods beginning on
or after January 1, 2020.
The Company continues to review its position with respect to the IASB pronouncements but is not expecting any potential impact on its consolidated
financial statements.
Disclosure Controls and Procedures and Internal Controls over Financial Reporting
The Company’s President and Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”) have designed, or caused to be designed under their
supervision, disclosure controls and procedures (“DC&P”) for Orca. DC&P, as defined in National Instrument 52-109, Certification of Disclosure in Issuers’ Annual
and Interim Filings, are designed to provide reasonable assurance that information required to be disclosed in reports filed with, or submitted to, securities
regulatory authorities is recorded, processed, summarized and reported within the time periods specified under Canadian securities law and include controls
and procedures designed to ensure that information required to be so disclosed is accumulated and communicated to management, including the CEO
and CFO, as appropriate, to allow timely decisions regarding required disclosure. The CEO and CFO of Orca evaluated the effectiveness of the design and
operation of the Company’s DC&P. Based on the evaluation, the officers concluded that Orca’s DC&P were effective as at December 31, 2019.
Quarterly Results Summary
The following is a summary of key results for the Company for the last eight quarters:
Figures in $’000
except where otherwise stated
2019
Q4
Q3
Q2
Q1
Q4
2018
Q3
Revenue
23,212
21,453
20,994
19,936
13,460
15,124
Net income (loss) attributable to shareholders
12,339
2,591
7,004
2,784
2,751
2,637
Q2
14,959
12,493
Earnings (loss) per share
– basic and diluted ($)
Net cash flows from operating activities
Adjusted funds flow from operations (1)
Capital expenditures
1
See non-GAAP measures.
0.36
5,156
13,560
2,679
0.07
7,568
0.20
8,943
10,153
10,463
652
1,413
0.08
13,206
9,037
1,092
0.09
4,085
6,398
2,628
0.07
0.35
10,483
12,657
5,130
1,354
4,752
1,042
Q1
14,223
(4,611)
(0.13)
1,527
2,975
819
Revenue has grown steadily through the last eight quarters. The decrease in Q4 2018 was primarily the result of a negative income tax adjustment. Access
to the NNGI in December 2018 resulted in increased deliveries to TANESCO and TPDC throughout 2019 and the corresponding continuous revenue
growth in 2019.
Orca Exploration Group Inc. // Annual Report & Accounts 2019Strategic ReportManagement’s Discussion & AnalysisFinancial Statements
52
MANAGEMENT’S DISCUSSION & ANALYSIS CONTINUED
Quarterly Results Summary continued
Net income (loss) attributable to shareholders was affected, in addition to factors affecting revenue, by the following:
• The loss in Q1 2018 was a result of increased interest expense ($4.7 million) and stock based compensation ($4.8 million) primarily a result
of the sale of a non-controlling interest in PAEM resulting in an additional interest payment to the IFC and an increase in the share price
• The increase in Q2 2018 resulted from the reversal of a provision for doubtful accounts against TANESCO and a corresponding increase
in finance income of $13.4 million
• Increases in net income in Q2 2019 and Q4 2019 reflect the increase in finance income related to the collection of $3.5 million and $7.5 million
of TANESCO arrears respectively. The decrease in net income in Q3 2019 was a result of decreased collection of TANESCO arrears compared
with Q2 2019
In addition to the factors impacting net income, net cash flows from operating activities were primarily affected by the timing and amount of payments
received from TANESCO. This is the primary reason for the large cash flows in Q2 and Q3 2018. The decrease in Q4 2018 was due to a combination
of changes in non-cash working capital following a payment of TPDC Profit Gas entitlement during the quarter along with the decrease in revenue.
The fluctuations throughout 2019 were primarily a result of the increase in revenue from quarter to quarter, payments to TPDC for profit share and
changes in non-cash working capital.
Adjusted funds flow from operations for the last eight quarters has shown consistent growth coinciding with the revenue growth. The consistent payments
from TANESCO have resulted in recording 100% of TANESCO deliveries as revenue since Q2 2018. The increase in Q4 2019 was primarily related to the
increased deliveries through the NNGI with the signing of the new LTGSA which resulted in TPDC taking gas deliveries of up to 30 to 40 MMcfd during the
quarter.
Capital expenditures in 2019 and 2018 primarily relate to the refrigeration project. Additionally, in 2018, work on the flowline to well SS12 was completed.
Selected Annual Financial Information
Selected annual financial information derived from the audited consolidated financial statements for the years ended December 31, 2019, 2018 and 2017
is set out below:
Figures in $’000 except per share amount
Revenue
Net income (loss) attributable to shareholders
Earnings (loss) – basic and diluted ($ per share)
Cash dividends declared (CDN$ per Class A and B Shares)
Net cash flows from operating activities
Adjusted funds flow from operations(1)
Total non-current liabilities
Total assets
1
See Non-GAAP measures.
2019
85,595
24,718
0.71
0.23
34,873
43,213
102,603
271,772
2018
57,766
13,270
0.38
0.60
28,752
19,255
104,345
262,441
2017
60,832
(2,500)
(0.07)
–
48,154
16,742
104,932
249,549
Revenue increased by 48% in 2019 compared to 2018. This was a result of increased sales to TANESCO and TPDC through NNGI as well as a higher
current income tax adjustment. The 5% decrease of revenue in 2018 compared to 2017 was primarily due to lower power sales volumes, higher TPDC
Profit Gas entitlement and a lower current income tax adjustment.
The increases in net income attributable to shareholders were primarily due to increased revenue and the reversal of provisions for doubtful accounts
related to the collection of TANESCO arrears. The net loss of $2.5 million in 2017 was primarily a result of not recording 100% of TANESCO deliveries as
revenue during the year and no reversals of TANESCO doubtful account provisions.
The Company does not have a dividend policy. The dividend in 2018 of CDN$0.60 per share was approved following the sale of a 7.9% interest in PAEM.
In 2019 the Company approved quarterly dividends, CDN$.05 per share for Q1 2019 and CDN$.06 per share for Q2, Q3 and Q4 2019. Please refer to
the table in the Normal Course Issuer Bid and Dividend section of this MD&A.
The fluctuations in net cash flows from operating activities compared to net income are primarily related to the timing of TANESCO receipts versus the
timing of recognition in the consolidated statement of income. This explains the relatively larger net cash flows from operating activities in 2017. The
decrease of 40% in 2018 compared to 2017 was also impacted by the increase in stock based compensation in Q1 2018 together with decreased cash
inflow associated with changes in non-cash working capital compared to the year ended December 31, 2017. The cash inflow associated with non-cash
working capital for the year ended December 31, 2017 is the consequence of increased trade and other creditors in relation to TPDC payable and deferred
revenue.
The increase in adjusted funds flow from operations over the three years reflects the increase in deliveries and revenue. The increase of 15% in adjusted
funds flow from operations in 2018 compared to 2017 was also impacted by lower general and administration expenses and an increase in interest income
on bonds.
Total non-current liabilities did not change significantly between the years. The decrease of $1.7 million in 2019 compared to 2018 was primarily due to
the repayment of a portion of the long-term loan.
Total assets increased throughout the three-year period, primarily because of increased collections from TANESCO increasing cash and investment
balances.
Orca Exploration Group Inc. // Annual Report & Accounts 2019
53
Non-GAAP Measures
The Company evaluates its performance using a number of non-GAAP (generally accepted accounting principles) measures. These non-GAAP measures
are not standardized and therefore may not be comparable to similar measurements of other entities.
• Adjusted funds flow from operations represents net cash flows from operating activities less interest expense and before changes in non-cash working
capital. This is a performance measure that management believes represents the Company’s ability to generate sufficient cash flow to fund capital
expenditures and/or service debt.
$’000
Net cash flows from operating activities
Interest expense
Finance income – TANESCO arrears
Changes in non-cash working capital
Adjusted funds flow from operations
Three Months ended
December 31
Year ended
December 31
2019
5,156
(1,645)
(7,546)
17,595
13,560
2018
4,085
(1,933)
(1,359)
5,605
6,398
2019
34,873
(8,279)
(11,044)
27,663
2018
28,752
(10,994)
(16,227)
17,724
43,213
19,255
• Operating netbacks represent the profit margin associated with the production and sale of Additional Gas and is calculated as revenues less processing
and transportation tariffs, TPDC’s revenue share, operating and distribution costs per one thousand standard cubic feet of Additional Gas. This is a key
measure as it demonstrates the profit generated from each unit of production.
• Adjusted funds flow from operations per share is calculated on the basis of the adjusted funds flow from operations divided by the weighted average
number of shares, similar to the calculation of earnings per share.
• Net cash flows from operating activities per share is calculated as net cash flows from operating activities divided by the weighted average number
of shares, similar to the calculation of earnings per share.
Use of Estimates and Judgments
The preparation of consolidated financial statements in conformity with IFRS requires management to make judgments, estimates and assumptions
that affect the application of accounting policies and the reported amounts of assets, liabilities, income and expenses. The reader is referred to Orca’s
December 31, 2019 audited consolidated financial statements for a description of estimates and judgments.
Business Risks
Industry and Business Conditions
Competition and operational risk
The oil and gas industry is intensely competitive and the Company competes with other companies which possess greater technical and financial resources.
Oil and gas drilling and production operations are subject to all the risks typically associated with such operations, including but not limited to risks of
fires, blowouts, spills, cratering and explosions, mechanical and equipment problems, uncontrolled flows or leaks of oil, well fluids, natural gas, brine, toxic
gas or other pollutants or hazardous materials, marine hazards with respect to offshore operations, formations with abnormal pressures, adverse weather
conditions, natural or man-made disasters, premature decline of reservoirs and invasion of water into producing formations.
Drilling wells is speculative and involves significant costs that may be more than estimated and may not result in any discoveries or additions to our future
production or reserves. Operational activities have numerous inherent risks and our license area is located on an island, 25 km offshore mainland Tanzania,
and partially in shallow water. This generally increases the operating costs, chances of delay, planning time, technical challenges and risks associated with
production activities. Our inability to access appropriate equipment and infrastructure in a timely manner may hinder our access to oil and natural gas
markets or delay our oil and natural gas production.
The development of oil and natural gas projects, including the availability and cost of drilling rigs, equipment, supplies, personnel and oilfield services,
is subject to delays and cost overruns. The Company may be affected by the inability to respond to changing technological developments and remain
competitive. Slower economic growth rates may materially adversely impact our operating results and financial position. Any material inaccuracies
in drilling costs, estimates or underlying assumptions will materially affect our business.
Key staff
Our performance and success are largely dependent on the ability, expertise, judgment and discretion of our management and the ability of our technical
team to identify, discover, evaluate and develop reserves. We are dependent on members of our management and technical team that may not be easily
replaced. The Company does not maintain any key life insurance on any of its employees or officers.
Environmental regulation
The oil and natural gas industry is subject to varying environmental regulations in each of the jurisdictions in which the Company may operate.
Environmental regulations place restrictions 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.
Orca Exploration Group Inc. // Annual Report & Accounts 2019Strategic ReportManagement’s Discussion & AnalysisFinancial Statements
54
MANAGEMENT’S DISCUSSION & ANALYSIS CONTINUED
Business Risks continued
Contractual
We operate in a litigious environment which could result in title or contractual disputes during the ordinary course of business. The inability of one or more
third parties who contract with us to meet their obligations to us may adversely affect our financial results.
Marketability and pricing
The marketability and price of natural gas which may be acquired, discovered or marketed by the Company will be affected by numerous factors beyond its
control. The natural gas market in Tanzania is developing and there is currently limited access to infrastructure with which to serve potential new markets
beyond that being constructed by the Company, Songas and TPDC, which now includes the NNGI. The ability of the Company to market any natural gas
from current or future reserves in Tanzania may depend upon its ability to develop natural gas markets in Tanzania and the surrounding region, obtain
access to the necessary infrastructure to process gas and to deliver sales gas volumes, including acquiring capacity on pipelines which deliver natural gas to
commercial markets. The Company is also subject to market fluctuations in the prices of natural gas, uncertainties 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.
The prices that the Company receives for its natural gas affect the Company’s revenue, profitability, access to capital and future growth rate. Historically,
the oil and natural gas markets have been volatile and will likely continue to be volatile in the future. Oil prices have experienced significant and sustained
declines in the past few years and may continue to be volatile in the future; though gas prices are less volatile, they may also be significantly affected in the
longer run.
The natural gas prices the Company receives from its industrial customers fluctuate with the price of heavy fuel oil against which most of the Company’s
industrial customer contracts are priced. Prices can also be affected by gas on gas competition from other producers in Tanzania. There have been significant
onshore and offshore discoveries of gas in the last ten years and it is expected that the development of these discoveries will increase competition in the
future. There is also scope for greater government intervention on gas prices as TPDC owns and operates the majority of the gas processing and pipeline
infrastructure.
A substantial or extended decline in both global and local oil and natural gas prices may adversely affect our business, financial condition and results of
operations. Localized competition with other gas producers and alternative power sources such as hydro power could adversely impact our financial results.
Cyber attack
The oil and gas industry has become increasingly dependent on digital technologies to conduct day-to-day operations including certain exploration,
development and production activities. For example, software programs are used to interpret seismic data, manage drilling rigs, conduct reservoir modeling
and reserves estimation, and to process and record financial and operating data. A cyber incident could result in information theft, data corruption,
operational disruption, and/or financial loss. There can be no assurance that we will not be the target of cyber-attacks in the future or suffer such losses
related to any cyber-incident.
Financial
Cost of capital
Our business plan requires substantial additional capital that we may be unable to fund out of working capital and cash flow generated from operations
or raise on acceptable terms or at all in the future and which may in turn limit our ability to develop our appraisal, development and production activities.
The Company’s ability to meet its financing obligations or to arrange financing in the future will depend in part upon the prevailing capital market
conditions as well as the Company’s business performance. There can be no assurance that the Company would be successful in its efforts to meet its
current commitments or arrange additional financing on terms satisfactory to the Company.
Collectability of receivables
The Company evaluates the collectability of its receivables on the basis of payment history, frequency and predictability, as well as Management’s
assessment of the customer’s willingness and ability to pay. In the past, the Company has recorded allowances for receivables that did not meet the criteria
for revenue recognition however no allowances have been recorded for the past two years.
Foreign exchange
The Company operates internationally and is exposed to foreign exchange risk arising from currency fluctuations against the US dollar when transactions
and recognized assets and liabilities of the Company are denominated in a currency that is not the US dollar functional currency. The main currencies to
which the Company has an exposure are Tanzanian shillings, British pounds sterling, Euros and Canadian dollars.
The majority of the expenditure associated with the operation of the gas distribution system is denominated in Tanzanian shillings. Whilst conversion
of Tanzanian shillings into US dollars is unrestricted, the foreign exchange market for Tanzanian shillings is limited and not highly liquid, reducing the
Company’s ability to convert large amounts of Tanzanian shillings into US dollars at any given time. To mitigate the risk of Tanzanian shilling devaluation,
the Company regularly converts Tanzanian shilling receipts into US dollars to the extent practicable. Capital stock, equity financing and any associated
stock based compensation are denominated in Canadian dollars. The operational revenue and the majority of capital expenditures are denominated
in US dollars.
Fluctuations in currency exchange rates could adversely impact the Company’s financial results.
Debt financing
From time to time the Company may enter into transactions to acquire assets or the shares of other companies. These transactions may be financed
partially or wholly with debt, which may temporarily increase the Company’s debt levels above industry standards. The Company currently has a long-term
loan that includes covenants that, among other things, restrict the incurrence of additional indebtedness, payment of dividends under certain conditions,
granting of liens, mergers and sale of all or a substantial part of our business or license.
Orca Exploration Group Inc. // Annual Report & Accounts 2019 55
Business Risks continued
Foreign operations and concentration risk
Asset concentration
The Company’s natural gas reserves are currently limited to one producing property, the Songo Songo field, and the productive potential from this field
is limited. There is no assurance that the Company will have sufficient deliverability through the existing wells to provide Protected and Additional Gas
volumes, and there may be significant capital expenditures associated with any remedial work, workovers, or new drilling required to achieve deliverability.
In addition, any difficulties relating to the operation or performance of the field would have a material adverse effect on the Company. A loss or material
reduction in production capabilities will have a material adverse effect on the total production and funds flow from operating activities of the Company.
Access to infrastructure
The Company is dependent upon access to the Songas Infrastructure and the Government owned NNGI to deliver gas to customers. The Company
operates the Songas Infrastructure however Songas is the owner of the facilities including the 12-inch subsea and the 16-inch surface pipeline systems
which transport natural gas from Songo Songo to Dar es Salaam. There are agreements in place to allow the Company to process and transport gas,
but there is no assurance that these rights could not be challenged or access curtailed. The inability to access infrastructure would materially impair
the Company’s ability to realize revenue from natural gas sales.
Reputational
Our Tanzanian operations are anticipated to be our sole source of our near-term revenue earnings. Due to our asset concentration, the success of
our operations is dependent on positive commercial relationships with a small number of organizations (including states and parastatal organizations)
and certainty with respect to our rights and obligations arising from those relationships. Any damage to our reputation due to the actual or perceived
occurrence of any number of events, such as environmental incidents, could negatively impact us. Reputation loss may result in negative publicity and
diminished or adversarial stakeholder relationships, which could lead to increased challenges in developing and maintaining community relations, decreased
investor confidence, and would likely impede our overall ability to advance our projects, thereby having a material adverse impact on financial performance,
cash flows and growth prospects.
Country and COVID-19 risk
The geographic location of the license exposes us to an increased risk of loss of revenue or curtailment of production as a result of factors generally
associated with foreign operations or arising from factors specifically affecting the area in which we operate or may operate. Tanzania may be considered to
be politically and/or economically unstable. Development and operational 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, creeping nationalization, renegotiation or nullification of existing contracts and production sharing
agreements, taxation policies, foreign exchange restrictions, changing political conditions, international monetary fluctuations, currency controls and foreign
governmental regulations that favor or require the awarding of drilling and construction 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, the Company may be subject
to the exclusive jurisdiction of foreign courts.
Countries in Africa are susceptible to outbreaks of disease and may lack the resources to effectively contain such an outbreak quickly. Such outbreaks may
impact our ability to explore for oil and gas, develop or produce our license areas by limiting access to qualified personnel, increasing costs associated with
ensuring the safety and health of our personnel, restricting transportation of personnel, equipment, supplies and oil and gas production to and from our
areas of operation and diverting the time, attention and resources of government agencies which are necessary to conduct our operations. In addition, any
losses we experience as a result of such outbreaks of disease which impact sales or delay production may not be covered by our insurance policies. If travel
bans are implemented or extended to the countries in which we operate, or contractors or personnel refuse to travel there, we could be adversely affected.
If services are obtained, costs associated with those services could be significantly higher than planned which could have a material adverse effect on our
business, results of operations, and future cash flow.
Since December 31, 2019 the Company’s business, operations and financial condition have not been significantly adversely affected by COVID-19. There
has been a small decline in industrial customer demand for gas however further spread of COVID-19 could result in volatility and disruptions in regular
business operations, supply chains and financial markets, as well as declining trade and market sentiment. COVID-19 as well as other factors have resulted
in the deepest drop in crude oil prices that global markets have seen since 1991. The recent events and conditions have caused a significant decrease in
the valuation of oil and natural gas companies and a decrease in confidence in the oil and natural gas industry. Although the Company’s production and
reserves are entirely comprised of gas, COVID-19 poses a risk on the financial capacity of the Company’s contract counterparties and potentially their
ability to perform contractual obligations and the Company’s ability to implement planned capital projects. A prolonged decline in world oil prices could
impact the competitiveness and demand for gas in Tanzania and negatively impact Company revenues, collectability of receivables and cash flow.
In Tanzania the state retains ownership of its minerals and consequently retains control of the exploration and production of hydrocarbon reserves.
The GoT has historically been supportive of foreign investment in resource development projects in Tanzania however it has recently adopted a more
conservative approach toward foreign involvement in the extractive sector, including the production, transmission, processing and marketing of natural gas.
Factors such as changes in government, an increased nationalist sentiment and pressure to preserve development opportunities for local enterprises can
result in legal and regulatory changes that can impact our ability to maintain our business operations.
Corruption
Tanzania ranks 96 out of 180 on the 2019 Transparency International Corruption Index (2018: 99 out of 180). Having assessed the Company’s exposure
to corruption in Tanzania, it has been concluded that the risk of the Company and/or its subsidiaries violating applicable laws prohibiting corrupt activities
are mitigated or unlikely given the Company’s controls relating to such risks and their effective operation. There is exposure to liabilities under anti-money
laundering and/or anti-corruption laws, and any determination that we violated such laws could have a material adverse effect on our business. There
can be no assurance that corruption may not indirectly affect or otherwise impair the Company’s ability to operate in Tanzania and effectively pursue its
business plan in that country.
Orca Exploration Group Inc. // Annual Report & Accounts 2019Strategic ReportManagement’s Discussion & AnalysisFinancial Statements 56
MANAGEMENT’S DISCUSSION & ANALYSIS CONTINUED
Business Risks continued
Contractual, regulatory and legislation risk
Contracts and regulations
The Company’s operations are subject to regulation and control by the GoT (see “Principal Terms of the PSA and Related Agreements”). The Company has
operated in Tanzania for a number of years and believes that it has had reasonably good relations with the current GoT. Under the principal agreements the
Company has the right to market and sell Additional Gas provided that such sales do not jeopardize the priority right of Songas to sell or otherwise dispose
of Protected Gas. There is a risk that Songas could exercise its contractual rights, which may curtail our ability to sell Additional Gas if there is insufficient
natural gas available for the required volumes of Protected Gas. There can be no assurance that present or future administrations in Tanzania will honor all
principal agreements which could materially adversely affect the operations or future cash flows of the Company.
PSA operations are regulated by national and parastatal organizations including the energy regulators (PURA and EWURA), and TPDC. Under our Gas
Agreement (“GA”) with the GoT, TPDC and Songas, the Company has the right to market and sell Additional Gas. The Amended and Restated Gas
Agreement (“ARGA”) provided clarification of the Protected Gas volumes and removes all terms dealing with the security of the Protected Gas. The ARGA
was initialed by all parties but remains unsigned as at the date of this report. In certain respects, the parties thereto are conducting themselves as though
the ARGA is in effect. In 2017 the Additional Gas Plan 2 (“AGP2”) was signed further delineating the rights of the Company to market and sell Additional
Gas. If our relationships with these counterparties were to deteriorate, then they might choose to exercise their contractual rights under our agreements
differently and in a manner that is adverse to our interests. Management does not foresee a material risk with the conduct of the Company’s business with
an unsigned ARGA at this time.
We have had, and continue to have, disagreements with TPDC regarding certain of our rights and responsibilities under the PSA. Pursuant to the PSA,
the Company plans for development and annual work programs must be submitted to TPDC for comment. We have previously had, and continue to
have, disagreements with TPDC and the GoT regarding certain of our rights and responsibilities under the PSA. There are also disagreements over our
ability to market and sell gas to end-users and TPDC has challenged our rights to cost recover a number of items under the PSA including the costs of our
downstream operations; however, there are currently no disagreements that have risen to the level of a formal dispute.
There can be no assurance that all of these disagreements will be resolved in our favor or that future disagreements will not arise in Tanzania or with any
host government and/or national oil companies in future projects elsewhere that may have a material adverse effect on our exploration or development
activities, our ability to operate, our rights under our licenses and local laws or our rights to monetize our interests.
Legislation
The GoT has passed several new laws in the past few years impacting the Company’s operation in Tanzania.
The National Energy Policy (2015) and the Petroleum Act, passed in 2015 provided regulatory framework over upstream, mid-stream and downstream gas
activity. The Petroleum Act created a new regulator to oversee the upstream sectors, PURA and conferred upon TPDC the status of National Oil Company
as the sole aggregator of natural gas in the country. Under the Petroleum Act Article 260 (3) preserves the Company’s pre-existing right with TPDC to
market and sell Additional Gas together or independently on terms and conditions (including prices) negotiated with third party natural gas customers.
There remain differences of opinion between the Company and TPDC on the effect of certain provisions within the Petroleum Act and their application
to the Company.
On October 7, 2016, the GoT issued the Petroleum (Natural Gas Pricing) Regulation made under Sections 165 and 258(I) of the Petroleum Act which may
give rise to additional uncertainty. These changes could impact our ability to set gas pricing and the introduction of regulated gas pricing could result in
operations becoming uneconomical and anticipated revenues could be materially affected. While the PSA has been grandfathered under the Petroleum
Act, we can provide no assurances that this situation will remain unchanged in the future.
On July 15, 2017 the GoT passed into law the Natural Wealth and Resources (Permanent Sovereignty) Act, 2017, the Written Laws (Miscellaneous
Amendments) Act, 2017, and the Natural Wealth and Resources Contracts (Review and Re-Negotiation of Unconscionable Terms) Act, 2017. The first and
second of these acts are forward looking and only apply to agreements entered into on or after July 15, 2017. The GoT may argue that the third of these
Acts has retrospective effect in terms of its ability to renegotiate pre-existing contracts. On January 31, 2020 the Government released the Natural Wealth
and Resources Contracts (Review and Renegotiation of Unconscionable Terms) Regulations, 2020 which set out further guidance as to how contracts may
be renegotiated. These acts contain new regulations including but not limited to regulations that all arbitration processes must be heard within Tanzania
and restrict the ability to move funds out of Tanzania.
In 2016, the TRA introduced significant changes to the income tax treatment of the extractive sector with separate new chapters in Part V of the Income
Tax Act 2004 (“ITA, 2004”) for mining and for petroleum to be effective commencing in 2018. Subsequent to this, further changes were made by the
Written Laws (Miscellaneous Amendments) Act, 2017 (“WLMAA, 2017”) to exclude cost oil/cost gas from inclusion in both income and expenditure.
We are still evaluating the tax effects of the changes as there are a number of uncertainties and ambiguities as to the interpretation and application
of certain provisions of the WLMAA, 2017 as there is an absence of regulations and guidance from TRA on the implementation of the changes. In the
absence of guidance on these matters, we will continue to use what we believe are reasonable interpretations and assumptions in applying the WLMAA,
2017 for purposes of determining our tax liabilities and filing our tax returns, which interpretations and assumptions may change as we receive additional
clarification and implementation guidance. As necessary, we will seek adjustments to the PSA to preserve our economic benefits. In addition, the Natural
Wealth and Resources (Permanent Sovereignty) Act, 2017 (the “Permanent Sovereignty Act 2017”) and the WLMAA 2017 restrict the ability of companies
to repatriate funds out of Tanzania and it is possible that the GoT will seek to argue at some stage that these provisions apply to the Company even though
our contracts with the GoT permit this.
Intervening policy and legislative changes such as those described above may conflict with our pre-existing rights under the PSA and other agreements,
though it remains unclear how such legislative actions will be implemented and whether and to what extent they will impact us. We are unable to predict
what legislation may be proposed that might affect our business or when any such proposals, if enacted, might become effective. Such changes could
require increased capital and operating expenditure and could prevent or delay certain of our operations. If, for reasons beyond our control, we are unable
to maintain compliance with any legislative changes, whether in the future or past, we may have to cease operations in certain locations.
Orca Exploration Group Inc. // Annual Report & Accounts 2019 57
Principal Terms of the PSA and Related Agreements
The principal terms of the PSA and related agreements are as follows:
Obligations and Restrictions
(a) The PSA covers two blocks within the Songo Songo Gas Field where there are gas reserves (“Discovery Blocks”). The Company has the right to conduct
petroleum operations on the Discovery Blocks, 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) No sale of Additional Gas may be made from the Discovery Blocks if in the Company’s reasonable judgment such sales would jeopardize the supply
of Protected Gas. Any Additional Gas contracts entered into are subject to interruption. 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 Blocks to secure the Company’s and
TPDC’s obligations in respect of Insufficiency (see (c) below).
(c) “Insufficiency” occurs if there is insufficient gas from the Discovery Blocks to supply the Protected Gas requirements or if the gas is so expensive to
develop that its cost exceeds the market price of alternative fuels at Ubungo.
Where there have been third party sales of Additional Gas by the Company and TPDC from the Discovery Blocks prior to the occurrence of the
Insufficiency, the Company and TPDC shall be jointly liable for the Insufficiency and shall satisfy their related liability by either replacing the Indemnified
Volume (as defined in (d) below) at the Protected Gas price with natural gas from other sources; or by paying monetary 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 $0.55/MMbtu
escalated) and the amount of transportation revenues previously credited by Songas to the state electricity utility, TANESCO, for the gas volumes.
(d) 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 Insufficiency 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.
Access and Development of Infrastructure
(e) The Company is able to utilize the Songas infrastructure including the gas processing plant and main pipeline to Dar es Salaam. Access to the
Songas infrastructure is open and can be utilized by any third party that wishes to process or transport gas.
Revenue Sharing Terms and Taxation
(f) 75% of the gross field revenues derived from the Discovery Blocks, less processing and pipeline tariffs and direct sales taxes in any year
(“field net revenue”), can be used to recover past costs incurred. Costs recovered out of field net revenue are termed “Cost Gas”.
The Company pays and recovers 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 an Additional Gas plan (“Additional Gas Plan”) as
submitted to the MoE, 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 MoE has approved the Additional Gas Plan, then TPDC is deemed not to have
elected to participate. If TPDC elects to participate, then it will be entitled to a ratable proportion of the Cost Gas and their profit share percentage
increases by the Specified Proportion for that development program.
To date, TPDC has neither elected to back in within the prescribed notice period nor contributed any costs associated with backing in. The Company
has therefore determined that to date there has been no working interest earned by TPDC. For the purpose of the reserves certification as at
December 31, 2018, there are no planned drilling activities to the end of the license.
(g) The Company’s long-term gas price to the Power sector as set out in the Amended and Restated Gas Agreement (“ARGA”) between the GoT, TPDC and
Songas and the PGSA is based on the price of gas at the wellhead. As at the date of this report, the ARGA remains an initialed agreement only and the
parties are not in agreement with all the terms in the ARGA, however the parties are conducting themselves in terms of pricing as though the ARGA is
in force.
In 2011 the Company signed a re-rating agreement with TANESCO, TPDC and Songas (the “Re-Rating Agreement”) which evidenced an increase to the
gas processing capacity of the Songas Plant to a maximum of 110 MMcfd (the pipeline and pressure requirements at the Ubungo power plant restrict
the infrastructure capacity to a maximum of 102 MMcfd). Under the terms of the Re-Rating Agreement, the Company paid additional compensation
of $0.30/mcf for sales between 70 MMcfd and 90 MMcfd and $0.40/mcf for volumes above 90 MMcfd by issuing credit notes to TANESCO. This
was in addition to the tariff of $0.59/mcf payable to Songas as set by the energy regulator, Energy and Water Regulatory Authority (“EWURA”). Songas
terminated the Re-Rating Agreement in 2014 although there remains a disagreement as to its current status.
In May 2016 the Company notified TANESCO and Songas that the additional compensation for sales over 70 MMcfd would no longer be paid effective
June 2016. The additional compensation was always intended to be temporary in nature until the expansion of the Songas Infrastructure, at which time
Songas would apply to EWURA to obtain approval of a new tariff for the processing of volumes over 70 MMcfd. The processing capacity at the Songas
Infrastructure remains unaltered and is fully available for the Company’s utilization along with the additional capacity within the NNGI which includes
two gas processing facilities and pipelines supplying gas from the Mtwara Region of Tanzania and Songo Songo Island to Dar es Salaam. The PGSA
provides for passing on to TANESCO any tariff to be charged to the Company in the event that a new tariff is approved.
Orca Exploration Group Inc. // Annual Report & Accounts 2019Strategic ReportManagement’s Discussion & AnalysisFinancial Statements
58
MANAGEMENT’S DISCUSSION & ANALYSIS CONTINUED
Principal Terms of the PSA and Related Agreements continued
Revenue Sharing Terms and Taxation continued
In Q3 2017 the Company received approval of the Additional Gas Plan 2 (“AGP2”) from the MoE to produce and sell increased volumes of Additional
Gas. Currently wells SS-11 and SS-12 are connected to the NNGI and the SS-12 well started flowing gas through the NNGI in December 2018.
In May 2019 the Company and TPDC signed the LTGSA, initially for volumes up to 20MMcfd which was increased subsequently to 30MMcfd on
a best endeavors basis.
(h) 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 field net revenue after cost recovery, based on the higher of the cumulative production or the average
daily sales. The Profit Gas share available to the Company is a minimum of 25% and a maximum of 55%.
Average daily sales of
Additional Gas
MMcfd
0 – 20
> 20 <= 30
> 30 <= 40
> 40 <= 50
> 50
Cumulative sales of
Additional Gas
Bcf
TPDC’s share of
Profit Gas
%
Company’s share of
Profit Gas
%
0 – 125
> 125 <= 250
> 250 <= 375
> 375 <= 500
> 500
75
70
65
60
45
25
30
35
40
55
For Additional Gas produced outside of the Proven Section, the Company’s Profit Gas share is 55%.
Where TPDC elects to participate in a development program, its profit share percentage increases by the Specified Proportion (for that development
program) with a corresponding decrease in the Company’s percentage share of Profit Gas.
The Company is liable for income tax in Tanzania. Where income tax is payable, the Company pays the tax and there is a corresponding deduction in the
amount of the Profit Gas payable to TPDC.
(i) “Additional Profits Tax” (or “APT”) is payable when the Company recovers its costs out of Additional Gas revenues plus an annual operating return under
the PSA of 25%, plus the percentage change in the United States Industrial Goods Producer Price Index (“PPI”). The maximum APT 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 Gas share can increase with larger daily gas sales and that the costs
will be recovered with a 25% plus PPI annual return before APT becomes payable. APT can have a significant negative impact on project economics if
only limited capital expenditure is incurred.
(j) The Company is appointed to develop, produce and process Protected Gas and operate and maintain the Songas Infrastructure, including the staffing,
procurement, capital improvements, contract maintenance, maintenance of books and records, preparation of reports, maintenance of permits, waste
handling, liaison with the GoT and taking all necessary safety, health and environmental precautions, all in accordance with good oilfield practices. In
return, the Company is paid or reimbursed by Songas so that it neither benefits nor suffers a loss as a result of its performance.
(k) In the event of loss arising from Songas’ failure to perform, and the loss is not fully compensated by Songas or through insurance coverage, then the
Company is liable to a performance and operational guarantee of $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 insufficient funds to cure the loss and operate the project.
Protected Gas
Under the terms of the 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, the Company is liable to pay the difference between the price of Protected Gas ($0.55/MMbtu escalated)
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 (214 Bcf as at
December 31, 2019). The Company did not have a shortfall during the reporting period and does not anticipate a shortfall arising during the term of the
Protected Gas delivery obligation to July 2024.
Orca Exploration Group Inc. // Annual Report & Accounts 2019
59
Principal Terms of the PSA and Related Agreements continued
Re-Rating Agreement
In 2011 the Company, TPDC and Songas signed a Re-Rating Agreement which evidenced an increase to the gas processing capacity of the Songas
Infrastructure to a maximum of 110 MMcfd (the pipeline and delivery pressure requirements at the Ubungo power plant restrict the infrastructure
capacity to a maximum of 102 MMcfd). Under the terms of the Re-Rating Agreement, the Company paid additional compensation of $0.30/mcf
for sales between 70 MMcfd and 90 MMcfd and $0.40/mcf for volumes above 90 MMcfd by issuing credit notes to TANESCO. This was in addition
to the tariff of $0.59/mcf payable to Songas as set by the energy regulator, EWURA.
Although Songas notified the Company in 2014 that the Re-Rating Agreement was terminated, the parties have continued to produce, transport and
sell gas volumes in line with the re-rated plant capacity. In May 2016 the Company notified TANESCO and Songas that the additional compensation
for sales over 70 MMcfd would no longer be paid effective June 2016. The additional compensation was always intended to be temporary in nature
until the expansion of the Songas Infrastructure, at which time Songas would apply to EWURA to obtain approval of a new tariff for the processing
of volumes over 70 MMcfd. The PGSA provides for passing on to TANESCO any tariff charged to the Company should a new tariff be approved.
The parties to the Re-Rating Agreement are in the process of negotiating a replacement agreement which may address the additional compensation paid
through the establishment of an approved tariff from EWURA. In the interim, the processing capacity at the Songas Infrastructure remains unaltered and is
fully available for utilization by the Company. This capacity is in addition to the capacity available within the NNGI.
Portfolio Gas Supply Agreement
In June 2011 the PGSA was signed (term to June 30, 2023) between TANESCO (as the buyer) and the Company and TPDC (collectively as the seller).
TANESCO requested a change to the PGSA Maximum Daily Quantity which PAET and TPDC approved effective January 29, 2018. The seller is now
obligated, subject to infrastructure capacity, to sell a maximum of approximately 26 MMcfd (previously 36 MMcfd) for use in any of TANESCO’s current
power plants, except those operated by Songas at Ubungo. Under the agreement, the basic wellhead price of approximately $2.98/mcf increased to $3.04/
mcf on July 1, 2018 and to $3.10/mcf on July 1, 2019. Previously under the PGSA any sales in excess of 36 MMcfd were subject to a 150% increase in the
basic wellhead gas price. On December 22, 2018 a side letter amendment to the PGSA was agreed with TPDC and TANESCO to allow PGSA volumes up to
a maximum monthly average volume of 35 MMcfd to temporarily flow through the NNGI. The temporary arrangement was terminated in September 2019
once the refrigeration unit became fully operational and all PGSA volumes were again processed through the Songas Infrastructure.
Long-term Gas Sales Agreement
On May 14, 2019 the Company and TPDC signed the LTGSA for an initial delivery of 20 MMcfd through the NNGI, at a price of $3.10/MMbtu as at
January 1, 2019, (escalating 2% per annum) exclusive of any processing and transportation tariff associated with the NNGI. The LTGSA was amended
on September 24, 2019 to increase the volumes supplied through the NNGI up to a maximum daily quantity of 30 MMcfd. All volumes above 20 MMcfd
are supplied on a best endeavors basis until compression facilities are added to the Songas Infrastructure.
TPDC Back-in
TPDC has the rights under the PSA to ‘back in’ to the Songo Songo field development and to convert this into a carried working interest in the PSA. The
current terms of the PSA require TPDC to provide formal notice in a defined period and contribute a proportion of the costs of any development, sharing
in the risks in return for an additional share of the gas. To date, TPDC has not contributed any costs nor provided any formal notice of intent to do so.
Forward-Looking Statements
This MD&A contains forward-looking statements or information (collectively, “forward-looking statements”) within the meaning of applicable securities
legislation. More particularly, this MD&A contains, without limitation, forward-looking statements pertaining to the following: the Company’s expectations
regarding supply and demand of natural gas; anticipated power sector revenues; the Company’s expectation that they will enter into an engineering
procurement contract for installation of compression on the Songas Infrastructure; anticipated value of the engineering procurement contract for
installation of compression on the Songas Infrastructure; the Company’s expectation regarding completion of the installation of compression on the Songas
Infrastructure; anticipated production volumes and expanded well deliverability through NNGI as a result of the installation of compression on the Songas
Infrastructure; the expected effects of the completion of compression on the Songas Infrastructure; current and potential impact of TPDC future back-in
rights on the economic terms of the PSA; current and potential production capacity of the Songa Songo field; ability to workover, recomplete and connect
well SS-10 to the NNGI during 2020; the Company’s expectation that all planned capital expenditures be funded out of existing working capital and cash
flow generated by current operations; the Company’s expectation that it will not incur any losses from debtors; the Company’s estimated spending for the
planned Development Program, which includes well workovers and installing compression on the Songas facilities to ensure current levels of production
are sustained beyond 2020; ability to meet all conditions under the IFC financing agreement; the Company’s expectations in respect of its appeals on
the decisions of the Tax Revenue Appeals Tribunal and other statements under “Contingencies – Taxation”; the potential impact of the National Energy
Policy (2015), the Petroleum Act, and the recently enacted Natural Wealth and Resources (Permanent Sovereignty) Act, 2017, the Natural Wealth and
Resources Contracts (Review and Re-Negotiation of Unconscionable Terms) Act, 2017 and the Written Laws (Miscellaneous Amendments) Act, 2017; the
Company’s belief that the parties to the unsigned ARGA will continue to conduct themselves in accordance with the ARGA until a new gas sales agreement
is signed; the Company’s expectation that despite the Re-Rating Agreement of the gas processing plant owned by Songas having expired, the Songas gas
processing plant production volumes will not be restricted; the anticipated effect of the Second AGP2 signed in 2017 on the Company’s available volumes
of Additional Gas for sale; additional Songo Songo field developments contemplated in connection with AGP2; the current and potential production
capacity of the Songo Songo field; the Company’s ability to access new markets; the Company’s ability to produce additional volumes; the Company’s
ability to access additional processing and transportation capacity; the status of ongoing negotiations with TPDC; the potential increase in sales volumes
associated with new gas sales agreements; the Company’s ability to locate and bring online additional supply in the future; the Company’s expectation that
it can expand and maintain the deliverability of gas volumes in excess of the existing Songas Infrastructure; the Company’s expectation that it will not have
a shortfall during the term of the Protected Gas delivery obligation to July 2024; and the expectation that the IASB pronouncements will not have any
impact on the Company’s consolidated financial statements. In addition, statements relating to “reserves” are by their nature forward-looking statements,
as they involve the implied assessment, based on certain estimates and assumptions that the reserves described can be produced profitably in the future.
Orca Exploration Group Inc. // Annual Report & Accounts 2019Strategic ReportManagement’s Discussion & AnalysisFinancial Statements 60
MANAGEMENT’S DISCUSSION & ANALYSIS CONTINUED
Forward-Looking Statements continued
The recovery and reserve estimates of the Company’s reserves provided herein are estimates only and there is no guarantee that the estimated reserves
will be recovered. As a consequence, actual results may differ materially from those anticipated in the forward-looking statements. Although management
believes that the expectations reflected in the forward-looking statements are reasonable, it cannot guarantee future results, levels of activity, access to
resources and infrastructure, performance or achievement since such expectations are inherently subject to significant business, economic, operational,
competitive, political and social uncertainties and contingencies.
These forward-looking statements involve substantial known and unknown risks and uncertainties, certain of which are beyond the Company’s control,
and many factors could cause the Company’s actual results to differ materially from those expressed or implied in any forward-looking statements made
by the Company, including, but not limited to: failure to receive payments from TANESCO; risk that the potential financing solutions to resolve the
TANESCO arrears are not implemented by the Tanzanian Government; risk that the Development Program is not completed as planned and the actual
cost to complete the Development Program exceeds the Company’s estimates; risk that the remaining well workovers under the Development Program
are unsuccessful or determined to be unfeasible; risk of a lack of access to Songas processing and transportation facilities; risk that the Company may be
unable to complete additional field development to support the Songo Songo production profile through the life of the license; risk that the Company
may be unable to develop additional supply or increase production values; risks associated with the Company’s ability to complete sales of Additional
Gas; potential negative effect on the Company’s rights under the PSA and other agreements relating to its business in Tanzania as a result of the recently
approved Petroleum Act and recently enacted legislation, as well as the risk that such legislation will create additional costs and time connected with the
Company’s business in Tanzania; risks regarding the uncertainty around evolution of Tanzanian legislation; risk that the Company will not be successful
in appealing claims made by the TRA and may be required to pay additional taxes and penalties; the impact of general economic conditions in the areas
in which the Company operates; civil unrest; the susceptibility of the areas in which the Company operates to outbreaks of disease; industry conditions;
changes in laws and regulations including the adoption of new environmental laws and regulations, impact of new local content regulations and variances
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; competition for, among other things, capital, drilling equipment and skilled personnel;
failure to obtain required equipment for drilling; delays in drilling plans; failure to obtain expected results from drilling of wells; effect of changes to the
PSA on the Company as a result of the implementation of the new Government policies for the oil and gas industry; changes in laws; imprecision in reserve
estimates; the production and growth potential of the Company’s assets; obtaining required approvals of regulatory authorities; risks associated with
negotiating with foreign governments; inability to satisfy debt obligations and conditions; failure to successfully negotiate agreements; and risk that the
Company will not be able to fulfill its contractual obligations. In addition, there are risks and uncertainties associated with oil and gas operations, therefore
the Company’s actual results, performance or achievement could differ materially from those expressed in, or implied by, these forward-looking statements
and, accordingly, no assurances can be given that any of the events anticipated by these forward-looking statements will transpire or occur, or if any of
them do so, what benefits the Company will derive therefrom. Readers are cautioned that the foregoing list of factors is not exhaustive.
Such forward-looking statements are based on certain assumptions made by the Company in light of its experience and perception of historical trends,
current conditions and expected future developments, as well as other factors the Company believes are appropriate in the circumstances, including,
but not limited to, that the Company will be able to negotiate Additional Gas sales contracts in relation to AGP2; the ability of the Company to complete
additional developments and increase its production capacity; the actual costs to complete the Company’s development program are in line with estimates;
that there will continue to be no restrictions on the movement of cash from Mauritius or Tanzania; that the Company will have sufficient cash flow, debt
or equity sources or other financial resources required to fund its capital and operating expenditures and requirements as needed; that the Company will
successfully negotiate agreements; receipt of required regulatory approvals; the ability of the Company to increase production as required to meet demand;
infrastructure capacity; commodity prices will not further deteriorate significantly; the ability of the Company to obtain equipment and services in a timely
manner to carry out exploration, development and exploitation activities; future capital expenditures; availability of skilled labor; timing and amount of
capital expenditures; uninterrupted access to infrastructure; the impact of increasing competition; conditions in general economic and financial markets;
effects of regulation by Governmental agencies; that the Company’s appeal of various tax assessments will be successful; that the enactment of the
Petroleum Act and new legislation in Tanzania will not impair the Company’s rights under the PSA to develop and market natural gas in Tanzania; current
or, where applicable, proposed industry conditions, laws and regulations will continue in effect or as anticipated as described herein; and other matters.
The forward-looking statements contained in this MD&A are made as of the date hereof and the Company undertakes no obligation to update publicly or
revise any forward-looking statements or information, whether as a result of new information, future events or otherwise, unless so required by applicable
securities laws.
Additional Information
Additional information relating to the Company is available on SEDAR at www.sedar.com.
Orca Exploration Group Inc. // Annual Report & Accounts 2019 61
Glossary
mcf
Thousand standard cubic feet
MMcf
Million standard cubic feet
Bcf
Tcf
Billion standard cubic feet
Trillion standard cubic feet
MMcfd Million standard cubic feet per day
MMbtu Million British thermal units
1P
2P
kWh
MW
$
Proven reserves
Proven and probable reserves
Kilowatt hour
Megawatt
US dollars
CDN$
Canadian dollars
Orca Exploration Group Inc. // Annual Report & Accounts 2019Strategic ReportManagement’s Discussion & AnalysisFinancial Statements 62
MANAGEMENT’S REPORT TO SHAREHOLDERS
The accompanying consolidated financial statements of Orca Exploration Group Inc. are the responsibility of Management. 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 maintains appropriate systems of internal controls. Policies and procedures are designed to give reasonable assurance that transactions are
properly authorised, assets are safeguarded and financial records are properly maintained to provide reliable information for the preparation of financial
statements. An independent firm of Chartered Professional Accountants, as appointed by the Shareholders, audited the consolidated financial statements
in accordance with the Canadian Generally Accepted Auditing Standards to enable them to express an opinion on the fairness of the consolidated financial
statements in accordance with International Financial Reporting Standards.
The Board of Directors carries out its responsibility for the financial reporting and internal controls of the Company principally through an Audit
Committee. The committee has met with the independent auditors and Management in order to determine if Management has fulfilled its responsibilities
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.
Nigel Friend
Chief Executive Officer
April 28, 2020
Blaine E. Karst
Chief Financial Officer
April 28, 2020
Orca Exploration Group Inc. // Annual Report & Accounts 2019
INDEPENDENT AUDITORS’ REPORT
63
To the Shareholders of Orca Exploration Group Inc.
Opinion
We have audited the consolidated financial statements of Orca Exploration Group Inc. (the “Company”), which comprise:
• the consolidated statements of financial position as at December 31, 2019 and December 31, 2018
• the consolidated statements of comprehensive income for the years then ended
• the consolidated statements of changes in shareholders’ equity for the years then ended
• the consolidated statements of cash flows for the years then ended
• and notes to the consolidated financial statements, including a summary of significant accounting policies
(Hereinafter referred to as the “financial statements”).
In our opinion, the accompanying financial statements present fairly, in all material respects, the consolidated financial position of the Company as at
December 31, 2019 and December 31, 2018, and its consolidated financial performance and its consolidated cash flows for the years then ended in
accordance with International Financial Reporting Standards (“IFRS”).
Basis for Opinion
We conducted our audit in accordance with Canadian generally accepted auditing standards. Our responsibilities under those standards are further
described in the “Auditors’ Responsibilities for the Audit of the Financial Statements” section of our auditors’ report.
We are independent of the Company in accordance with the ethical requirements that are relevant to our audit of the financial statements in Canada
and we have fulfilled our other ethical responsibilities in accordance with these requirements.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.
Other Information
Management is responsible for the other information. Other information comprises:
• the information included in Management’s Discussion & Analysis filed with the relevant Canadian Securities Commissions.
Our opinion on the financial statements does not cover the other information and we do not and will not express any form of assurance conclusion
thereon.
In connection with our audit of the financial statements, our responsibility is to read the other information identified above and, in doing so, consider
whether the other information is materially inconsistent with the financial statements or our knowledge obtained in the audit and remain alert for
indications that the other information appears to be materially misstated.
We obtained the information included in Management’s Discussion & Analysis filed with the relevant Canadian Securities Commissions as at the date of
this auditors’ report. If, based on the work we have performed on this other information, we conclude that there is a material misstatement of this other
information, we are required to report that fact in the auditors’ report.
We have nothing to report in this regard.
Responsibilities of Management and Those Charged with Governance for the Financial Statements
Management is responsible for the preparation and fair presentation of the financial statements in accordance with IFRS, and for such internal control
as management determines is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud
or error.
In preparing the financial statements, management is responsible for assessing the Company’s ability to continue as a going concern, disclosing as
applicable, matters related to going concern and using the going concern basis of accounting unless management either intends to liquidate the Company
or to cease operations, or has no realistic alternative but to do so.
Those charged with governance are responsible for overseeing the Company’s financial reporting process.
Orca Exploration Group Inc. // Annual Report & Accounts 2019Strategic ReportManagement’s Discussion & AnalysisFinancial Statements 64
INDEPENDENT AUDITORS’ REPORT CONTINUED
Auditors’ Responsibilities for the Audit of the Financial Statements
Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due
to fraud or error, and to issue an auditors’ report that includes our opinion.
Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with Canadian generally accepted auditing
standards will always detect a material misstatement when it exists.
Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence
the economic decisions of users taken on the basis of the financial statements.
As part of an audit in accordance with Canadian generally accepted auditing standards, we exercise professional judgment and maintain professional
skepticism throughout the audit.
We also:
• Identify and assess the risks of material misstatement of the financial statements, whether due to fraud or error, design and perform audit procedures
responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion.
The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery,
intentional omissions, misrepresentations, or the override of internal control.
• Obtain an understanding of internal control relevant to the audit 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 Company’s internal control.
• Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by management.
• Conclude on the appropriateness of management’s use of the going concern basis of accounting and, based on the audit evidence obtained, whether a
material uncertainty exists related to events or conditions that may cast significant doubt on the Company’s ability to continue as a going concern. If we
conclude that a material uncertainty exists, we are required to draw attention in our auditors’ report to the related disclosures in the financial statements
or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditors’
report. However, future events or conditions may cause the Company to cease to continue as a going concern.
• Evaluate the overall presentation, structure and content of the financial statements, including the disclosures, and whether the financial statements
represent the underlying transactions and events in a manner that achieves fair presentation.
• Communicate with those charged with governance regarding, among other matters, the planned scope and timing of the audit and significant audit
findings, including any significant deficiencies in internal control that we identify during our audit.
• Provide those charged with governance with a statement that we have complied with relevant ethical requirements regarding independence, and
communicate with them all relationships and other matters that may reasonably be thought to bear on our independence, and where applicable,
related safeguards.
• Obtain sufficient appropriate audit evidence regarding the financial information of the entities or business activities within the Company to express an
opinion on the financial statements. We are responsible for the direction, supervision and performance of the group audit. We remain solely responsible
for our audit opinion.
The engagement partner on the audit resulting in this auditors’ report is John Waiand.
Chartered Professional Accountants
Calgary, Canada
April 28, 2020
Orca Exploration Group Inc. // Annual Report & Accounts 2019 CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
65
$’000
Revenue
Production, distribution and transportation
Net production revenue
Operating expenses
General and administrative
Stock based compensation
Depletion
Finance income
Finance expense
Income before tax
Income tax expense – current
Income tax expense – deferred
Additional Profits Tax
Net income
Net income attributable to non-controlling interest
Net income attributable to shareholders
Foreign currency translation gain (loss) from foreign operations
Comprehensive income
Net income attributable to shareholders per share ($)
Basic and diluted
See accompanying notes to the consolidated financial statements.
Note
6, 7
8,17
9
9
10
10
11
24
Years ended December 31
2019
85,595
11,865
73,730
14,397
2,455
15,005
(13,909)
9,866
45,916
10,657
2,326
6,587
26,346
1,628
24,718
38
2018
57,766
12,378
45,388
12,827
4,643
9,495
(19,136)
15,378
22,181
4,588
1,016
3,014
13,563
293
13,270
(83)
24,756
13,187
18
0.71
0.38
Orca Exploration Group Inc. // Annual Report & Accounts 2019Strategic ReportManagement’s Discussion & AnalysisFinancial Statements
66
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
$’000
ASSETS
Current assets
Cash and cash equivalents
Investment in short-term bonds
Trade and other receivables
Prepayments
Non-current assets
Long-term receivables
Investments
Capital assets
Total Assets
EQUITY AND LIABILITIES
Current liabilities
Trade and other payables
Tax payable
Current portion of long-term loan
Current portion of Additional Profits Tax
Non-current liabilities
Deferred income taxes
Lease liabilities
Long-term loan
Additional Profits Tax
Total Liabilities
SHAREHOLDERS’ EQUITY
Capital stock
Contributed surplus
Accumulated other comprehensive loss
Accumulated income
Non-controlling interest
Total equity and liabilities
As at December 31
Note
2019
2018
9
12
15
24
13
14
16
11
10
13
16
11
17
24
93,899
44,756
22,167
6,752
64,660
66,837
15,862
1,217
167,574
148,576
2,250
3,967
2,424
3,967
97,981
107,474
104,198
113,865
271,772
262,441
48,161
501
–
11,940
60,602
15,153
1,129
54,057
32,264
59,634
–
4,760
–
64,394
12,828
–
53,900
37,617
102,603
104,345
163,205
168,739
84,099
4,181
(210)
20,334
163
86,508
6,319
(248)
1,636
(513)
108,567
93,702
271,772
262,441
See accompanying notes to the consolidated financial statements.
Nature of Operations (Note 1); Contractual Obligations and Committed Capital Investment (Note 20); Contingencies (Note 21); Subsequent Events (Note 25).
The consolidated financial statements were approved by the Board on April 23, 2020.
Director
Director
Orca Exploration Group Inc. // Annual Report & Accounts 2019
CONSOLIDATED STATEMENTS OF CASH FLOWS
$’000
OPERATING ACTIVITIES
Net Income
Adjustment for:
Depletion and depreciation
Indirect tax
Stock-based compensation expense
Deferred income taxes expense
Additional Profits Tax
Unrealized loss on foreign exchange
Interest expense
Change in non-cash operating working capital
Net cash flows from operating activities
INVESTING ACTIVITIES
Capital expenditures
Change in non-cash working capital
Net cash used in investing activities
FINANCING ACTIVITIES
Long-term loan repayment
Lease payments
Normal course issuer bid
Investment in bonds, net
Interest paid, net
Participation interest paid
Proceeds on sale of interest in a subsidiary
Dividends paid to shareholders
Dividends paid to non-controlling interest
Net cash used in financing activities
Increase (decrease) in cash
Cash and cash equivalents at the beginning of the year
Effect of change in foreign exchange on cash for the year
Cash and cash equivalents at the end of the year
See accompanying notes to the consolidated financial statements.
67
Years ended December 31
Note
2019
2018
13
9
17
10
11
9
23
13
23
16
17
9
9
9
24
17
24
26,346
13,563
15,329
1,298
2,455
2,326
6,587
(84)
8,279
(27,663)
9,660
3,689
4,643
1,016
3,014
(103)
10,994
(17,724)
34,873
28,752
(4,171)
(114)
(4,285)
(5,843)
792
(5,051)
(4,760) –
(254) –
(4,547) –
22,081
(6,164)
(2,267)
–
(4,476)
(952)
(1,339)
29,249
64,660
(10)
(66,837)
(6,249)
(6,103)
15,374
(16,866)
(984)
(81,665)
(57,964)
122,322
302
93,899
64,660
Orca Exploration Group Inc. // Annual Report & Accounts 2019Strategic ReportManagement’s Discussion & AnalysisFinancial Statements
68
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
Accumulated
other
$’000
Note
Balance as at December 31, 2018
Share repurchase
Dividends declared
Foreign currency translation adjustment on foreign operations
Net income
Non-controlling interest dividend declared and paid
Capital Contributed comprehensive Accumulated
income
surplus
stock
loss
17
86,508
(2,409)
–
–
–
–
6,319
(2,138)
–
–
–
–
(248)
–
–
38
–
–
17
1,636
–
(6,020)
–
24,718
–
Non-
Controlling
Interest
24
(513)
–
–
–
1,628
(952)
Total
93,702
(4,547)
(6,020)
38
26,346
(952)
Balance as at December 31, 2019
84,099
4,181
(210)
20,334
163
108,567
$’000
Note
Balance as at December 31, 2017
Dividend declared and paid
Foreign currency translation adjustment on foreign operations
Net income
Gain on sale of interest in a subsidiary (Note 24)
Non-controlling interest recorded at date of acquisition
Non-controlling interest dividend declared and paid
Accumulated
other
Capital Contributed comprehensive Accumulated
income
surplus
stock
loss
17
86,508
6,319
–
–
–
–
–
–
–
–
–
–
–
–
(165)
–
(83)
–
–
–
–
17
(13,931)
(16,866)
–
13,270
19,163
–
–
Balance as at December 31, 2018
86,508
6,319
(248)
1,636
See accompanying notes to the consolidated financial statements.
Non-
Controlling
Interest
24
–
–
–
293
–
178
(984)
(513)
Total
78,731
(16,866)
(83)
13,563
19,163
178
(984)
93,702
Orca Exploration Group Inc. // Annual Report & Accounts 2019
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
69
General Information
Orca Exploration Group Inc. was incorporated on April 28, 2004 under the laws of the British Virgin Islands with registered offices located at PO Box 146,
Road Town, Tortola, British Virgin Islands, VG110. The Company produces and sells natural gas to the power and industrial sectors in Tanzania.
The consolidated financial statements of the Company as at and for the year ended December 31, 2019 comprise accounts of the Company and its
subsidiaries (collectively, the “Company” or “Orca Exploration”) and were authorised for issue in accordance with a resolution of the directors on
April 23, 2020.
1. Nature of Operations
The Company’s principal operating asset is an interest held by a subsidiary, PanAfrican Energy Tanzania Limited (“PAET”) in a Production Sharing Agreement
(“PSA”) with the Tanzania Petroleum Development Corporation (“TPDC”) and the Government of Tanzania (“GoT”) in the United Republic of Tanzania.
This PSA covers the production and marketing of certain gas from the Songo Songo Block offshore Tanzania.
The PSA defines gas in the Songo Songo field as “Protected Gas” and “Additional Gas”. The “Protected Gas” is owned by TPDC and is sold under a 20-year
gas agreement until July 2024 (“Gas Agreement”) to Songas Limited (“Songas”). Songas is the owner of the infrastructure that enables the gas to be
delivered to Dar es Salaam, which includes a gas processing plant on Songo Songo Island. The Company operates the gas processing plant and field on a
‘no gain no loss’ basis and receives no revenue for the Protected Gas delivered to Songas.
Under the PSA, the Company has the right to produce and market all gas in the Songo Songo Block in excess of the Protected Gas requirements
(“Additional Gas”).
The Tanzania Electricity Supply Company Limited (“TANESCO”) is a parastatal organization wholly-owned by the Government of Tanzania, with oversight
by the Ministry for Energy (“ME”), previously known as the Ministry of Energy and Minerals (“MEM”). TANESCO is responsible for the majority of electricity
generation, transmission and distribution throughout Tanzania. The Company currently supplies Additional Gas directly to TANESCO by way of a Portfolio
Gas Supply Agreement (“PGSA”) and indirectly through the supply of Protected Gas and Additional Gas to Songas which in turn generates and sells power
to TANESCO.
The Company recently began delivering gas to TPDC through a new long-term gas sales agreement (“LTGSA”) to the TPDC operated National Natural Gas
Infrastructure (“NNGI”) on Songo Songo Island where the natural gas is processed before being transported to Dar es Salaam for power and industrial use.
In addition to gas supplied to Songas and TANESCO for the generation of power, the Company has developed and supplies an industrial gas market in the
Dar es Salaam area.
2. Basis of Preparation
Statement of Compliance
The consolidated financial statements have been prepared in accordance with International Financial Reporting Standards (“IFRS”) as issued by the
International Accounting Standards Board (“IASB”). Certain comparative period amounts have been reclassified to conform with the current period
presentation.
Basis of Measurement
These consolidated financial statements have been prepared on a historical cost basis and have been prepared using the accrual basis of accounting.
The consolidated financial statements are presented in US dollars (“$”).
Basis of Consolidation
Subsidiaries
Subsidiaries are those enterprises controlled by the Company. The following companies have been consolidated within the Orca Exploration financial
statements:
Subsidiary
Orca Exploration Group Inc.
Orca Exploration Italy Inc.(1)
Orca Exploration Italy Onshore Inc.(1)
PAE PanAfrican Energy Corporation(“PAEM”)
PanAfrican Energy Tanzania Limited
Orca Exploration UK Services Limited
1 The companies are expected to be wound up during 2020.
Registered
Holding
Functional currency
British Virgin Islands
British Virgin Islands
British Virgin Islands
Mauritius
Jersey
United Kingdom
Parent Company
100%
100%
92%
92%
100%
US dollar
Euro
Euro
US dollar
US dollar
British pound
Transactions Eliminated Upon Consolidation
Inter-company balances and transactions and any unrealized gains or losses arising from inter-company transactions are eliminated in preparing the
consolidated financial statements.
Orca Exploration Group Inc. // Annual Report & Accounts 2019Strategic ReportManagement’s Discussion & AnalysisFinancial Statements
70
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
2. Basis of Preparation continued
Foreign Currency
i) Foreign Currency Transactions
Transactions in foreign currencies 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 recognized
in earnings.
ii) Foreign Currency Translation
Foreign currency differences are recognized in comprehensive income and accumulated in the translation reserve. The assets and liabilities of these
companies are translated into the functional currency at the period-end exchange rate. The income and expenses of the companies are translated
into the functional currency at the average exchange rate for the period. Translation gains and losses are included in other comprehensive income.
3. Summary of Significant Accounting Policies
The accounting policies set out below have been applied consistently to all periods presented in these consolidated financial statements.
Capital Assets
i) Capital Assets
Capital assets comprises the Company’s tangible natural gas assets, development wells, leasehold improvements, computer equipment, motor vehicles
and fixtures and fittings carried at cost, right-of-use assets less any accumulated depletion, depreciation and accumulated impairment losses. Cost includes
purchase price and construction 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 amortized on a unit of production method based on commercial proven reserves. The calculation of the unit of production amortization
takes into account the estimated future development cost associated with proven reserves.
ii) Impairment of Property, Plant and Equipment
At each balance sheet date, the Company reviews the carrying amounts of its property, plant and equipment to determine if indicators of impairment
exist. Individual assets are grouped together as a cash generating unit (“CGU”) for impairment assessment purposes at the lowest level at which there are
identifiable cash flows that are independent from other group assets. 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 CGU exceeds
its recoverable amount, the CGU 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 CGU and are discounted to their present value with a pre-tax discount rate that reflects the current
market indicators. The fair value less costs to sell is the amount that would be obtained from the sale of a CGU in an arm’s length transaction between
knowledgeable and willing parties. Where an impairment loss subsequently reverses, the carrying amount of the asset CGU 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 CGU in prior years. A reversal of an impairment loss is recognized in earnings.
Operatorship
The Company operates the Songo Songo Gas Field, flowlines and gas processing plant. The Songas wells, flowlines and gas plant are operated by the
Company on behalf of Songas on a ‘no gain no loss’ basis. The cost of operating and maintaining the wells and flowlines is paid for by the Company and
Songas in proportion to the respective volumes of Protected Gas and Additional Gas sales. The costs of operating and maintaining the wells and flowlines
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. Costs incurred by the Company in connection with the operatorship of the Songas plant are recorded as
receivables which are re-charged to Songas. Subsequent payments received from Songas are credited to receivables. When there are Additional Gas sales,
a tariff is paid to Songas as compensation for using the gas processing plant and pipeline.
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 the United Kingdom
and Tanzania. Obligations for contributions to the statutory pension fund are recognized as an expense as incurred.
ii) Stock Appreciation Rights and Restricted Stock Units
Stock appreciation rights (“SARs”) and restricted stock units (“RSUs”) are issued to certain key managers, officers, directors and employees. The fair value of
SARs and RSUs are recorded in earnings in accordance with the service period. The fair value of the SARs and RSUs is revalued every reporting date with
the change in the value recognized in earnings.
Asset Retirement Obligations
No provision has been made for future site restoration costs in Tanzania because the Company currently has no legal or contractual or constructive
obligation under the PSA to restore the fields at the end of their commercial lives, should such occur within the term of the PSA. If an amendment to the
PSA is agreed requiring the Company to restore the fields at the end of the commercial lives, a provision will be made for future site restoration costs.
Orca Exploration Group Inc. // Annual Report & Accounts 2019 71
3. Summary of Significant Accounting Policies continued
Revenue Recognition, Production Sharing Agreements and Royalties
Pursuant to the terms of the PSA, the Company has exclusive rights to (i) to carry on Exploration Operations in the Songo Songo Gas Field; (ii) to carry
on Development Operations in the Songo Songo Gas Field and (iii) jointly with TPDC, to sell or otherwise dispose of Additional Gas.
The Company recognizes revenue related to Additional Gas sales to all customers at specified delivery points at benchmark and contractual prices.
A good or service is transferred when the customer obtains control of that good or service. The transfer of control of natural gas occurs at the metering
points at the inlet to the customer’s facility (see Note 7). Under the terms of the PSA, the Company pays both its share and TPDC’s share of operating,
administrative and capital costs. The Company recovers all reasonably incurred operating, administrative and capital costs including TPDC’s share of these
costs from future revenues over several years (“Cost Gas”). TPDC’s share of operating and administrative costs is recorded in operating and general and
administrative costs when incurred and capital costs are recorded in capital assets. All recoveries are recorded as Cost Gas in the year of recovery.
The Company has gas sales contracts under which the customers are required to take, or pay for, a minimum quantity of gas. In the event that a customer
has paid for gas that was not delivered, the additional income received by the Company is carried on the balance sheet as deferred revenue. If the customer
consumes volumes in excess of the minimum, it will be charged at the current rate, but may receive a credit for volumes paid but not delivered. At the end of
each reporting period the Company reassesses the volumes for which the customer may receive credit, any remaining balance is credited to income.
In any given year, the Company is entitled to recover as Cost Gas up to 75% of the net revenue (gross revenue less processing and pipeline tariffs). Any net
revenue in excess of the Cost Gas (“Profit Gas”) is shared between the Company and TPDC in accordance with the terms of the PSA. Under the PSA the
Profit Gas payable to TPDC is adjusted by the amount necessary to fully pay and discharge the Company’s liability for taxes on income. Revenue represents
the Company’s share of Profit Gas and Cost Gas during the period.
The Company records revenues for sales to TANESCO based on the expected amount to be collected, which represents a percentage of the amounts
invoiced to TANESCO determined by comparison of TANESCO’s payment history to the amounts invoiced by the Company. Management believes this
approach provides the best estimate of TANESCO’s ability to pay and remain reasonably current; it also reflects the economic reality of the situation (see
Notes 4 and 7).
The estimated percentage used to recognize TANESCO revenue will be reviewed periodically as circumstances require. If there is a significant difference
between the amount of revenue recorded and amounts received, the percentage used to record revenue as well as any existing receivable or deferred
revenue balance will be revised accordingly. Since April 1, 2018 the Company has recognized 100% of amounts invoiced for TANESCO gas deliveries in
revenue as payments from TANESCO for the past three years have consistently been higher than amounts invoiced for gas deliveries.
Prior to April 1, 2018 cash received in excess of the revenue recorded for deliveries to TANESCO in any given period was recorded as deferred revenue.
In periods when the deferred revenue balance was greater than the amounts invoiced to TANESCO for gas deliveries for the previous four quarters,
any amount in excess of the previous four quarter average was recorded as current period revenue to the extent there had been unrecognized revenue
resulting from the expected collectability approach. If such unrecognized revenue is reduced to nil, additional amounts collected in excess of the quarterly
average will be applied to pay the oldest TANESCO invoice recorded and previously provided for, the corresponding doubtful debt provision is released and
recorded as finance income.
In periods when cash received is less than revenue recorded, the deferred revenue will be reduced accordingly. If the deferred revenue amount is reduced
to nil, the difference will be recorded as accounts receivable.
The Company sells its natural gas to power customers (TANESCO, TPDC and Songas) and one industrial customer (a cement manufacturer) pursuant to
fixed-price contracts. Sales to other industrial customers are at fixed-price discounts (subject to certain floors and ceilings) to the lowest alternative fuel
source in Dar es Salaam, Heavy Fuel Oil (“HFO”) and coal. Under all contracts, the Company is required to deliver volumes of natural gas to the contract
counterparty. Natural gas revenue is recognized when the Company gives up control of the natural gas which occurs at metering points located at the
inlets of customers’ facilities. The amount of production revenue recognized is based on the agreed transaction price and the volumes delivered.
The Company has entered into contracts with customers with terms ranging from four to seven years.
Additional Profits Tax
Under the terms of the PSA, in the event that all costs have been recovered with an annual return from the PSA 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. APT is provided for by
forecasting the total APT payable in the future as a proportion of the forecast Profit Gas over the term of PSA license. 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 PSA states that APT shall be calculated for each year and shall vary with the real rate of return earned by the Company on the net cash flow from the
Contract Area (as defined in the PSA). The calculation of APT includes a working capital adjustment reflecting the effect of the timing of actual receipt of
amounts owing from TANESCO on net cash flow.
Income Taxes
The Company is liable for Tanzanian income tax on the income for the year; this comprises current and deferred tax. Where current income tax is payable,
this is shown as a current tax liability. Deferred tax is provided using the balance sheet 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 realization 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.
Orca Exploration Group Inc. // Annual Report & Accounts 2019Strategic ReportManagement’s Discussion & AnalysisFinancial Statements 72
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
3. Summary of Significant Accounting Policies continued
Depreciation
Depreciation for non-natural gas properties is charged to earnings 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
Leased assets and right-of-use assets
Over the remaining life of the lease
Financial Instruments
All financial instruments are initially recognized at fair value on the consolidated statement of financial position. The Company has classified each financial
instrument into one of the following categories: (i) fair value through the statement of comprehensive income (loss), (ii) loans and receivables, and (iii) other
financial liabilities. Measurement in subsequent periods depends on the classification of the financial instrument as described below:
• Fair value through profit or loss: financial instruments under this classification include cash and cash equivalents and derivative assets and liabilities.
• Amortized cost: financial instruments under this classification include accounts receivable, investments in bonds, investments, accounts payable and
accrued liabilities, dividends payable, finance lease obligations, and long-term debt.
Financial assets and liabilities are recognized when the Company becomes a party to the contractual provisions of the instrument. Financial assets are
derecognized when the rights to receive cash flows from the assets have expired or have been transferred and the Company has transferred substantially
all risks and rewards of ownership. Financial assets and liabilities are offset and the net amount is reported on the statement of financial position when
there is a legally enforceable right to offset the recognized amounts and there is an intention to settle on a net basis, or realize the asset and settle the
liability simultaneously.
Cash and Cash Equivalents
Cash and cash equivalents include cash on hand, term deposits and short-term highly liquid investments with the original term to maturity of three months
or less, which are convertible to known amounts of cash and which, in the opinion of management, are subject to an insignificant risk of changes in value.
The fair value of cash and cash equivalents approximates their carrying amount. There are no restrictions on the movement of funds out of Tanzania.
Investments in Short-Term Bonds
Investments in short-term bonds includes highly liquid investments with the original term to maturity of 12-months or less which are convertible to
known amounts of cash and which, in the opinion of management, are subject to an insignificant risk of changes in value. The fair value of the investments
in short-term bonds approximates their carrying amount.
Impairment of Financial Assets
A financial asset is assessed at each reporting date to determine whether there is any objective evidence that it is impaired. A financial asset is considered
to be impaired if objective evidence indicates that one or more events have had a negative effect on the estimated future cash flows of that asset.
An impairment loss in respect of a financial asset measured at amortized cost is calculated as the difference between its carrying amount and the present
value of the estimated future cash flows discounted at the original effective interest rate. Individually significant financial assets are tested for impairment
on an individual basis. The remaining financial assets are assessed collectively in groups that share similar credit risk characteristics.
All impairment losses are recognized in earnings. An impairment loss is reversed if the reversal can be related objectively to an event occurring after the
impairment loss was recognized. For financial assets measured at amortized cost the reversal is recognized in earnings.
Leases
Effective January 1, 2019 the Company adopted IFRS 16 using the modified retrospective approach, and therefore the comparative information has not
been restated and continues to be reported under IAS 17 and IFRIC 4. The implementation of the new policy has not resulted in any material changes to
the Company’s financial statements.
On adoption of IFRS 16 the Company elected to apply the practical expedient of retaining the assessment of which transactions are leases. IFRS 16
was applied only to contracts that were previously identified as leases. Contracts that were not identified as leases under IAS 17 and IFRIC 4 were not
reassessed as to whether or not there is a lease. Therefore, the definition of a lease under IFRS 16 was applied only to contracts entered into or changed
after January 1, 2019.
The Company recognizes a right-of-use asset and a lease liability at the lease commencement date. The right-of-use asset is initially measured at cost,
which comprises the initial amount of the lease liability adjusted for any lease payments made at or before the commencement date, plus any initial direct
costs incurred and an estimate of costs to dismantle and remove the underlying asset or to restore the underlying asset or the site on which it is located,
less any lease incentives received.
The right-of-use asset is depreciated using the straight-line method from its commencement date to the earlier of the end of the useful life of the
right-of-use asset or end of the lease term. The estimated useful lives of right-of-use assets are determined on the same basis as those of property,
plant and equipment. In addition, the right-of-use asset is periodically reduced by impairment losses, if any, and adjusted for certain re-measurements
of the lease liability.
Orca Exploration Group Inc. // Annual Report & Accounts 2019 73
3. Summary of Significant Accounting Policies continued
The lease liability is initially measured at the present value of the minimum lease payments that are not yet paid at the commencement date, discounted
using the interest rate implicit in the lease or, if that rate cannot be readily determined, the Company’s incremental borrowing rate for that asset. Generally,
the Company uses its incremental borrowing rate as the discount rate. The lease liability is subsequently increased by the interest cost on the lease liability
and decreased by lease payments made. It is remeasured when there is a change in future lease payments arising from a change in an index or rate,
a change in estimate of the amount expected to be payable under a residual value guarantee, changes in the assessment of whether a purchase or
extension option is reasonably certain to be exercised or a termination option is reasonably certain not to be exercised.
As a result of adopting IFRS 16, the Company has recorded right-of-use assets and lease liabilities related to contracts which previously had been
off-balance sheet and classified as operating leases under IAS 17. The following table details the impact of the adoption of IFRS 16 on the Company’s
balance sheet:
$’000
Capital assets
Trade and other payables
Lease liabilities
Balance sheet impact
As at December 31 2019
Increase
Increase
Increase
1,665
(282)
(1,129)
Short-Term Leases and Leases of Low Value Assets
The Company has elected not to recognize right-of-use assets and lease liabilities for short term leases that have a term of 12-months or less and leases
of low value assets defined as less than $5,000 USD or less. The Company recognizes the lease payments associated with these leases as an expense
when incurred, over the lease term.
Future Accounting Changes
The following pronouncements from the IASB will become effective or were amended for financial reporting periods beginning on or after January 1, 2020.
On October 22, 2018, the IASB issued “Definition of a Business (Amendments to IFRS 3)” aimed at resolving the difficulties that arise when an entity
determines whether it has acquired a business or a group of assets. The amendments are effective for business combinations for which the acquisition date
is on or after the beginning of the first annual reporting period beginning on or after January 1, 2020.
On October 31, 2018, the IASB issued “Definition of Material (Amendments to IAS 1 and IAS 8)” to clarify the definition of ‘material’ and to align the
definition used in the Conceptual Framework and the standards themselves. The amendments are effective for annual reporting periods beginning on
or after January 1, 2020.
The Company continues to review its position with respect to the IASB pronouncements but is not expecting any significant impact on its consolidated
financial statements.
4. Use of Estimates and Judgments
The following are the critical judgments, apart from those involving estimations (see below), that management has made in the process of applying
the Company’s accounting policies and that have the most significant effect on the accounts recognized in these consolidated financial statements.
Critical Judgments in Applying Accounting Policies:
A. Natural gas assets
The Company assesses its natural gas assets for impairment when events or circumstances indicate that the carrying amount of its assets may not be
recoverable. If any indication of impairment exists, the Company performs an impairment test on the CGU, which is the lowest level at which there are
identifiable cash flows. The carrying amount of the CGU is compared to its recoverable amount which is defined as the greater of its fair value less cost
to sell and value in use and is subject to management estimates. These estimates include quantities of reserves and future production, future commodity
pricing, development costs, operating costs, and discount rates. Any changes in these estimates may have an impact on the recoverable amount of the
CGU.
B. Collectability of receivables
The Company evaluates the collectability of its receivables on the basis of payment history, frequency and predictability, as well as Management’s
assessment of the customer’s willingness and ability to pay. Management performs impairment tests each period on the Company’s current and
long-term receivables.
C. Statutory taxes
The Company operates in a jurisdiction with complex tax laws and regulations, which are evolving over time. The Company has taken certain tax positions
in its tax filings and these filings are subject to audit and potential reassessment after the lapse of considerable time. Accordingly, the actual income tax
impact may differ significantly from that estimated and recorded by management.
The recognition or reversal of deferred tax assets requires judgment as to whether or not there will be sufficient taxable profits available to offset
the tax assets when they do reverse. This requires assumptions regarding future profitability and is therefore inherently uncertain.
Orca Exploration Group Inc. // Annual Report & Accounts 2019Strategic ReportManagement’s Discussion & AnalysisFinancial Statements
74
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
4. Use of Estimates and Judgments continued
Key Sources of Estimation of Uncertainty
D. 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 the Company. The reserves and estimated future net cash flow from the Company’s properties have been evaluated
by independent petroleum engineers. 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 the relevant evaluations were prepared and many of these assumptions are subject to change and are beyond the control of the Company. To date,
TPDC has neither elected to back in within the prescribed notice period nor contributed any costs associated with backing in.
Reserves are integral to the amount of depletion and impairment test.
E. Fair Value of Stock Based Compensation
All SARs and RSUs granted by the Company are required to be measured at their fair value for each reporting period. In assessing the fair value of the
equity based compensation, estimates have to be made as to (i) the volatility in share price, (ii) the risk free rate of interest, (iii) the level of forfeiture, and
(iv) the dividend yield.
F. Cost Recovery
The Company is able to recover reasonable costs incurred on the development of the Songo Songo project out of 75% of the gross field revenue less
processing and pipeline tariffs (“field net revenue”). There are inherent uncertainties in estimating when costs have been recovered as these costs are
subject to Government audit and in exceptional circumstances a potential reassessment after the lapse of a considerable period of time.
5. 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 as well as political risk associated with conducting operations in an emerging market. The Company seeks to manage its exposure to
these risks wherever possible.
A. Foreign Exchange Risk
Foreign exchange risk arises when transactions and recognized assets and liabilities of the Company are denominated in a currency that is not the US dollar
functional currency.
The Company operates internationally and is exposed to foreign exchange risk arising from currency exposures to US dollars. The main currencies to which
the Company has an exposure are: Tanzanian shillings, British pounds sterling, Euros and Canadian dollars.
The majority of contracts with customers are based on US dollar prices for gas delivered however the majority of invoices and receipts are in Tanzanian
shillings. Invoices are priced and then converted to Tanzanian shillings at the time of invoicing however payments are based on the US dollar invoiced
amount translated to shillings at the time of payment. While conversion of Tanzanian shillings into US dollars is unrestricted, the foreign exchange market
for Tanzanian shillings is limited and not highly liquid, reducing the Company’s ability to convert large amounts of Tanzanian shillings into US dollars at any
given time. To mitigate the risk of Tanzanian shilling devaluation, the Company regularly converts Tanzanian shilling receipts into US dollars to the extent
practicable taking into consideration that the majority of operating expenditures are denominated in Tanzanian shillings.
The majority of capital expenditures are denominated in US dollars. Capital stock, equity financing and any associated stock based compensation are
denominated in Canadian dollars.
There are no forward exchange rate contracts in place.
A 10% increase in the US dollar against the relevant foreign currency would result in an overall increase in working capital (defined as current assets less
current liabilities) of $1.2 million from $107.0 million to $108.2 million and an increase in the income before tax from $45.9 million to $47.0 million.
The sensitivity includes only outstanding foreign currency denominated monetary items and adjusts their translation at period end for a 10% change in
the foreign currency rates. A 10% sensitivity rate is used when reporting foreign currency risk internally to key management personnel and represents
management’s assessment of the reasonable possible change in foreign exchange rates.
The following balances are denominated in foreign currency (stated in US dollars at period end exchange rates):
Balances as at December 31, 2019
$’millions
Cash
Trade and other receivables
Trade and other payables
Net
Canadian
dollars
Tanzanian
shillings
0.1
–
(1.5)
(1.4)
9.4
9.6
(9.2)
9.8
Euros
0.2
–
–
0.2
Other
currencies
0.5
0.1
(0.1)
0.5
Total
10.2
9.7
(10.8)
9.1
Orca Exploration Group Inc. // Annual Report & Accounts 2019
75
B. Commodity Price Risk
The Company negotiated industrial gas sales contracts with gas prices which, subject to certain floors and ceilings, are determined as a discount to the
lowest cost alternative fuels in Dar es Salaam, namely Heavy Fuel Oil (“HFO”) and coal. The price of HFO is exposed to the volatility in the market price
of crude oil.
C. Interest Rate Risk
Interest rate risk is the risk that future cash flows will fluctuate as a result of changes in market interest rates. The Company has minimal exposure to
interest rates as the long-term loan has a fixed interest rate, interest rates on short-term investments are fixed and interest received on cash balances
is not significant.
D. Concentration Risk
All the Company’s sales are currently made 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 contract with Songas for the supply of gas to the Ubungo power plant, a contract with TANESCO to supply gas to some of the
TANESCO power plants, and a contract with TPDC to supply gas through NNGI. The contracts with Songas, TANESCO and TPDC accounted for 57% of
the Company’s gross field revenue operating revenue during 2019 and $9.6 million of the short and long-term receivables at December 31, 2019.
E. Credit Risk
Credit risk is the risk of financial loss to the Company if a customer or counterparty to a financial instrument fails to meet its contractual obligations
and arises principally from the Company’s receivables from TANESCO, Songas and TPDC. The carrying amount of accounts receivable and the long-term
receivable represents the maximum credit exposure. As at December 31, 2019 and 2018, provisions exist against all of the long-term TANESCO receivable,
gas plant operations and capital expenditure receivables from Songas, and a receivable of $0.5 million from one industrial customer. No write-off of any
receivables occurred in 2019 or 2018 (see Note 12).
The Company manages the credit exposure related to cash and cash equivalents by selecting counterparties based on credit ratings and monitoring all
investments to ensure a stable return, avoiding complex investment vehicles with higher risk such as asset backed commercial paper. The Company’s cash
resources are placed with reputable financial institutions with no history of default.
F. 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 regular basis. These are reviewed to ensure sufficient funds exist to finance the Company’s current operational and investment
cash flow requirements. At December 31, 2019 the Company has working capital of $107.0 million which is net of $60.6 million of financial liabilities with
regards to trade and other payables of which $34.6 million is due within one to three months, nil is due within three to six months, and $26.0 million is due
within six to twelve months (see Note 14).
At the end of the year approximately 56% of the current liabilities relate to TPDC (see Note 14). The amounts due to TPDC represent its share of Profit
Gas and the current portion of Additional Profit Tax; in accordance with the terms of the PSA, TPDC is entitled to the payment of its share of Profit Gas on
a quarterly basis proportional to the cash receipts during the quarter. A large proportion of the TPDC liability is associated with the long-term TANESCO
arrears and payments to TPDC are made when cash is received for the arrears.
G. 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 achieve an optimal capital structure to reduce the cost of capital.
H. Country Risk
The Company has unresolved disputes with TPDC related to Cost Gas revenue, TANESCO and Songas regarding unpaid invoices, and the Tanzanian Revenue
Authority (“TRA”) in relation to tax disputes (see Note 21). The Company continues to rely upon its rights under the existing PSA and has initiated notices
of disputes as required under the PSA and by local tax regulations to resolve outstanding issues. The Company has put in place an advisory committee of
experienced individuals with significant experience working with the Tanzanian Government to mitigate the risks of doing business in Tanzania.
Orca Exploration Group Inc. // Annual Report & Accounts 2019Strategic ReportManagement’s Discussion & AnalysisFinancial Statements 76
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
6. Segment Information
The Company has one reportable industry segment which is international exploration, development and production of petroleum and natural gas.
During 2019 the Company’s producing and exploration assets were entirely located in Tanzania. Previously, the Company had exploration and
appraisal interests in Italy.
$’000
External revenue
Segment net income attributable to shareholders
Finance income (Note 9)
Finance expense (Note 9)
Capital expenditures (Note 13)
Depletion & depreciation (Note 13)
$’000
Total assets
Total liabilities
7. Revenue
$’000
Industrial sector
Power sector
Gross field revenue
TPDC share of revenue
Company operating revenue
Current income tax adjustment
Revenue
Years ended December 31
2019
Tanzania
85,595
24,718
13,909
9,577
5,836
15,329
Total
85,595
24,718
13,909
9,577
5,836
15,329
Italy
–
340
–
–
–
–
Years ended December 31
2019
Tanzania
271,772
163,205
Total
271,772
163,205
Italy
748
16
2018
Tanzania
57,766
12,930
19,136
14,683
5,843
9,660
2018
Tanzania
261,693
168,723
Total
57,766
13,270
19,136
14,683
5,843
9,660
Total
262,441
168,739
Years ended December 31
2019
38,530
62,329
100,859
(28,334)
72,525
13,070
85,595
2018
39,095
40,395
79,490
(25,056)
54,434
3,332
57,766
Since April 1, 2018 the Company has recognized 100% of amounts invoiced for deliveries to TANESCO as revenue. The 2018 trend, which saw TANESCO
paying in excess of gas delivered, continued in 2019. The Company invoiced TANESCO $50.6 million (2018: $31.7 million) for gas deliveries and received
$61.6 million (2018: $43.3 million) in payments during 2019. Based on the consistent payments from TANESCO, the Company: (i) recognized all amounts
invoiced for gas deliveries in 2019 as revenue; and (ii) recognized $11.0 million during the year (2018: $15.9 million) as finance income relating to the
amounts collected during 2019 that were applied towards the long-term TANESCO arrears previously provided for (see Note 9).
8. Personnel Expenses
$’000
Employee and related costs included in:
Production, distribution and transportation
General and administrative
Stock based compensation (Note 17)
Years ended December 31
2019
2018
3,036
6,188
9,224
2,455
2,907
6,084
8,991
4,643
11,679
13,634
Personnel expenses include Company employees who operate the Songas facilities on behalf of Songas; these expenses are recharged to Songas.
Orca Exploration Group Inc. // Annual Report & Accounts 2019
9. Finance Income and Expense
Finance Income
$’000
Interest income
Investment income
Reversal of provision for doubtful accounts
77
Years ended December 31
2019
666
2,199
11,044
13,909
2018
625
1,084
17,427
19,136
The reversal of the provision for doubtful accounts of $11.0 million (2018: $15.9 million) follows collection of TANESCO arrears which had been previously
provided for and represents the excess of receipts over gas sales invoiced during the year (see Notes 7 and 12). The 2018 amount also includes reversals of
provisions re Songas of $1.2 million and value added tax of $0.3 million.
At December 31, 2019 the Company had $44.8 million invested in US dollar short-term bonds with maturity dates from February 2020 to July 2020
and a range of interest rates from 1.375% to 2.75% (December 31, 2018: $66.8 million with maturity dates from March 2019 to December 2019 and
a range of interest rates from 0.875% to 2.125%). The $2.2 million investment income for the year ended December 31, 2019 (2018: $1.1 million) includes
interest earned of $1.4 million (2018: $0.6 million) and amortization of the discount on the acquisition of the bonds of $0.8 million (2018: $0.5 million).
The Company’s intent is to hold the bond investments to maturity; however, the bonds are highly liquid by their nature and may readily be liquidated into
cash if necessary. To date, there have been no sale of bond investments prior to their maturity.
Finance Expense
$’000
Base interest expense
Participation interest expense
Lease interest expense
Interest expense
Net foreign exchange loss
Indirect tax
Years ended December 31
2019
6,164
2,071
44
8,279
289
1,298
9,866
2018
6,249
4,745
–
10,994
695
3,689
15,378
Base interest expense and participation interest expense relate to the long-term loan (“Loan”) with the International Finance Corporation (“IFC”). Base interest
on the Loan is payable quarterly at 10% per annum on a ‘pay-if-you-can-basis’ using a formula to calculate the net cash available for such payments as at any
given interest payment date. The interest expense is payable quarterly in arrears. The participation interest expense is paid annually in arrears. It equates to
6.4% of PAET’s net cash flows from operating activities net of net cash flows used in investing activities for the year. Initially the annual variable participation
interest equated to 7% but was reduced as a prepayment of $2.6 million was made in January 2018 associated with the sale of a 7.9% interest in PAEM in
accordance with the terms of the Loan. Such participation interest will continue until October 15, 2026 regardless of whether the Loan is repaid prior to its
contractual maturity date. The participation interest for the year ended December 31, 2018 included an additional payment of $2.6 million associated with
the sale of a 7.9% interest in PAEM in January 2018 in accordance with the terms of the Loan (see Notes 16 and 24).
The indirect tax is for VAT associated with invoices to TANESCO for interest on late payments and invoices under the take or pay provisions within the
PGSA. The decline in indirect taxation is a result of no invoice being issued under the take or pay provisions of the PGSA. No take or pay invoice was issued
as TANESCO took the required volumes during the contract year to June 30, 2019. In 2018 a take or pay invoice of $16.6 million was raised but not
recognized in the financial statements as not meeting revenue recognition criteria with respect to assurance of collectability.
Orca Exploration Group Inc. // Annual Report & Accounts 2019Strategic ReportManagement’s Discussion & AnalysisFinancial Statements
78
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
10. Income Taxes
The tax charge is as follows:
$’000
Current income tax expense
Deferred income tax expense
Years ended December 31
2019
10,657
2,326
12,983
2018
4,588
1,016
5,604
Tax of $ nil was paid during 2019 in relation to the settlement of the prior year’s tax liability (2018: $ nil). Installment tax payments totaling $10.0 million
were made in respect of 2019 (2018: $5.5 million). These are presented as a reduction in tax payable on the consolidated statement of financial position.
Tax Rate Reconciliation
$’000
Income before tax per Consolidated Statements of Comprehensive Income
Less Additional Profits Tax
Income before statutory tax
Provision for income tax calculated at the statutory rate of 30%
Effect on income tax of:
Administrative and operating expenses
Foreign exchange loss
Stock-based compensation
TANESCO interest not recognized as interest income
Change in unrecognized tax asset
Other permanent differences
Years ended December 31
2019
45,916
(6,587)
39,329
11,799
1,827
61
532
2,164
(2,924)
(476)
12,983
2018
22,181
(3,014)
19,167
5,750
1,478
92
878
1,936
(4,903)
373
5,604
As at December 31, 2019 the provision for doubtful debts against TANESCO had resulted in a $22.2 million unrecognized deferred tax asset
(December 31, 2018: $22.8 million). If this debt is ultimately not recovered, the Company will also be entitled to a $15.3 million (2018: $15.7 million)
refund of Value Added Tax.
The deferred income tax liability includes the following temporary differences:
$’000
Differences between tax base and carrying value of property, plant and equipment
Tax recoverable from TPDC
Provision for doubtful debt
Additional Profits Tax
Unrealized exchange losses/other provisions
As at December 31
2019
(27,153)
(4,560)
2,720
13,287
553
2018
(24,746)
(2,128)
2,720
11,248
78
(15,153)
(12,828)
11. Additional Profits Tax
Under the terms of the PSA, in the event that all costs have been recovered with an annual cash return from the PSA of 25% plus the percentage
change in the United States Industrial Goods Producer Price Index (“PPI”), an Additional Profits Tax (“APT”) is payable.
The Company provides for APT by forecasting the total APT payable as a proportion of the Company’s forecast Profit Gas over the term of the PSA.
The effective APT rate of 19.0% (2018: 19.4%) has been applied to Profit Gas of $34.6 million (2018: $15.5 million). Accordingly, $6.6 million of APT
has been recorded as Additional Profits Tax for the year ended December 31, 2019 (2018: $3.0 million). As at December 31, 2019 the current portion
of APT payable was $11.9 million (December 31, 2018: $ nil) with a long-term APT payable of $32.3 million (December 31, 2018: $37.6 million).
Orca Exploration Group Inc. // Annual Report & Accounts 2019
12. Trade and Other Receivables
Current Receivables
$’000
Trade receivables
Songas
TPDC
Industrial customers
Less provision for doubtful accounts
Other receivables
Songas gas plant operations
Other
Less provision for doubtful accounts
Trade Receivables Aged Analysis
$’000
$’000
79
As at December 31
2019
2018
2,332
7,284
9,121
(452)
2,489
–
9,107
(452)
18,285
11,144
6,431
1,166
(3,715)
3,882
6,496
1,937
(3,715)
4,718
22,167
15,862
As at December 31, 2019
Current
>30 <60
>60 <90
7,631
8,228
640
>90
1,786
Total
18,285
As at December 31, 2018
Current
>30 <60
>60 <90
3,457
5,057
1,657
>90
973
Total
11,144
TANESCO
TANESCO has consistently paid more than the amounts invoiced for gas deliveries during the past two years and as a result the current TANESCO
receivable as at December 31, 2019 was $ nil (December 31, 2018: $ nil). See Note 15 in relation to the long-term receivable due from TANESCO.
Songas
As at December 31, 2019 Songas owed the Company $8.8 million (December 31, 2018: $9.0 million), while the Company owed Songas $2.4 million
(December 31, 2018: $2.2 million). The amounts due to the Company are mainly for sales of gas of $2.3 million (December 31, 2018: $2.5 million) and
for the operation of the gas plant of $6.4 million (December 31, 2018: $6.5 million) against which the Company has made a provision for doubtful accounts
of $3.7 million (December 31, 2018: $3.7 million). The amounts due to Songas primarily relate to pipeline tariff charges of $1.8 million (December 31,
2018: $1.8 million). The operation of the gas plant is conducted at cost and the charges are billed to Songas on a flow through basis.
TPDC
The current receivable from TPDC is for gas deliveries through the NNGI pursuant to the signing of the LTGSA. In accordance with the LTGSA, any unpaid,
overdue amounts can be offset against TPDC profit share.
Orca Exploration Group Inc. // Annual Report & Accounts 2019Strategic ReportManagement’s Discussion & AnalysisFinancial Statements
80
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
13. Capital Assets
$’000
Costs
As at December 31, 2018
Additions
Disposals
As at December 31, 2019
Accumulated depletion and depreciation
As at December 31, 2018
Additions
Disposals
As at December 31, 2019
Net book values
As at December 31, 2019
$’000
Costs
As at December 31, 2017
Additions
As at December 31, 2018
Accumulated depletion and depreciation
As at December 31, 2017
Additions
As at December 31, 2018
Net book values
As at December 31, 2018
Natural gas
interests
Office
and other Right-of-use
Total
210,010
4,153
–
214,163
102,753
15,005
–
117,758
3,860
18
(1,008)
2,870
3,643
135
(1,008)
2,770
–
213,870
1,665
–
5,836
(1,008)
1,665
218,698
–
189
–
189
106,396
15,329
(1,008)
120,717
96,405
100
1,476
97,981
Natural gas
interests
Office
and other
Right-of-use
Total
204,266
5,744
210,010
93,258
9,495
102,753
3,761
99
3,860
3,478
165
3,643
–
–
–
–
–
–
208,027
5,843
213,870
96,736
9,660
106,396
107,257
217
–
107,474
In determining the depletion charge, it is estimated that future development costs of $67.9 million (December 31, 2018: $72.0 million) will be required
to bring the total proved reserves to production. The decrease in estimated future development costs is a result of expenditures during the year of $4.2
million and the revision of future cost estimates. The future development cost is an estimate of the capital expenditure required to ensure the Company
can produce the required gas volumes to meet its contractual obligations for the remaining life of the license. During the year the Company recorded
depreciation of $0.3 million (2018: $0.2 million) in general and administrative expenses.
Leases
Effective January 1, 2019, the Company adopted IFRS 16 – Leases which replaced IAS 17 – Leases. The new standard was adopted using the modified
retrospective approach.
On transition to IFRS 16, the Company recognized additional right-of-use assets and lease liabilities. The Company leases office space which previously
were classified as operating leases under IAS 17 and payments were expensed. The impact of the transition and activity in the period is summarized below.
Orca Exploration Group Inc. // Annual Report & Accounts 2019
13. Capital Assets continued
Right-of-use assets
$’000
As at January 1, 2019 (effect from IFRS 16 adoption)
Additions
Depreciation
As at December 31, 2019
Lease liabilities
$’000
As at January 1, 2019 (effect from IFRS 16 adoption)
Additions
Lease interest expense
Lease payments
As at December 31, 2019
81
537
1,128
(189)
1,476
537
1,128
44
(298)
1,411
Right-of-use assets is presented as part of capital assets on the Company’s balance sheet. Of the total lease liability of $1.4 million, $0.3 million is current
and is presented in trade and other payables.
14. Trade and Other Payables
$’000
Songas
Other trade payables
Trade payables
TPDC Profit Gas entitlement, net
Accrued liabilities
TPDC share of Profit Gas
$’000
TPDC share of Profit Gas
Less “Adjustment Factor”
TPDC share of Profit Gas entitlement
As at December 31
2019
2,354
1,310
3,664
33,134
11,363
48,161
2018
2,163
2,347
4,510
40,260
14,864
59,634
As at December 31
2019
38,077
(4,943)
33,134
2018
40,606
(346)
40,260
Under the PSA revenue sharing mechanism, the Company is to adjust TPDC’s Profit Gas entitlement by the “Adjustment Factor”. The Adjustment Factor is
equal to the amount necessary to fully pay and discharge the PAET liability for taxes on income derived from petroleum operations.
Orca Exploration Group Inc. // Annual Report & Accounts 2019Strategic ReportManagement’s Discussion & AnalysisFinancial Statements
82
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
15. Long-term Receivables
$’000
TANESCO receivable
Provision for doubtful accounts
Net TANESCO receivable
VAT Songas workovers
Lease deposit
As at December 31
2019
47,454
(47,454)
–
2,205
45
2,250
2018
58,498
(58,498)
–
2,205
219
2,424
During the year the amounts received from TANESCO were in excess of the revenue recognized for gas sales to TANESCO and $11.0 million of cumulative
excess cash receipts over sales invoiced in 2019 were recorded to reduce the long-term arrears along with the associated reversal of the provision for
doubtful accounts (2018: $15.9 million).
In 2017, based on agreement with TPDC, the Songas share of workover costs of $14.5 million was transferred to the cost pool to recover the costs via the
PSA cost recovery mechanism. This resulted in $2.2 million relating to VAT on the workovers that had already been paid being reclassified as a long-term
receivable. The Company continues to take action to collect the workover costs. Amounts not collected will be pursued through the mechanisms provided
in the agreements with Songas.
16. Long-term Loan
In 2015 PAET took out the Loan with the IFC, a member of the World Bank Group, for $60 million. The Loan was fully drawn down in 2016.
The Loan is to be paid out through six semi-annual payments of $5 million starting April 15, 2022 and one final payment of $25.2 million due on April 15,
2025. The Company may voluntarily prepay all or part of the Loan but must simultaneously pay any accrued base interest costs related to the principal
amount being prepaid. The Loan is an unsecured subordinated obligation of PAET and was initially guaranteed by the Company to a maximum of $30
million. The initial guarantee may only be called upon by IFC at maturity in 2025 and, subject to IFC approval and receipt of all required regulatory
approvals, the Company, at its discretion, may issue shares in fulfillment of all or part of the guarantee obligation in 2025. Pursuant to the sale of the
non-controlling interest in PAEM, the Company agreed with the IFC to reduce the outstanding amount of the loan by the percentage interest sold of
7.9% ($4.8 million) on the fourth anniversary of the first drawdown. PAET made this payment on October 16, 2019.
Dividends and distributions from PAET to the Company are restricted, if at any time amounts of interest, principal or participating interest are due and
outstanding. All amounts due under the Loan have been paid when due.
$’000
Loan principal
Financing costs
Current portion of loan
As at December 31
2019
55,240
(1,183)
–
54,057
2018
60,000
(1,340)
(4,760)
53,900
Orca Exploration Group Inc. // Annual Report & Accounts 2019
83
17. Capital Stock
Authorised
50,000,000
100,000,000
100,000,000
Class A common shares (“Class A Shares”)
Class B subordinate voting shares (“Class B Shares”)
First preference shares
No par value
No par value
No par value
The Class A and Class B Shares rank pari passu in respect of dividends and repayment of capital in the event of winding-up. Class A Shares carry twenty
(20) votes per share and Class B Shares carry one vote per share. The Class A Shares are convertible at the option of the holder at any time into Class B
Shares on a one-for-one basis. The Class B Shares are convertible into Class A Shares on a one-for-one basis in the event that a take-over bid is made
to purchase Class A Shares which must, by reason of a stock exchange or legal requirements, be made to all or substantially all of the holders of Class A
Shares and which is not concurrently made to holders of Class B Shares.
Changes in the capital stock
Number of shares
Class A Shares
Class B Shares
First preference shares
Total
As at December 31
Authorised
(000)
50,000
100,000
100,000
2019
Issued
(000)
1,750
32,557
–
Amount
($’000)
Authorised
(000)
983
83,116
–
50,000
100,000
100,000
2018
Issued
(000)
1,750
33,506
–
Amount
($’000)
983
85,525
–
250,000
34,307
84,099
250,000
35,256
86,508
During the year the Company repurchased and canceled 933,028 Class B Shares (2018: nil) at a weighted average price of CDN$6.43 per Class B Share
under a normal course issuer bid (“NCIB”). Total cash payments of $4.5 million were applied to the capital stock and contributed surplus accounts (see Note
25 re substantial issuer bid). All issued capital stock is fully paid.
Changes in Stock Appreciation Rights (“SARs”)
Outstanding as at January 1
Issued
Exercised
Forfeited
Outstanding as at December 31
2019
2018
SARs
(000)
Exercise price
(CDN$)
SARs Exercise price
(CDN$)
(000)
645
2.30 to 3.87
2,485
2.12 to 3.87
2,169
5.00 to 6.65
–
–
(405)
2.30 to 3.87
(1,630)
2.12 to 3.87
(87)
5.00
(210)
2.30 to 3.87
2,322
2.30 to 6.65
645
2.30 to 3.87
The number outstanding, the weighted average remaining life and weighted average exercise prices of SARs at December 31, 2019 were as follows:
Exercise price (CDN$)
2.30
3.02
3.87
5.00 to 6.65
2.30 to 6.65
Weighted
average
remaining
outstanding contractual life
(years)
Number
(000)
Number
Weighted
average
exercisable exercise price
(CDN$)
(000)
30
120
90
2,082
2,322
–
1.00
3.00
3.00
2.86
30
60
–
–
90
2.30
3.02
3.87
6.06
4.95
Orca Exploration Group Inc. // Annual Report & Accounts 2019Strategic ReportManagement’s Discussion & AnalysisFinancial Statements
84
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
17. Capital Stock continued
Change in Restrictive Stock Units (“RSUs”)
Outstanding as at January 1
Issued
Exercised
Forfeited
2019
2018
RSUs (000)
Exercise price
(CDN$)
RSUs (000)
Exercise price
(CDN$)
88
218
(63)
(8)
0.001
0.01
0.01
0.01
1,148
–
(1,060)
0.001
–
0.001
Outstanding as at December 31
235 0.001 to 0.01
88
0.001
The number outstanding, the weighted average remaining life and weighted average exercise prices of RSUs at December 31, 2019 were as follows:
Exercise price (CDN$)
0.001 to 0.01
Weighted
average
remaining
exercisable contractual life
(years)
Number
(000)
Number
outstanding
(000)
235
235
2.93
As SARs and RSUs are settled in cash, they are re-valued at each reporting date using the Black-Scholes option pricing model with the resulting liability
being recognized in trade and other payables. In the valuation of stock appreciation rights and restricted stock units as at December 31, 2019, the
following assumptions have been made: a risk free rate of interest of 1.0%, stock volatility of 30.1% to 40.9%, 0% dividend yield, 5% forfeiture and a
closing stock price of CDN$6.05 per share.
$’000
SARs
RSUs
As at December 31
2019
1,996
536
2,532
2018
1,196
364
1,560
As at December 31, 2019 a total accrued liability of $2.5 million (December 31, 2018: $1.6 million) has been recognized in relation to SARs and RSUs
which is included in other payables. The Company recognized an expense for the year of $2.5 million (2018: $4.6 million) as stock based compensation.
Dividend Summary
Declaration date
February 25, 2020
November 28, 2019
September 17, 2019
May 29, 2019
January 22, 2019
January 18, 2018
18. Earnings Per Share
(000)
Outstanding shares
Record date
March 31, 2020
December 31, 2019
September 30, 2019
June 30, 2019
March 31, 2019
January 31, 2018
Payment date
April 30, 2020
January 31, 2020
October 31, 2019
July 31, 2019
April 30, 2019
February 7, 2018
Weighted average number of Class A and Class B Shares
Weighted average diluted number of Class A and Class B Shares
Amount per share (CDN$)
0.06
0.06
0.06
0.06
0.05
0.60
As at December 31
2019
2018
34,931
34,931
35,256
35,256
The calculation of basic earnings per share is based on a net income attributable to shareholders for the year of $24.7 million (2018: $13.3 million)
and a weighted average number of Class A and Class B Shares outstanding during the period of 34,931,144 (2018: 35,256,432).
Orca Exploration Group Inc. // Annual Report & Accounts 2019
85
19. Related Party Transactions
The Chairman of the Company’s Board of Directors is counsel to a law firm that provides legal advice to the Company and its subsidiaries. During the year
ended December 31, 2019 fees for services provided by this firm totaled $0.4 million (2018: $0.3 million).
As at December 31, 2019 the Company had a total of $0.2 million (December 31, 2018: $0.04 million) recorded in trade and other payables in relation
to related parties.
20. Contractual Obligations and Committed Capital Investments
Protected Gas
Under the terms of the 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, the Company is liable to pay the difference between the price of Protected Gas ($0.55/MMbtu escalated)
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 which was
214 Bcf as at December 31, 2019 (191 Bcf as at December 31, 2018). The Company did not have a shortfall during the reporting period and does not
anticipate a shortfall arising during the term of the Protected Gas delivery obligation to July 2024.
Terms of the Gas Agreement were modified by the Amended and Restated Gas Agreement (“ARGA”) which was initialed by all parties but remains unsigned.
In certain respects, the parties thereto are conducting themselves as though the ARGA is in effect. Management does not foresee a material risk with the
conduct of the Company’s business with an unsigned ARGA at this time.
Re-Rating Agreement
In 2011 the Company, TPDC and Songas signed a Re-Rating Agreement which evidenced an increase to the gas processing capacity of the Songas
Infrastructure to a maximum of 110 MMcfd (the pipeline and delivery pressure requirements at the Ubungo power plant restrict the infrastructure capacity
to a maximum of 102 MMcfd). Under the terms of the Re-Rating Agreement, the Company paid additional compensation of $0.30/mcf for sales between
70 MMcfd and 90 MMcfd and $0.40/mcf for volumes above 90 MMcfd by issuing credit notes to TANESCO. This was in addition to the tariff of $0.59/
mcf payable to Songas as set by the energy regulator, EWURA.
Although Songas notified the Company in 2014 that the Re-Rating Agreement was terminated, the parties have continued to produce, transport and
sell gas volumes in line with the re-rated plant capacity. In May 2016 the Company notified TANESCO and Songas that the additional compensation for
sales over 70 MMcfd would no longer be paid effective June 2016. The additional compensation was always intended to be temporary in nature until the
expansion of the Songas Infrastructure, at which time Songas would apply to EWURA to obtain approval of a new tariff for the processing of volumes over
70 MMcfd. The PGSA provides for passing on to TANESCO any tariff charged to the Company in the event that a new tariff is approved.
The parties to the Re-Rating Agreement are in the process of negotiating a replacement agreement which may address the additional compensation paid
through the establishment of an approved tariff from EWURA. In the interim, the processing capacity at the Songas Infrastructure remains unaltered and is
fully available for utilization by the Company. This capacity is in addition to the capacity available within the NNGI.
Portfolio Gas Supply Agreement (“PGSA”)
On June 17, 2011, the PGSA was signed (term to June 2023) between TANESCO (as the buyer) and the Company and TPDC (collectively as the seller).
TANESCO requested a change to the PGSA MDQ in accordance with clause 7.6(b) which PAET and TPDC approved effective January 29, 2018. The seller
is now obligated, subject to infrastructure capacity, to sell a maximum of approximately 26 MMcfd (previously 36 MMcfd) for use in any of TANESCO’s
current power plants, except those operated by Songas at Ubungo. Under the agreement, the basic wellhead price of approximately $2.98/mcf increased
to $3.04/mcf on July 1, 2017 and to $3.10/mcf on July 1, 2019. Previously under the PGSA any sales in excess of 36 MMcfd were subject to a 150%
increase in the basic wellhead gas price. On December 22, 2018 a side letter amendment to the PGSA was agreed with TPDC to allow PGSA volumes up
to a maximum monthly average volume of 35 MMscf/d to temporarily flow through the NNGI. The temporary arrangement was terminated in September
2019 once the refrigeration unit became fully operational and all PGSA volumes were again processed through the Songas Infrastructure.
Long-term Gas Sales Agreement (“LTGSA”)
On May 14, 2019 the Company and TPDC signed the LTGSA for an initial delivery of 20 MMcfd through the NNGI, at a price of $3.10/MMbtu as at
January 1, 2019, (escalating 2% per annum) exclusive of any processing and transportation tariff associated with the NNGI. The LTGSA was amended
on September 24, 2019 to increase the volumes supplied through the NNGI up to a maximum daily quantity of 30 MMcfd. All volumes above 20 MMcfd
are supplied on a best endeavors basis until compression facilities are added to the Songas facilities.
Leases
The Company has three office rental agreements, one in Dar es Salaam, Tanzania and two in England, one in Winchester and one in London. A new
agreement for the office in Dar es Salaam was entered into on November 1, 2019 and expires on October 31, 2023 at an annual rent of $0.4 million.
The Winchester lease expires on September 25, 2022 at an annual rental of $0.2 million per annum. The Winchester office is currently vacant as the
Company was trying to sublet and is now considering options for utilizing the office space. The lease of the London office was for a 12-month period
and was renewed on February 1, 2020 at $0.2 million per annum for a further six months. The cost of the London office lease is recognized in the
general and administrative expenses.
Orca Exploration Group Inc. // Annual Report & Accounts 2019Strategic ReportManagement’s Discussion & AnalysisFinancial Statements 86
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
20. Contractual Obligations and Committed Capital Investments continued
Capital Commitments
The Company is adapting to the recent outbreak of the novel coronavirus (“COVID-19”) and the related economic and social disruption, volatility in
financial markets, potential disruption to global supply chains, and the ability to directly and indirectly staff the Company’s day to day operations. The
current challenging economic climate may lead to further adverse changes in cash flows, working capital levels and/or debt balances, which may also
have a direct impact on the Company’s operating results and financial position. These and other factors may adversely affect the Company’s liquidity and
ability to generate income and cash flows in the future. The current volatility in commodity prices and uncertainty regarding the timing for recovery creates
inherent challenges with the preparation of financial forecasts.
Tanzania
There are no contractual commitments for exploration or development drilling or other field development, either in the PSA or otherwise agreed, which
would give rise to significant capital expenditure at Songo Songo. Any significant additional capital expenditure in Tanzania is discretionary.
Italy
As a result of the delays in developing the Italian permit due to changes in the Italian environmental regulations, the Company relinquished its rights to
farm-in on the Central Adriatic permit in Q2 2019 and has no further capital obligations relating to Italian operations. The subsidiary companies previously
used for the Company’s Italian operations are expected to be wound up in 2020.
21. Contingencies
Upstream and Downstream Activities
The Petroleum Act, 2015 (the “Petroleum Act”) provides TPDC with exclusive rights over the distribution of gas in Tanzania. The Petroleum Act has
grandfathering provisions upholding the rights of the Company to develop and market natural gas produced under the PSA as it was signed prior to
the Petroleum Act coming into effect in 2015. However, it is still unclear how the provisions of the Petroleum Act will be interpreted and implemented
regarding upstream and downstream activities and the Company is uncertain regarding the potential impact on its business in Tanzania.
On October 7, 2016 the Government of Tanzania issued the Petroleum (Natural Gas Pricing) Regulation made under Sections 165 and 258 (I) of the
Petroleum Act. Article 260 (3) of the Petroleum Act preserves the Company’s pre-existing right with TPDC to market and sell Additional Gas together
or independently on terms and conditions (including prices) negotiated with third party Natural Gas customers. The impact of the Natural Gas Pricing
Regulation, if any, cannot be determined at this time.
TPDC Back-in
TPDC has the right under the PSA to ‘back in’ to the Songo Songo field development and convert this into a carried working interest in the PSA.
The current terms of the PSA require TPDC to provide formal notice in a defined period and contribute a proportion of the costs of any development,
sharing in the risks in return for an additional share of the gas. To date, TPDC has not contributed any costs.
Cost Recovery
TPDC conducted an audit of the historic Cost Pool and in 2011 disputed approximately $34.0 million of costs that had been recovered from the Cost
Pool from 2002 through to 2009. In 2014 a substantial portion of the disputed costs were agreed to be cost recoverable by TPDC. Under the dispute
mechanism outlined in the PSA, parties are to agree the appointment of an independent specialist to assist the parties in reaching agreement on costs
that are still subject to dispute. In 2014, prior to appointing an independent specialist, TPDC suspended the process. From 2010 to 2015 TPDC rejected
a further $18.0 million of costs. In 2016 PURA assumed the role of auditing the PSA cost pool from TPDC and for 2016 and 2017 has rejected all costs
pertaining to downstream development amounting to $5.9 million and a further $0.8 million of other costs. To date there remains a total of $45.1 million
of costs that have been queried or rejected by TPDC or PURA through the cost pool audit process.
During 2019 discussions on the disputed amounts briefly resumed with TPDC based on the most recent report published by the Tanzanian Attorney
General highlighting the lack of progress in resolving the long-standing dispute. At the time of writing this report no independent specialist has been
appointed and neither TPDC nor PURA have issued a formal dispute regarding cost recovery. If the matter is not resolved to the Company’s satisfaction,
the Company intends to proceed to arbitration via the International Centre for Settlement of Investment Disputes (“ICSID”) pursuant to the terms of the
PSA. The Company’s view is that all costs have been correctly included in the Cost Pool however should any of the costs be rejected as not being cost
recoverable, the Company would be required to retroactively adjust its share of revenue for the period under dispute.
Orca Exploration Group Inc. // Annual Report & Accounts 2019 87
As at December 31
2019
Total
1.5 1
8.3 2
50.9 3
2018
Total
0.3
1.7
42.6
21. Contingencies continued
Taxation
Amounts in $’millions
Area
Period
Reason for dispute
Principal
Interest
Pay-As-You-Earn
(“PAYE”) tax
Withholding tax
(“WHT”)
2008-16
2005-16
PAYE tax on grossed-up amounts in staff
salaries which are contractually stated as net.
WHT on services performed outside of
Tanzania by non-resident persons.
Income tax
2008-16
VAT
2008-16
Deductibility of capital expenditures and
expenses (2009, 2012, 2015 and 2016),
additional income tax (2008, 2010, 2011
and 2012), tax on repatriated income (2012),
deemed branch dividend (2015 and 2016),
foreign exchange rate application (2013 and 2015)
and underestimation of tax due (2014).
Output VAT on imported services and
SSI Operatorship services.
1.2
5.7
35.2
0.3
2.6
15.7
2.8
2.9
5.7(4
5.5
44.9
21.5
66.4
50.1
During the year and following completion of audits for the years ended December 31, 2015 and December 31, 2016, Tanzania Revenue Authority (“TRA”)
issued assessments for $15.1 million with regards to corporation tax, withholding tax, VAT, excise duty and payroll tax. With the exception of $0.1 million of
VAT and WHT on rent which the Company has conceded, the Company has objected to the other components of the assessment and requested a waiver
of the deposit required to allow a dispute of the assessment and is awaiting a TRA response. The Company has also objected to several other assessments
from TRA demanding deposits to allow the dispute to be made and is awaiting a Tax Revenue Appeals Board (“TRAB”) hearing dates. Management, with
advice from its legal counsels, has reviewed the Company’s position on the objections and appeals related to the disputed amounts and has concluded
that no provision is required with regard to these matters and that the maximum potential exposure is $66.4 million (December 31, 2018: $50.1 million).
The process of appealing assessments issued by TRA start by initially filing an appeal with TRA. If this is not successful, claims can be taken to higher
authorities starting with the TRAB, followed by an appeal to the Tax Revenue Appeals Tribunal (“TRAT”) and finally to the Court of Appeal of Tanzania
(“CAT”). Below is a summary of the status of the various assessments:
1
(a) 2008-10 ($0.3 million): Subsequent to December 31, 2019 the Company lost an appeal with CAT on the principal amount and now intends to file an application
for judicial review at CAT;
(b) 2015-16 ($1.2 million): The Company has objected to an assessment and is awaiting a TRA response;
2
(a) 2005-2009 ($1.6 million): In 2018 the CAT ruled in favor of the Company that no WHT was required on services performed outside Tanzania by non-resident persons. Waiting to see
whether TRA will file an application to object to the CAT ruling;
(b) 2010 ($0.1 million): The Company filed a Statement of Appeal with TRAT and is awaiting a hearing date. The Company has also filed an application for stay of execution with TRAT in
response to the TRA demand notice for payment of the amount in dispute and is awaiting a hearing date;
(c) 2015-16 ($6.6 million): The Company objected to several assessments in Q4 2019 issued by TRA with regards to withholding tax. The Company has objected to these assessments
and is awaiting a TRA response;
3
(a) 2008 ($0.6 million): The Company has objected to a TRA assessment that did not recognize a tax loss carried forward and is awaiting a response;
(b) 2009 ($2.6 million): The Company has filed an application for review of a CAT judgment and is awaiting a hearing date ($1.8 million). The Company objected to an amended
assessment from TRA ($0.8 million) for being time-barred and arbitrary and is awaiting a TRA response;
(c) 2010 ($2.4 million): The Company is awaiting a judgment from a TRAB hearing held in 2019;
(d) 2011 ($1.9 million): The Company is awaiting a judgment from TRAB ($1.7 million). The Company is also awaiting a TRA response on an objection of an assessment ($0.2 million);
(e) 2012 ($15.5 million): The Company has objected to TRA assessments with respect to understated revenue, timing of deductibility of capital expenditures, expenses and tax on
repatriated income. The Company is awaiting a CAT hearing date for waiver of a deposit payment required to file its objection;
(f) 2013 ($8.7 million): The Company filed an objection to TRA assessment ($0.2 million) and is awaiting a response. The Company has objected to two assessments as being time-barred
and without merit ($8.5 million) and is in the process of appealing to CAT that a deposit is required to file the objection;
(g) 2014 ($11.4 million): The Company filed an objection to a TRA assessment ($3.3 million) and is in the process of appealing to CAT that a deposit is required to file the objection.
TRA issued two additional assessments for the year for corporation tax of $5.0 million and tax on repatriated income of $3.1 million. The Company has objected to the assessments
and is awaiting a TRA response;
(h) 2015-16 ($7.8 million): The Company filed objections to TRA assessments and is awaiting a response;
4
(a) 2008-2010 ($5.4 million): The Company has filed an appeal of a TRA assessment and is awaiting a TRAT judgment;
(b) 2015-16 ($0.3 million): The Company has filed an objection to a TRA assessment and is awaiting a response.
Orca Exploration Group Inc. // Annual Report & Accounts 2019Strategic ReportManagement’s Discussion & AnalysisFinancial Statements
88
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
21. Contingencies continued
In 2016 TRA introduced significant changes in relation to the income tax treatment of the extractive sector with separate new chapters in Part V of
the Income Tax Act 2004 (“ITA, 2004”) for mining and for petroleum to be effective commencing in 2018. Further changes were subsequently made
by the Written Laws (Miscellaneous Amendments) Act, 2017 (“WLMAA, 2017”) and in particular section 36(a)(ii) of the WLMAA, 2017. The WLMAA,
2017 amended section 65M and 65N of the ITA 2004 to exclude cost oil/cost gas from inclusion in both income and expenditure. The Company is
still evaluating the tax effects of the changes as there are a number of uncertainties and ambiguities as to the interpretation and application of certain
provisions of the WLMAA, 2017. In the absence of guidance on these matters, the Company has used what it believes are reasonable interpretations and
assumptions in applying the WLMAA, 2017 for purposes of determining its tax liabilities and the results of operations, which may change as it receives
additional clarification and implementation guidance. The Company does not expect a significant impact from the changes as it is able to recover taxes
payable from the TPDC Profit Gas entitlement under the terms of the PSA.
22. Directors and Officers Emoluments
$’000
Directors
Directors
Officers
Officers
Year
2019
2018
2019
2018
Base
554
528
1,486
1,845
Stock based
compensation
expense
Bonus
–
–
–
–
273
583
1,082
2,116
Total
827
1,111
2,568
3,961
The table above provides information on compensation relating to the Company’s officers and directors. Four officers (year ended December 31,
2018: three) and six non-executive directors (year ended December 31, 2018: four) comprised the key management personnel during the year
ended December 31, 2019.
23. Change in Non-Cash Operating Working Capital
$’000
Increase in trade and other receivables
Increase in prepayments
Decrease in trade and other payables
Increase (decrease) in tax payable
Decrease in long-term receivable
Changes in non-cash operating working capital
Changes in non-cash investing working capital
Changes in non-cash working capital
As at December 31
2019
(7,552)
(5,535)
(15,365)
501
174
2018
(7,309)
(351)
(8,780)
(865)
373
(27,777)
(16,932)
(27,663)
(17,724)
(114)
792
(27,777)
(16,932)
Orca Exploration Group Inc. // Annual Report & Accounts 2019
89
24. Non-Controlling Interest
On January 16, 2018 the Company sold 7.9% (7,933 Class A common shares) of PAEM to a wholly owned subsidiary of Swala Oil & Gas (Tanzania)
plc. (“Swala”) for $15.4 million cash (net of closing adjustments) and $4.0 million of Swala convertible preference shares (“Preference Shares”) pursuant
to a share purchase agreement. The Preference Shares were issued to the Company on June 18, 2018 and entitle the Company to a 10% per annum
distribution payable 15 days after each quarter end commencing from the closing date, January 16, 2018. Payment of the quarterly distributions is at the
discretion of Swala based on funds available, however, the liability accrues if any amount is unpaid when due. If any distributable amount remains unpaid at
December 31, 2021, the Company may demand settlement and Swala is obligated to comply by transferring and returning the Class A common shares of
PAEM sold to Swala. The aggregate value of these shares will equal the amount of the outstanding distributions. As at December 31, 2019 the Company
has not received any distributions or recorded any amount receivable related to the Preference Shares.
Swala is obligated to redeem 20% of the Preference Shares for cash annually starting from December 31, 2021 until all shares are redeemed. If at any time
Swala does not redeem in cash the required number of Preference Shares, Swala is obligated to redeem the Preference Shares by transferring and returning
the Class A common shares of PAEM sold to Swala. The aggregate value of these Class A common shares will equal the amount of any outstanding
redemption.
A reconciliation of the non-controlling interest is detailed below:
$’000
Balance, beginning of year
Recorded at the date of disposition
Share of post-disposition income
Dividends paid
Balance, end of year
As at December 31
2019
(513) –
–
1,628
(952)
163
2018
178
293
(984)
(513)
During the year PAEM paid a dividend of $1.0 million (2018: $1.0 million) to Swala.
25. Subsequent Events
On January 24, 2020, the Company announced the authorization of a substantial issuer bid, the outcome of its strategic review process and its focused
strategy to grow an integrated gas business in Africa. The announcement followed the work of a special committee of the directors appointed on July 25,
2019 to review strategic alternatives.
On February 25, 2020 the Company declared a dividend of CDN$0.06 per share on each of its Class A Shares and Class B Shares for a total of $1.2 million
to holders of record as of March 31, 2020 to be paid on April 30, 2020.
On March 12, 2020 the Company announced the final results of the substantial issuer bid whereby the Company took up and paid for 7,692,297 Class B
Shares at a price of CDN$6.50 per Class B Share. This resulted in an aggregate purchase of CDN$50.0 million of Class B Shares representing 23.6% of the
Company’s issued and outstanding Class B Shares and 22.4% of the total number of the Company’s issued and outstanding shares.
On April 7, 2020 the Company announced its intention to amend the NCIB for purchase of its Class B shares initiated in June 2019. Additional purchases
made pursuant to the NCIB will not exceed 700,000 Class B Shares (subject to a maximum aggregate purchase limit of CDN$3,850,000) representing
not more than 5% of the issued and outstanding Class B Shares as at June 14, 2019 (33,505,915 Class B Shares) less 933,028 Class B Shares already
purchased under the NCIB. The NCIB will be in effect until June 14, 2020.
Orca Exploration Group Inc. // Annual Report & Accounts 2019Strategic ReportManagement’s Discussion & AnalysisFinancial Statements
90
CORPORATE INFORMATION
Board of Directors
Operating Office
Engineering Consultants
McDaniel & Associates Consultants Ltd.
Calgary, Canada
Auditors
KPMG LLP
Calgary, Canada
Website
orcaexploration.com
Lawyers
Burnet, Duckworth & Palmer LLP
Calgary, Canada
Transfer Agent
AST Trust Company
Calgary, Canada
Nigel Friend
Executive Director and Chief Executive Officer
London, UK
David W. Ross
Chairman and Non-Executive Director
Calgary, Canada
Dr Frannie Léautier
Non-Executive Director
Washington DC, United States
Jay Lyons
Non-Executive Director
Vancouver, Canada
Linda Beal
Non-Executive Director
London, UK
Ebbie Haan
Non-Executive Director
The Hague, Netherlands
Carole Wainaina
Non-Executive Director
Nairobi, Kenya
Officers
Nigel Friend
Chief Executive Officer
London, UK
Blaine Karst
Chief Financial Officer
Calgary, Canada
Andrew Hanna
Managing Director, PAET
Guildford, UK
Pierre Raillard
Head of Business Development
London, UK
PanAfrican Energy Tanzania Limited
Oyster Plaza Building, 5th Floor, Haile
Selassie Road
P.O. Box 80139, Dar es Salaam
Tanzania
Tel: + 255 22 2138737
Fax: + 255 22 2138938
Registered Office
Orca Exploration Group Inc.
Vistra Corporate Service Centre
Wickhams Cay II,
Road Town Tortola
British Virgin Islands, VG110
Investor Relations
Nigel Friend
Chief Executive Officer
nfriend@orcaexploration.com
Blaine Karst
Chief Financial Officer
bkarst@orcaexploration.com
International Subsidiaries
PanAfrican Energy Tanzania Limited
Oyster Plaza Building, 5th Floor Haile
Selassie Road
P.O. Box 80139, Dar es Salaam
Tanzania
Tel: + 255 22 2138737
Fax: + 255 22 2138938
PAE PanAfrican Energy Corporation
3rd Floor, Rogers House,
5 President John Kennedy Street
Port Louis,
Mauritius
Tel: + 230 207 8888
Fax: + 230 207 8833
Orca Exploration Group Inc. // Annual Report & Accounts 2019
Design and Production
www.carrkamasa.co.uk
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Orca Exploration Group Inc.
Wickhams Cay II
Road Town
Tortola
British Virgin Islands, VG110
orcaexploration.com