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WesternZagros Resources Ltd. (TSX VENTURE:WZR) ("WesternZagros" or "the
Company") provides its results for the periods ended September 30, 2011, key
highlights, and activities to date.
In September 2011, WesternZagros received approval from the Ministry of Natural
Resources of the Kurdistan Regional Government to start an extended well test at
Sarqala. First oil production from Sarqala-1 was achieved on October 18, 2011,
after the necessary construction and commissioning activities for the initial
facilities were completed. Production started at approximately 2,000 barrels of
oil per day ("bopd") and the Company is planning to achieve production from
Sarqala-1 of approximately 5,000 bopd by the end of 2011. In the first half of
2011, the Sarqala-1 well initially tested 40 degrees API crude oil at rates of
over 9,000 bopd and at a wellhead pressure of approximately 2,400 pounds per
square inch. The well was not stimulated and is expected to improve production
rate capability during the extended well test. WesternZagros will utilize the
information gathered from the extended well test in determining future appraisal
and development activities, including the potential for increasing production
beyond 5,000 bopd.
On October 27, 2011, WesternZagros sold its first oil produced from Sarqala-1
into the domestic market. To date, for the sales into the domestic market
WesternZagros has executed two sales contracts for total delivery of
approximately 66,500 barrels of oil priced in the range of $50 to $60 per
barrel, and under the terms of these sales contracts WesternZagros received
payments totaling $3.8 million in advance of delivery for these sales.
Deliveries under these sales agreements to November 17, 2011 have totaled
approximately 47,000 barrels of oil.
On October 25, 2011, WesternZagros closed a strategic investment with the Abu
Dhabi National Energy Company PJSC ("TAQA") whereby TAQA purchased from
WesternZagros, through a private placement, 74 million common shares of the
Company at a price of Cdn$0.63 per share for gross proceeds of Cdn$46,620,000.
TAQA now holds approximately 19.9 percent of the Company's issued and
outstanding common shares. The proceeds from the private placement will be used
towards WesternZagros's 2011/2012 capital and operating program.
On August 29, 2011, WesternZagros commenced drilling operations at the Mil
Qasim-1 well on the Garmian Block. Mil Qasim-1 is located three kilometres to
the south-east of the Company's Sarqala-1 discovery well and is targeting the
prospective Upper Fars interval. After successfully setting the 13-5/8 inch
casing at 1,615 metres in Mil Qasim-1, the Company has drilled into the Upper
Fars interval and has encountered over 88 metres of sands in the Upper Fars and
had hydrocarbon shows, both oil and gas, while drilling. WesternZagros has
completed logging these initial sands in the Upper Fars, set the 9-5/8 inch
casing at 2,128 metres and is preparing to complete drilling to the estimated
total depth of Mil Qasim-1 of 2,400 metres. Once total depth is reached,
WesternZagros plans to conduct a testing program of the Upper Fars interval.
On October 25, 2011, the Kurdamir-2 exploration well commenced drilling
operations, with expected completion by June 2012. The well is being drilled on
the flank of the Kurdamir structure approximately two kilometres from the
Kurdamir-1 discovery well. Kurdamir-2 is targeting the prospective Oligocene,
Eocene and Cretaceous reservoirs. Talisman (Block K44) B.V. ("Talisman") is the
operator of the Kurdamir-2 well. To date Kurdamir-2 has been drilled to a depth
of approximately 700 metres, where the first intermediate string of casing has
been set. WesternZagros anticipates that the drilling and testing of the first
reservoir, the Oligocene reservoir, will occur in the first quarter of 2012,
with the deeper reservoirs, the Eocene and Cretaceous reservoirs, expected to be
drilled and tested by the end of the second quarter of 2012.
During the third quarter of 2011, WesternZagros updated its contingent and
prospective resource estimates to reflect the discovery in the Jeribe reservoir
at Sarqala-1 and the additional prospects and plays identified on the Garmian
Block (Tilako, Zardi, Segrdan, Chwar and Alyan prospects, the Upper Fars Fault
Trap Play and the Upper Fars Bawanoor Saddle Play). These updates of contingent
and prospective resource estimates were audited by Sproule International
Limited. The Company's mean estimate of gross contingent resources for the
discovery at Sarqala-1 is 24 million barrels (MMbbl) of oil, or 31 million
barrels of oil equivalent (MMBOE), as of September 7, 2011. This contingent
resource number does not include the significant prospective resource potential
on the flanks of the Sarqala structure deeper than the lowest known oil at 3,485
metres, nor the potential of an extension of this reservoir interval on the
southwest flank of the structure. WesternZagros's combined mean estimate of
gross unrisked prospective oil resources for these intervals increased to 198
MMbbl, or 250 MMBOE, as of September 7, 2011. Previously the mean estimate of
gross unrisked prospective resources for the Jeribe reservoir of Sarqala-1 was
101 MMbbl, or 137 MMBOE. As at January 14, 2011 Western Zagros's mean estimate
of gross unrisked prospective oil resources is 705 MMbbl in the Upper Fars Fault
Trap Play, 120 MMbbl in the Bawanoor Saddle Play, 127 MMbbl in the Zardi
prospect, 93 MMbbl in the Segrdan prospect, 25 MMbbl in the Chwar prospect, 17
MMbbl in the Alyan prospect, and 13 MMbbl in the Tilako prospect as of July 19,
2011. With the completion of these assessments the combined mean estimate of
prospective resources on the Company's two contract areas in Kurdistan is 2.3
billion barrels of oil, or 3.7 billion barrels of oil equivalent. Further
details on these resource assessments can be found in the material change
reports of the Company dated September 14, 2011 and July 19, 2011.
Building on the significant discovery made at Sarqala-1, WesternZagros during
the first half of 2012 will begin to design, plan and procure the necessary long
lead materials and services for a 3D appraisal program, an appraisal well on
Sarqala targeting the Jeribe reservoir ("Sarqala-2") and an exploration well on
the Garmian Block to target the Oligocene reservoir ("Hasira-1") that would also
appraise the Jeribe reservoir from the Sarqala structure. WesternZagros
anticipates that the 3D seismic, Sarqala-2 and Hasira-1 would commence in the
second half of 2012, dependent on the availability of the long lead materials
and services, including drilling rigs.
Commenting on the third quarter results and subsequent events, WesternZagros's
Chief Executive Officer Simon Hatfield said, "We have delivered strong operating
performance through the achievements of the last few months, including our first
sale of oil from the Sarqala extended well test, securing the necessary funding
for our remaining commitments, and by spudding both the Mil Qasim-1 and
Kurdamir-2 wells. Our current objectives are increasing oil production from
Sarqala-1, completing the drilling and testing at the Mil Qasim-1 well and
proving up our prospective oil resources with the Kurdamir-2 well."
Management's Discussion and Analysis
The following management's discussion and analysis ("MD&A") reviews
WesternZagros Resources Ltd.'s ("WesternZagros" or the "Company") financial
condition, activities and results of operations for the three and nine month
periods ended September 30, 2011. It should be read in conjunction with the
unaudited condensed consolidated interim financial statements prepared under
International Financial Reporting Standards for the period ended September 30,
2011, and the audited consolidated financial statements for the year ended
December 31, 2010 prepared under Canadian Generally Accepted Accounting
Principles ("GAAP") and the related notes. The effective date of this MD&A is
November 18, 2011.
Forward-Looking Information
This discussion offers management's analysis of the financial and operating
results of WesternZagros and contains certain forward-looking statements
relating to, but not limited to, operational information, future drilling plans
and testing programs and the timing associated therewith, future production and
sales, estimated commitments under the Company's amended Production Sharing
Contract for the Kurdamir area ("Kurdamir PSC") and Production Sharing Contract
for the Garmian area ("Garmian PSC"), anticipated capital and operating budgets,
anticipated working capital and estimated costs. Forward-looking information
typically contains statements with words such as "anticipate", "estimate",
"expect", "potential", "could", or similar words suggesting future outcomes. The
Company cautions readers and prospective investors in the Company's securities
to not place undue reliance on forward-looking information as, by its nature, it
is based on current expectations regarding future events that involve a number
of assumptions, inherent risks and uncertainties, which could cause actual
results to differ materially from those anticipated by WesternZagros. Readers
are also cautioned that disclosed test rates may not be indicative of ultimate
production levels.
Forward looking information is not based on historical facts but rather on
management's current expectations and assumptions regarding, among other things,
outcomes of future well operations, plans for and results of extended well tests
and drilling activity, future capital and other expenditures (including the
amount, nature and sources of funding thereof), future economic conditions,
future currency and exchange rates, continued political stability, timely
receipt of any necessary government or regulatory approvals, the Company's
continued ability to employ qualified staff and to obtain equipment in a timely
and cost efficient manner, the participation of the Company's co-venture
partners in exploration activities and the timing of and costs reimbursed by the
third party participant interest assignment in the Garmian PSC. In addition,
budgets are based upon WesternZagros's current exploration and appraisal plans
and anticipated costs, both of which are subject to change based on, among other
things, the actual outcomes of well operations and the results of drilling and
testing activity, unexpected delays, availability of future financing and
changes in market conditions. Although the Company believes the expectations and
assumptions reflected in such forward-looking information are reasonable, they
may prove to be incorrect. Forward-looking information involves significant
known and unknown risks and uncertainties. A number of factors could cause
actual results to differ materially from those anticipated by WesternZagros
including, but not limited to, risks associated with the oil and gas industry
(e.g. operational risks in exploration and production; inherent uncertainties in
interpreting geological data; changes in plans with respect to exploration or
capital expenditures; interruptions in operations together with any associated
insurance proceedings; denial of any portion of the insurance claims; the
uncertainty of estimates and projections in relation to costs and expenses and
health, safety and environmental risks), the risk of commodity price and foreign
exchange rate fluctuations, the uncertainty associated with negotiating with
foreign governments and risk associated with international activity.
In addition, statements relating to "resources" contained herein are deemed to
be forward-looking statements, as they involve the implied assessment, based on
certain estimates and assumptions, that the resources described can be
economically produced in the future. Terms related to resource classifications
referred to herein are based on the definitions and guidelines in the Canadian
Oil and Gas Evaluation Handbook which are as follows. "Prospective resources"
are those quantities of petroleum estimated, as of a given date, to be
potentially recoverable from undiscovered accumulations by application of future
development projects. Prospective resources have both an associated chance of
discovery (geological chance of success) and a chance of development (economic,
regulatory, market, facility, corporate commitment or political risks). The
chance of commerciality is the product of these two risk components. The
estimates referred to herein have not been risked for either the chance of
discovery or the chance of development. There is no certainty that any portion
of the prospective resources will be discovered. If a discovery is made, there
is no certainty that it will be developed or, if it is developed, there is no
certainty as to the timing of such development or that it will be commercially
viable to produce any portion of the prospective resources. "Contingent
resources" are those quantities of petroleum estimated, as of a given date, to
be potentially recoverable from known accumulations using established technology
or technology under development, but which are not currently considered to be
commercially recoverable due to one or more contingencies. Contingent resources
have an associated chance of development (economic, regulatory, market and
facility, corporate commitment or political risks).
The estimates referred to herein have not been risked for the chance of
development. There is no certainty that the contingent resources will be
developed and, if developed, there is no certainty as to the timing of such
development or that it will be commercially viable to produce any portion of the
contingent resources. All resource estimates presented are gross volumes for the
indicated reservoirs, without any adjustment for the Company's working interest
or encumbrances. A barrel of oil equivalent (BOE) is determined by converting a
volume of natural gas to barrels using the ratio of 6 million cubic feet (Mcf)
to one barrel. BOEs may be misleading, particularly if used in isolation. A BOE
conversion ratio of 6 Mcf:1 BOE is based on an energy equivalency conversion
method primarily applicable at the burner tip and does not represent a value
equivalency at the wellhead. The Company's material change reports filed on
SEDAR at www.sedar.com and dated December 16, 2010, January 17, 2011, February
22, 2011, July 19, 2011, and September 14, 2011 contain additional detail on the
information used in the resource assessments and include the risks and level of
uncertainty associated with the recovery and development of the resources, the
significant positive and negative factors relevant to the estimates and, in
respect of contingent resources, the specific contingencies which prevent the
classification of the resources as reserves. In addition, combined mean
estimates of resources which are presented in this MD&A are an arithmetic sum of
the mean estimates for individual reservoirs and each such mean estimate is the
average from the probabilistic assessment that was completed for the reservoir.
Readers should refer to the foregoing material change reports for a detailed
breakdown of the high (P10), low (P90) and best (P50) estimates for each of the
individual reservoir assessments.
Readers are cautioned that the foregoing list of important factors is not
exhaustive. The forward-looking statements contained in this MD&A are made as of
the date of this MD&A and, except as required by law, WesternZagros does not
undertake any obligation to update publicly or to revise any of the included
forward-looking statements, whether as a result of new information, future
events or otherwise. The forward-looking statements contained in this MD&A are
expressly qualified by this cautionary statement. See the Risk Factors section
of this MD&A for a further description of these risks and uncertainties facing
WesternZagros. Additional information relating to WesternZagros is also
available on SEDAR at www.sedar.com, including the Company's Annual Information
Form.
Overview
WesternZagros is a publicly-traded, Calgary-based, international oil and gas
company engaged in acquiring properties and exploring for, developing and
producing crude oil and natural gas in Iraq. WesternZagros holds two Production
Sharing Contracts ("PSCs") with the Kurdistan Regional Government ("KRG") in the
Kurdistan Region of Iraq that are both on trend with, and adjacent to, a number
of prolific historic oil and gas discoveries. The Kurdamir and Garmian PSCs each
govern separate contract areas (collectively referred to as the "PSC Lands").
The Garmian contract area (1,780 square kilometres) is operated by
WesternZagros. The Kurdamir contract area (340 square kilometres) is operated by
Talisman with a 40 percent working interest. WesternZagros holds a 40 percent
working interest in both PSCs. The KRG holds a 20 percent working interest in
both PSCs. The remaining 40 percent third party participant interest ("TPPI") of
the Garmian PSC is held pending assignment by the KRG to a third party
participant.
Basis of Presentation
Reporting and Functional Currency
The Company has prepared its September 30, 2011 unaudited Condensed Consolidated
Interim Financial Statements in accordance with International Financial
Reporting Standards ("IFRS"). December 31, 2011 will mark the Company's first
annual reporting date under IFRS. Accordingly, the comparative information for
2010, including that utilized in this MD&A, has been prepared in accordance with
the Company's IFRS accounting policies. Please refer to "Adoption of IFRS"
section of this MD&A for further descriptions of this impact.
The reporting and functional currency of the Company is the United States
("U.S.") dollar. All references herein to US$ or to $ are to United States
dollars and references herein to Cdn$ are to Canadian dollars.
Highlights
WesternZagros is currently exploring for crude oil and natural gas in the
Kurdistan Region of Iraq and is in the exploration phase on its PSC Lands.
WesternZagros's highlights and activities for the third quarter of 2011 and to
November 18, 2011 include the following.
HSE&S
-- On October 27, 2011, WesternZagros's operations celebrated having worked
one full year without a recordable injury incident. To this date, over
1.2 million hours of work have been performed safely. The dedication to
safety demonstrated by all of the Company's employees and contractors
has produced a work safety culture ranked as world class.
-- WesternZagros continues to integrate health, safety, environmental and
security matters into its business decisions and remains committed to
playing a leadership role in this regard. Positive safety results
indicate that the Company is on the right track.
-- WesternZagros has achieved a total of 387 days without any Lost Time
Incidents ("LTIs") to November 17, 2011.
Production
-- On October 18, 2011, first oil production from the Sarqala-1 extended
well test was achieved. Production started at approximately 2,000
barrels of oil per day ("bopd") and is anticipated to increase towards
5,000 bopd by 2011 year end. The Sarqala-1 well initially tested 40
degree API crude oil at rates of over 9,000 bopd at a wellhead pressure
of approximately 2,400 pounds per square inch. The well was not
stimulated and is expected to continue to clean up and increase
production capability during the extended well test.
-- On October 27, 2011, WesternZagros sold its first oil produced from
Sarqala-1 into the domestic market. To date, for the sales into the
domestic market, WesternZagros has executed two sales contracts for
total delivery of approximately 66,500 barrels of oil priced in the
range of $50 to $60 per barrel, and under the terms of these sales
contracts WesternZagros received payments totaling $3.8 million in
advance of delivery for these sales. Deliveries under these sales
agreements to November 17, 2011 have totaled approximately 47,000
barrels of oil.
Operations
-- Mil Qasim-1, the Company's third exploration well, commenced drilling
operations on August 29, 2011, on the Garmian Block in the Kurdistan
Region of Iraq. After successfully setting the 13-5/8"casing at 1,615
metres in Mil Qasim-1, WesternZagros has drilled into the Upper Fars
interval and has encountered over 88 metres of sands in the Upper Fars
and had hydrocarbon shows, both oil and gas, while drilling.
WesternZagros has completed logging these initial sands in the Upper
Fars, set the 9-5/8" casing at 2,128 metres and is preparing to complete
drilling to the estimated total depth of Mil Qasim-1 of 2,400 metres.
Once total depth is reached, WesternZagros plans to conduct a testing
program of the Upper Fars interval.
-- The Kurdamir-2 exploration well commenced drilling operations on October
25, 2011, and is anticipated to be completed by June 2012. The well is
being drilled on the flank of the Kurdamir structure approximately two
kilometres from the Company's Kurdamir-1 discovery well and the well
will target the Oligocene, Eocene and Cretaceous reservoirs. Talisman is
the operator of the Kurdamir-2 well. To date Kurdamir-2 has been drilled
to a depth of approximately 700 metres, where the first intermediate
string of casing has been set. WesternZagros anticipates that the
drilling and testing of the first reservoir, the Oligocene reservoir,
will occur in the first quarter of 2012, with the deeper reservoirs, the
Eocene and Cretaceous reservoirs, expected to be drilled and tested by
the end of the second quarter of 2012.
Exploration
-- In the third quarter of 2011, Sproule International Limited ("Sproule")
completed an independent audit of the Company's contingent and
prospective resource estimates for the Jeribe/Upper Dhiban reservoir
interval at Sarqala-1. As at September 7, 2011, the Company estimates
gross unrisked contingent oil resources for this interval of 9 MMbbl
(low estimate), 21 MMbbl (best estimate), 44 MMbbl (high estimate) and
24 MMbbl (mean estimate). Contingent resources were assigned over a 66
metre gross pay zone from the top of the Sarqala reservoir down to 3,485
metres as determined by wireline logs and production testing. This
contingent resource number does not include the significant prospective
resource potential on the flanks of the Sarqala structure deeper than
the lowest known oil at 3,485 metres, nor the potential of an extension
of this reservoir interval on the southwest flank of the structure. The
gross unrisked prospective resources in the Sarqala structure deeper
than the lowest know oil at 3,485 metres are 17 MMbbl (low estimate), 49
MMbbl (best estimate), 125 MMbbl (high estimate) and 63 MMbbl (mean
estimate). The gross unrisked prospective resources in the potential
extension of the Jeribe reservoir on the southwest flank of structure
are 14 MMbbl (low estimate), 87 MMbbl (best estimate), 304 MMbbl (high
estimate) and 135 MMbbl (mean estimate). These estimated resources are
in addition to the Company's prior audited estimates of prospective
resources for the deeper reservoirs at Sarqala and the prior audited
estimates of contingent resources and prospective resources for the
Company's other prospects on the PSC Lands, including Mil Qasim and
Kurdamir.
-- In the third quarter of 2011, Sproule completed a further independent
audit of the Company's resource assessments on the PSC Lands. The audit
included prospects identified on the Garmian Block with Jeribe, Mio-
Oligocene, Shiranish and Eocene reservoirs (Tilako, Zardi, Segrdan,
Chwar, Alyan) and two Upper Fars plays (Fault Trap Play, Bawanoor
Saddle). As at July 19, 2011, the combined mean estimate of gross
unrisked prospective resources for these prospects was 1,099 million
barrels of oil or 1,798 million barrels of oil equivalent when gas and
condensate prospective resources are included.
-- With the completion of these additional assessments, the combined mean
estimate of prospective resources on the Company's two contract areas in
Kurdistan is 2.3 billion barrels of oil, or 3.7 billion barrels of oil
equivalent. Further details on these resource assessments can be found
in the material change reports of the Company dated September 14, 2011
and July 19, 2011.
-- WesternZagros continues to compile seismic data and information from
wells adjacent to its PSC Lands to integrate with its existing large
technical database and aid further in the definition and upgrade of its
prospects and leads inventory. Talisman is expected to complete its
Topkhana-1 well, which is located on the neighbouring Topkhana Block
that is currently held by Talisman and the KRG, in the fourth quarter of
2011 and has tested the Oligocene reservoir in the prospect, though
details of the results are not known. The Topkhana well results will
impact the interpretation of the Kurdamir-Topkhana megastructure trap
and the attractiveness of drilling offsetting prospects on the Garmian
Block, notably Qulijan.
Financial
-- As at September 30, 2011, WesternZagros had $20.4 million in working
capital.
-- On October 25, 2011, WesternZagros closed a strategic investment with
the Abu Dhabi National Energy Company PJSC ("TAQA") whereby TAQA
purchased from WesternZagros, through a private placement, 74 million
common shares of the Company at a price of Cdn$0.63 per share for gross
proceeds of Cdn$46,620,000. TAQA now holds approximately 19.9 percent of
the Company's issued and outstanding common shares. The proceeds from
the private placement will be used towards WesternZagros's 2011/2012
capital and operating program.
-- For the nine months ended September 30, 2011, WesternZagros's share of
capital expenditures, associated with its Garmian and Kurdamir PSC
activities and other capitalized costs was $58.5 million (net of
disposals and prior to the impact of changes in non-cash investing
capital). Year-to-date expenditures for 2011 included $42.3 million of
drilling-related costs; $1.8 million for appraisal activities; $1.5
million of geological and geosciences related work; $4.0 million of
supervision and field office costs; $1.5 million of PSC-related
expenditures; and $7.4 million for corporate related activities. These
expenditures reflect the requirement that WesternZagros currently fund
100 percent of the activities on the Garmian Block, with the Company to
recover the third party participant's share of these costs when the KRG
assigns the remaining interest in the Garmian Block.
Insurance
-- WesternZagros has concluded its insurance claim for a total of $45
million relating to the Kurdamir-1 well. The final proceeds of $4.4
million were received during the third quarter of 2011. The Company and
its insurers have also renewed the Company's insurance policy for the
drilling of the Kurdamir-2 well. The terms of the policy include an
increase in the net aggregate limit from $45 million to $75 million.
Corporate
-- On October 27, 2011, David Cook, TAQA Executive Officer and Head of
Oil and Gas, was appointed to the WesternZagros Board of Directors. Mr.
Cook has in excess of 20 years of experience in the upstream oil and gas
sector through a variety of global technical, commercial and managerial
positions based from the United States, United Kingdom, and Russia, as
well as board directorships.
Political
-- Although the Iraq federal laws have yet to be enacted to address the
future organization of Iraq's petroleum industry or the sharing of
petroleum and other revenues within Iraq, in February 2011 an interim
agreement was reached between the KRG and the federal government of Iraq
with respect to the export and sale of crude oil from Kurdistan. The
agreement is reported to provide 50 percent of the revenues from such
sales to the KRG in order to reimburse the operators for costs
associated with the producing fields. The KRG has confirmed receipt of
two payments to date under this agreement, with the first payment
received from the federal government equalling $243 million for
production from February and March and distributed to the operators in
June. The second payment to the KRG pursuant to this interim agreement
occurred in the third quarter of 2011, with the KRG confirming it has
received $207 million from the federal government for production from
the second quarter of 2011. According to statements made by the KRG, a
further approximate $1 billion is owing for the oil exported to date
from Kurdistan.
-- The Parliament Oil and Energy Committee ("POEC") released a draft
federal petroleum law in August 2011 that was based upon the 2007 draft
federal petroleum law (the "2007 Draft Law") that was supported by the
KRG and formed the basis for Kurdistan's Oil and Gas Law enacted in
August 2007. The draft released by the POEC provided for greater
involvement of the regions of Iraq in administering and issuing
contracts related to oil and gas activities and was supported by both
the KRG and the Kurdistan Alliance. The federal Council of Ministers, or
Cabinet, subsequently released its draft of a federal petroleum law
which centralized authority at the federal level and diminished the
authority of the regions of Iraq. In October 2011, Iraqi Prime Minister
Nuri Al-Maliki and Prime Minister Barham Salih, of the KRG, sidelined
the two controversial oil and gas versions presented in August 2011 and
agreed to, by the end of 2011, either amend the 2007 Draft Law, with
agreement by all political factions, or adopt the 2007 Draft Law as is.
Corporate Social Responsibility
-- WesternZagros aspires to be an industry leader with respect to corporate
social responsibility. The Company continues to focus on four key
corporate social responsibility initiatives in the PSC Lands of
Kurdistan, namely, local employment, water supply, education and health
care. Activities in the third quarter of 2011 included:
-- An ongoing Environmental Impact Assessment data collection
process for the Garmian Block;
-- Drilling and repairing water wells in several villages; digging
sumps, pits and irrigation channels in several rural communities
that did not have any other reliable sources of drinking water;
and completion of water projects in Qulijan Sarhad village and
Shakal village;
-- Commencement of a Community Health Awareness Program with doctors
giving presentations on preventative measures in Hasira and Mil
Qasim villages; and completion of major refurbishments to the
medical clinic in Aziz Qadr village;
-- Completion of approximately twenty earthworks projects in
surrounding villages providing infrastructure for new-build
housing, road/access improvement and sanitation upgrades;
significant upgrading of roads to both Mil Qasim and Hasira
villages;
-- Refurbishment and upgrading of six primary schools in local
villages; and ongoing purchasing and distribution of sports
equipment throughout the Garmian region; and partnering with
Heartland Alliance to facilitate 'mobile literary bus'
educational visits to villages in Sarqala sub-district.
WesternZagros also continues to place a strong, yet safe, emphasis on the
incremental development of local personnel capacity:
-- Local Garmian village personnel are being trained and promoted to
positions within drilling crews and within the extended well testing
operations;
-- Additional Garmian personnel trained and appointed as Health, Safety and
Environment Technicians and Material & Logistics Supervisors; and
-- All Garmian local rig labourers and rig crew completed 'Rig Pass'
training and certification.
General and Administrative Expenses
For the three and nine months ended September 30, 2011, WesternZagros expensed
$2.0 million and $5.6 million in general and administrative expenses ("G&A"),
respectively, as compared to $0.9 million and $4.2 million for the comparable
periods in 2010. G&A costs were higher in 2011 due to increased personnel costs
and a relatively stronger Canadian dollar in 2011, which impacts a large portion
of the Company's G&A expenditures.
For the nine months ended September 30, 2011, WesternZagros capitalized $3.1
million of G&A (2010: $1.4 million), including the capitalized portion of
share-based payments. The amounts capitalized are directly related to the
supervision of the Company's exploration and evaluation activities. The increase
in 2011 reflects the current requirement that WesternZagros fund 100 percent of
the activities on the Garmian Block, prior to assignment of the TPPI by the KRG.
For the three months ended September 31, 2011, WesternZagros capitalized $1.0
million of G&A (2010: $0.5 million), including the capitalized portion of
share-based payments.
Depreciation, Depletion and Amortization (DD&A)
For the three and nine months ended September 30, 2011, WesternZagros had $0.1
million and $0.2 million, respectively, of depreciation related to certain
administrative assets (2010: $0.1 and $0.4 million respectively). No depletion
of exploration and evaluation expenditures will be recognized until such time
that the technical feasibility and commercial viability has been demonstrated
and development has been sanctioned, in which case the assets would then be
tested for impairment and reclassified as development expenditures and then
depleted on a unit of production basis.
Share based payments
The Company recognized the expense associated with share based payments on a
graded vesting basis for all stock options granted. For the quarter ended
September 30, 2011, WesternZagros recorded $0.2 million in stock based
compensation expense (2010: $0.1 million) and $0.2 million as part of
capitalized G&A (2010: negligible), with a corresponding increase to contributed
surplus. For the nine months ended September 30, 2011, WesternZagros recorded
$0.6 million in stock-based compensation expense (2010: $0.6 million), and $0.5
million as part of capitalized G&A (2010: negligible).
Foreign Exchange
WesternZagros adopted the U.S. dollar as its measurement and reporting currency
since the majority of its expenditures are, or will be, directly or indirectly
denominated in U.S. dollars and to facilitate a more direct comparison to other
international crude oil and natural gas exploration and development companies.
As at September 30, 2011, WesternZagros held approximately 90 percent of its
cash and cash equivalents in U.S. dollar accounts and U.S. dollar overnight term
deposits. The Company also has certain assets and liabilities in currencies
other than the U.S. dollar (mainly Canadian dollars). For financial statement
presentation purposes, WesternZagros converts other currencies to U.S. dollars
at the end of each period resulting in foreign exchange gains and losses.
Canadian dollar balances are held for the purpose of funding WesternZagros's
Canadian dollar expenditures, which are mainly related to the costs associated
with general and administrative costs for its head office and certain
drilling-related services and tangible equipment procured from Canadian
suppliers. For the quarter ended September 30, 2011, WesternZagros recorded a
foreign exchange loss of $0.3 million relating to these conversions, compared to
a $0.1 million foreign exchange gain for the quarter ended September 30, 2010.
For the nine months ended September 30, 2011, WesternZagros recorded a foreign
exchange loss of $0.3 million, compared to a $0.1 million loss for the nine
months ended September 30, 2010. As at September 30, 2011, had the U.S. Dollar
changed by one percent against the Canadian Dollar, with all other variables
held constant, the Company's foreign exchange gain or loss would have affected
by approximately $22,000.
Income Taxes
For the quarter ended September 30, 2011, WesternZagros had a net income tax
recovery of $0.2 million (2010: $0.1 million recovery), comprised of $0.3
million of current income tax recovery (2010: $0.1 million recovery) and a $0.1
million deferred income tax expense (2010: negligible). For the nine months
ended September 30, 2011, WesternZagros had a net income tax recovery of $1.1
million (2010: $0.9 million) comprised of current income tax recovery of $1.2
million and partially offset by a $0.1 million deferred tax expense (2010: $1.0
million current income tax recovery and $0.1 million deferred tax expense). The
current tax recovery relates to the expected recovery of taxes incurred in 2008
on realized foreign exchange gains and losses in WesternZagros's wholly-owned
Canadian subsidiary through the utilization of share issuance costs as well as
the associated G&A costs incurred by the subsidiary.
Other Income
WesternZagros's other income is comprised entirely of interest earned on cash
and cash equivalents and short-term investment balances. Interest of $0.02
million was earned for the quarter ended September 30, 2011 compared to $0.04
million for the quarter ended September 30, 2010. Interest of $0.07 million was
earned for the nine months ended September 30, 2011, compared to $0.07 million
for the nine months ended September 30, 2010.
Net Loss
For the quarter ended September 30, 2011, WesternZagros recorded a net loss of
$2.0 million compared to a $0.8 million loss for the quarter ended September 30,
2010. For the nine months ended September 30, 2011, WesternZagros recorded a net
loss of $4.9 million (2010: $3.8 million loss). WesternZagros is an early stage
exploration enterprise and, apart from its working interest in the Kurdamir and
Garmian PSCs and cash and cash equivalents, the Company has no other significant
assets. The increase in G&A costs and foreign exchange losses for the first nine
months of 2011 was offset by lower depreciation and increased tax recoveries as
compared to the same period of 2010.
Capital Expenditures
For the three months ended September 30, 2011, WesternZagros's share of capital
expenditures associated with its activities and other capitalized costs was
$24.7 million (prior to the impact of changes in non-cash investing capital).
Expenditures for the third quarter of 2011 included $12.7 million of
drilling-related costs; $1.8 million for appraisal activities; $0.6 million of
geological and geosciences related work; $1.7 million of supervision and field
office costs; $0.8 million of other PSC related expenditures; and $7.1 million
for corporate activities. These expenditures reflect the requirement that
WesternZagros currently fund 100 percent of activities on the Garmian Block.
By comparison, WesternZagros's share of exploration and evaluation expenditures
for the quarter ended September 30, 2010 associated with its activities was
$20.5 million, prior to insurance recoveries. Capital expenditures for the third
quarter of 2010 included $19.0 million of drilling-related costs; $0.3 million
of geological and geosciences-related work; $0.7 million for related field
office and supervision costs in support of operations; $0.3 million of
PSC-related costs; and $0.2 million for corporate-related activities.
For the nine months ended September 30, 2011, WesternZagros's share of capital
expenditures associated with its activities and other capitalized costs was
$58.5 million (net of disposals and prior to the impact of changes in non-cash
investing capital). Expenditures included $42.3 million of drilled-related
costs; $1.8 million for appraisal activities; $1.5 million of geological and
geosciences related work; $4.0 million of supervision and field office costs;
$1.5 million of other PSC-related expenditures; and $7.4 million for corporate
activities. These expenditures reflect the requirement that WesternZagros
currently fund 100 percent of activities on the Garmian Block.
By comparison, WesternZagros's share of exploration and evaluation expenditures
for the nine months ended September 30, 2010 associated with its activities was
$49.6 million, prior to insurance recoveries. Expenditures included $46.2
million of drilling-related costs; $0.7 million of geological and geosciences
work; $1.9 million of supervision and field office costs; $0.3 million of
PSC-related expenditures; and $0.5 million for corporate activities.
WesternZagros capitalized $3.1 million of G&A expenses, including $0.5 million
of stock-based compensation, for the nine months ended September 30, 2011,
compared to capitalizing $1.4 million of G&A expenses, including a negligible
amount of stock-based compensation, for the nine months ended September 30,
2010. For the three months ended September 31, 2011, the Company capitalized
$1.0 million of G&A expenses (2010: $0.5 million), including $0.2 million of
stock-based compensation (2010: negligible amount).
Subsequent to September 30, 2011, the Company commenced production from an
extended well test at Sarqala-1. Prior to sanctioning development any production
is considered to be test production and any associated proceeds, net of
applicable costs, received will be credited to exploration and evaluation
expenditures.
Kurdamir and Garmian Production Sharing Contracts: Summary and Commitments
Under the terms of its Kurdamir and Garmian PSCs, WesternZagros has a 40 percent
working interest in each PSC and the KRG has a 20 percent working interest which
is carried by WesternZagros. The remaining 40 percent TPPI in the Kurdamir PSC
is held by Talisman and the remaining 40 percent TPPI in the Garmian PSC is held
by the KRG to be assigned to another third party participant. WesternZagros, the
KRG and Talisman for the Kurdamir PSC and WesternZagros, the KRG, and the third
party participant for the Garmian PSC, are collectively the "Contractor Groups."
WesternZagros's remaining PSC commitments are summarized in the following table:
----------------------------------------------------------------------------
Kurdamir PSC Garmian PSC
----------------------------------------------------------------------------
First exploration
sub-period
(expires) June 30, 2012 December 31, 2011
----------------------------------------------------------------------------
Exploration
obligation Mil Qasim-1 exploration
(remaining) Kurdamir-2 well
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Second exploration
sub-period Additional two years Additional two years
----------------------------------------------------------------------------
Exploration
obligation One appraisal well One exploration well
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Other extensions Six month extension One year extension
----------------------------------------------------------------------------
Work commitments One appraisal well One exploration well
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Economic terms Unchanged Unchanged
----------------------------------------------------------------------------
PSC payments Additional Capacity
Building Support Payment Additional Capacity
payable equal to 3% of Building Support Payment
WesternZagros Profit payable equal to 3% of
Oil. Continuation of WesternZagros Profit
previous annual Oil. Annual payments 50%
payments. of previous payments.
----------------------------------------------------------------------------
Operator Talisman WesternZagros
----------------------------------------------------------------------------
Working interest WesternZagros 40% WesternZagros 40%
Talisman 40% Unassigned TPPI 40%(ii)
KRG 20% (i) KRG 20% (i)
----------------------------------------------------------------------------
Contract area 340 km2 1,780 km2
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(i) WesternZagros funds the KRG costs, ultimately to be recovered by
WesternZagros through the KRG's share of Cost Recovery Oil. For the Garmian
Block, the current PSC requires that the third party participant will be
required to pay for half of the KRG's carried share. This will be confirmed once
the TPPI is assigned.
(ii) WesternZagros initially funds the 40% of the costs for the third party
participant until the TPPI is assigned by the KRG. The amounts funded by
WesternZagros for the TPPI will be repaid upon assignment of this interest.
As at September 30, 2011, the Company estimates expenditures of approximately
$52 million to meet its remaining commitments for the first exploration
sub-periods under the PSCs. This estimate includes the Company's current 100
percent funding requirement for the remaining costs associated with drilling the
Mil Qasim-1 commitment well by December 31, 2011; the Company's 60 percent
funding requirement of costs for drilling the Kurdamir-2 commitment well by June
30, 2012; the associated supervision and local office support costs related to
both drilling operations; the Company's annual funding requirements for certain
technological, logistical, recruitment and training support under its PSCs; and
other commitments related to the Kurdamir Block activities.
Kurdamir and Garmian Production Sharing Contracts: Commercial Terms
Under the Kurdamir and Garmian PSCs, the sharing of oil occurs as follows: of
the total oil produced, operations oil is available to the Contract Group for
use in carrying out its obligations under the PSCs; the remaining oil is subject
to a 10 percent royalty payable to the KRG (the residual is considered to be
"net available oil"). Up to 45 percent of the net available oil is available for
cost recovery with the remainder as "profit oil". Costs subject to cost recovery
include all costs and expenditures incurred by the Contractor Group for
exploration, development, production and decommissioning operations, as well as
any other costs and expenditures incurred directly or indirectly with these
activities. The portion of profit oil available to the Contractor Group is based
on a sliding scale from 35 percent to 16 percent depending on a calculated
R-Factor. The R-Factor is established by reference to the ratio of cumulative
revenues over cumulative costs. When the ratio is below one, the Contractor
Group is entitled to 35 percent of the profit oil. The percentage is then
reduced on a linear sliding scale to a minimum of 16 percent at an R-Factor
ratio of two or greater.
The production sharing terms for natural gas are the same as the oil production
sharing terms except that the net available gas available for cost recovery is
55 percent and the profit sharing component is on a different scale. For natural
gas, the portion of profit natural gas available for the Contractor Group is
based on a sliding scale from 40 percent to 20 percent depending on a calculated
R-factor. The R-Factor is established by reference to the ratio of the
Contractor Group's cumulative revenue over cumulative costs. When the R-Factor
is below one, the Contractor Group is entitled to 40 percent of the profit oil.
The Contractor Group's percentage is then reduced on a linear scale to a minimum
of 20 percent at a ratio of 2.75 or greater.
As at September 30, 2011, the Company had approximately $129 million related to
the Garmian PSC and $98 million relating to the Kurdamir PSC, both net to
WesternZagros, of recoverable costs available that may ultimately be recovered
from future crude oil or natural gas sales in accordance with the PSCs.
Production
The Kurdamir and Garmian PSCs provide the Contractor Group with the exclusive
right to develop and produce any commercial discoveries. The development period
for producing a commercial discovery is an initial term of 20 years from the
date of declaring a commercial discovery with a further automatic right to a
five year extension. If commercial production is possible at the end of the last
period then the Contractor Group shall be entitled to an extension of a further
five years under the same terms as in the applicable PSC if a request is made by
the Contractor Group at least six months before the end of the first five year
extension.
Pursuant to the terms of the Kurdamir and Garmian PSCs, WesternZagros maintains
the right to market its share of oil on the world market. There is an obligation
under the Kurdamir and Garmian PSCs to make oil production available to meet
regional market demand. The price of such oil is a market-based price based on a
basket of crudes. Subsequent to September 30, 2011, the Company signed two
separate oil sales contracts, with the approval from the Ministry, to sell
initial test production from Sarqala-1 to local buyers based on an auction
process within local markets at prices between $50 and $60 per barrel. With
continued approval from the Ministry of Natural Resources of the KRG, any future
sales contracts for ongoing test production from Sarqala-1 could continue to be
sold via the local auction market process or alternatively sold for export
depending on local demand.
Pursuant to the terms of the Kurdamir and Garmian PSCs, the price for natural
gas is based on local commercial value and Iraq tariffs. However, limited
markets exist for natural gas within Iraq and there is limited infrastructure
for export. The KRG has as one of its priorities the expansion of its
electricity generation and is pursuing a number of projects that may expand
these markets and the demand for natural gas.
Other Commitments
The Company has entered into various exploration-related contracts, including
contracts for drilling equipment, services, tangibles and consulting service
contracts. The following table summarizes the estimated commitments in relation
to these exploration-related contracts relating to the Garmian PSC and other
contractual obligations at September 30, 2011:
For the Years Ending December 31,
2011 2012 2013 2014 2015+ Total
----------------------------------------------------------------------------
Exploration $ 1,437 - - - - $ 1,437
Office $ 162 $ 602 $ 559 $ 456 - $ 1,779
----------------------------------------------------------------------------
$ 1,599 $ 602 $ 559 $ 456 - $ 3,216
----------------------------------------------------------------------------
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Legal Proceedings
From time to time, the Company may become involved in legal or administrative
proceedings in the normal conduct of business. The Company is currently in
disputes with two contractors, one is related to compensation owing to a
contractor under a terminated agreement and the other is over a potential breach
of contract by a contractor related to services provided to the Company.
Although there has been no formal claim of monetary damages to date in either of
the matters, the Company does not currently expect that the matters,
individually or in aggregate, would have a material impact on the Company's
financial position. The Company continues to pursue resolution of these
disputes, and will enforce its contractual rights through arbitration if
necessary. Notice of arbitration has been received by the Company with respect
to one of these disputes. Given the early stage of the disputes there is no
certainty as to the ultimate outcome of any such proceedings. Amounts involved
in such matters are not reasonably estimable due to uncertainty as to the final
outcome.
Off Balance Sheet Arrangements
The Company does not presently utilize any off-balance sheet arrangements to
enhance its liquidity and capital resource positions, or for any other purpose.
During the period ended September 30, 2011, WesternZagros did not enter into any
off-balance sheet transactions.
Insurance Claim Update
WesternZagros initiated a control of well insurance claim in the first quarter
of 2010 in relation to certain events at Kurdamir-1 which commenced when the
well was drilled into a high pressure formation in the Gulneri Seal. These
operations continued after a subsequent additional high pressure zone was
encountered in the Aaliji Seal and continued until October 14, 2010, when the
open hole in the Kurdamir-1 well was plugged and cemented to approximately 2,500
metres, concluding well control operations.
WesternZagros has concluded its insurance claim for a total of $45 million
relating to the Kurdamir-1 well, with the final proceeds due of $4.4 million
received during the third quarter of 2011. The Company and its insurers have
also renewed the Company's insurance policy for the drilling of the Kurdamir-2
well. The terms of the policy include an increase in the net aggregate limit
from $45 million to $75 million.
Outlook
WesternZagros's plans for the remainder of 2011 and for fiscal 2012 are to focus
its exploration and appraisal programs on the highly prospective formations
discovered through the Sarqala-1 and Kurdamir-1 wells. These exploration and
appraisal programs will further delineate the approximately one billion barrels
of oil equivalent of mean gross unrisked prospective resources that these
formations are estimated to contain (prospective resources estimated as of
December 14, 2010, January 14, 2011, January 31, 2011 and September 7, 2011, as
audited by Sproule International Limited - see "Forward Looking Information").
Activities on the Garmian Block for the remainder of 2011 and for fiscal 2012
are planned to include the Sarqala extended well test, the drilling and testing
of Mil Qasim-1, completing a 3D seismic appraisal program for the Sarqala
discovery and completing the design, drilling plan and necessary procurement for
both an exploration well and a Sarqala appraisal well. Activities on the
Kurdamir Block for the remainder of 2011 and for fiscal 2012 are planned to
include the drilling and testing of Kurdamir-2 and planning for further
appraisal activities, including a potential 3D seismic program and future
appraisal wells.
On October 27, 2011, WesternZagros began producing oil from the extended well
test at Sarqala-1 and is estimating achieving production rates of approximately
2,000 bopd for the remainder of 2011. Production is currently being restricted
to 2,000 bopd, however the Company expects to increase production to
approximately 5,000 barrels per day by the end of 2011, through the addition of
more tank capacity, the construction of a new weighbridge at site and the
construction of a new road from the facilities to the highway that will by-pass
the neighbouring village.
Further engineering work has also commenced in the fourth quarter of 2011 and is
expected to be completed in the first half of 2012 with respect to sourcing
permanent facilities and optimizing the location of these facilities for
increasing future production beyond 5,000 barrels per day from the Sarqala-1
well and future wells on the Sarqala structure. This work will include the
necessary facilities to utilize the associated natural gas from this crude oil
production.
On August 29, 2011, WesternZagros spudded the Garmian Block exploration
commitment well at Mil Qasim-1, located three kilometres from Sarqala-1. After
successfully setting the 13-5/8 inch casing at 1,615 metres in Mil Qasim-1,
WesternZagros has drilled into the Upper Fars interval and has encountered over
88 metres of sands in the Upper Fars and had hydrocarbon shows, both oil and
gas, while drilling. WesternZagros has completed logging these initial sands in
the Upper Fars, set the 9-5/8 inch casing at 2,128 metres and is preparing to
complete drilling to the estimated total depth of Mil Qasim-1 of 2,400 metres.
Once total depth is reached, WesternZagros plans to conduct a testing program of
the Upper Fars interval. If the testing at Mil Qasim-1 confirms a discovery,
WesternZagros will look to complete an extended well test at Mil Qasim-1 and
examine ways to appraise and develop Mil Qasim in combination with the Sarqala
discovery.
During the first half of 2012, WesternZagros expects to design, plan and procure
the necessary long lead materials and services for a 3D appraisal program, an
appraisal well on Sarqala targeting the Jeribe reservoir ("Sarqala-2") and an
exploration well on the Garmian Block to target the Oligocene reservoir
("Hasira-1") that would also appraise the Jeribe reservoir from the Sarqala
structure. WesternZagros anticipates that the 3D seismic, Sarqala-2 and Hasira-1
would commence in the second half of 2012, dependent on the availability of the
long lead materials and services, including drilling rigs.
The Kurdamir-2 exploration well was spudded on October 25, 2011 and is being
operated by Talisman. The well is being drilled on the flank of the Kurdamir
structure approximately two kilometres from the Kurdamir-1 discovery well and
the well will target the Oligocene, Eocene and Cretaceous reservoirs.
WesternZagros anticipates that the drilling and testing of the first reservoir,
the Oligocene reservoir, will occur in the first quarter of 2012, with the
deeper reservoirs, the Eocene and Cretaceous reservoirs, expected to be drilled
and tested by the end of the second quarter of 2012. WesternZagros continues to
evaluate with its co-venturer Talisman options for early production at Kurdamir
of crude oil, condensate and natural gas.
WesternZagros estimates its capital and operating expenditures for the fourth
quarter of 2011, including the requirement for the Company to fund 100 percent
of Mil Qasim-1 until the TPPI is assigned and to fund its share of the costs of
the Kurdamir-2 well, to be approximately $37 million. This includes
approximately $13 million for drilling and related costs for Kurdamir-2, $19
million for drilling and related costs for Mil Qasim-1, $3.5 million for
in-country support costs related to both Kurdamir-2 and Mil Qasim and the
remainder of the budget comprised of funds for corporate general and
administrative costs.
For the first half of fiscal 2012, WesternZagros estimates its capital and
operating expenditures, including the requirement for the Company to fund 100
percent of Garmian activities in 2012 until the assignment of the TPPI by the
KRG and to fund its share of the costs of the Kurdamir-2 well, to be
approximately $47-57 million. This includes approximately $30-35 million for
drilling and testing Kurdamir-2; $10-15 million for designing, planning.
procurement of the necessary long lead materials, for the Sarqala-2 and Hasira-1
wells and the 3D seismic program; $4 million for in-country support costs and
other PSC expenditures for both the Kurdamir and Garmian Blocks; and
approximately $3 million for corporate and general and administrative costs.
This excludes any of the proceeds from the sale of crude oil from the extended
well test at Sarqala-1 and the reimbursement of the costs on the Garmian Block
that WesternZagros has funded and will be reimburse upon the assignment of the
TPPI by the KRG.
Liquidity and Capital Resources
WesternZagros is currently exploring for and appraising discoveries of crude oil
and natural gas in the Kurdistan Region of Iraq. Subsequent to September 30,
2011, the Company commenced an extended well test and the sale of crude oil test
production from the Sarqala-1 exploration well. Prior to sanctioning
development, any production is considered to be test production and any
associated proceeds received, net of applicable costs, will be credited to
exploration and evaluation expenditures. WesternZagros's other income is
comprised entirely of interest earned on cash and cash equivalent balances and
short-term investments. WesternZagros invests its cash and cash equivalents with
major Canadian financial institutions with investment grade credit ratings and
in Government of Canada instruments. This is in accordance with an Investment
Policy approved by the Board of Directors.
As at September 30, 2011, WesternZagros had $20.4 million in working capital and
no outstanding bank debt or other interest bearing indebtedness. Subsequent to
September 30, 2011, the Company also raised an additional Cdn$46.6 million
through a private placement of 74 million shares. WesternZagros has granted
certain rights to TAQA to participate for its pro-rata share in future equity
issuances and the shares issued are subject to a hold period until June 30,
2012.
During the fourth quarter of 2011, WesternZagros began oil production from the
Sarqala-1 extended well test and sales of this test production into the domestic
market in Kurdistan. Under the terms of the contracts entered into for the sale
of this production, the purchasers have prepaid WesternZagros for the
production, with payments received to date for both October and November
production totaling approximately $3.8 million. WesternZagros will use these
cash proceeds, along with sales proceeds from further production from the
extended well test to fund future exploration and appraisal activities.
WesternZagros may be required to access further funding over time dependent on
the level and timing of exploration and appraisal activities pursued by the
Company and the funding requirements under the relevant PSCs.
WesternZagros will monitor the timing and likelihood of the TPPI being assigned
by the KRG in the Garmian PSC in determining its future capital requirements, as
WesternZagros will continue to fund 100 percent of the costs incurred on the
Garmian Block until such a time as the TPPI is assigned by the KRG. Upon
assignment of the TPPI by the KRG, WesternZagros will be reimbursed for the
costs that it has funded on the Garmian PSC and will be able to utilize these
funds for other exploration and appraisal activities. WesternZagros, in
considering the proper timing to potentially access further capital, will also
assess the following factors:
-- Continuation of the Sarqala-1 extended well test and sale of the related
production;
-- The expected timing for exploration results from Mil Qasim-1 and
Kurdamir-2;
-- The expected timing for appraisal activities at Sarqala and future
exploration activities, including the 3D seismic program, the drilling
of Sarqala-2 and the drilling of Hasira-1;
-- The ability to export oil and natural gas from the Kurdistan Region of
Iraq in accordance with the economic terms under the PSCs likely
following the promulgation of the new Federal Petroleum Law of Iraq; and
-- The current conditions in the financial markets, including the potential
for further market instability.
With the commencement of production from the Sarqala-1 extended well test and
the receipt of proceeds from the sale of its production, the completion of the
Company's recent private placement and the general industry interest in the
Kurdistan Region, management has a reasonable expectation that any future
capital requirements will be able to be met through either further equity
issuances or sales proceeds generated from extended well tests.
Outstanding Share Data
As at November 18, 2011, the total number of shares outstanding was 371,209,472,
including the 74 million shares issued to TAQA subsequent to September 30, 2011.
The total number of options outstanding as at November 18, 2011 was 18,778,700,
including 48,000 options granted to, and 126,667 stock options forfeited by,
employees and contractors subsequent to September 30, 2011.
Supplemental Quarterly Information
The following table summarizes key financial information on a quarterly basis
for the periods indicated, note that only the quarters for 2011 and 2010 are in
accordance with accounting policies under IFRS, while the presented 2009 data is
in accordance with previous GAAP:
----------------------------------------------------------------------------
(US$ thousands, unless otherwise
specified) Three Month Periods Ended
----------------------------------------------------------------------------
Sept 30 Jun 30 Mar 31 Dec 31
2011 2011 2011 2010
----------------------------------------------------------------------------
Total Revenue 16 34 17 13
----------------------------------------------------------------------------
Net Loss 2,013 1,416 1,480 2,003
----------------------------------------------------------------------------
Net Loss Per Share (US$ Per Share)
(Basic and Fully Diluted) 0.007 0.005 0.006 0.010
----------------------------------------------------------------------------
Capital Expenditures, net of
disposals 24,649 18,420 15,494 17,283
----------------------------------------------------------------------------
Total Assets 275,078 272,650 271,720 240,290
----------------------------------------------------------------------------
Total Non-Current Liabilities 1,417 864 816 649
----------------------------------------------------------------------------
Dividend (US$ per Share) Nil Nil Nil Nil
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Three Month Periods Ended
----------------------------------------------------------------------------
Sept 30 Jun 30 Mar 31 Dec 31
2010 2010 2010 2009
----------------------------------------------------------------------------
Total Revenue 38 17 19 32
----------------------------------------------------------------------------
Net Loss 819 1,646 1,333 1,035
----------------------------------------------------------------------------
Net Loss Per Share (US$ Per Share)
(Basic and Fully Diluted) 0.004 0.008 0.006 0.005
----------------------------------------------------------------------------
Capital Expenditures 20,455 15,962 13,153 11,250
----------------------------------------------------------------------------
Total Assets 233,770 235,295 235,514 241,077
----------------------------------------------------------------------------
Total Non-Current Liabilities 665 624 573 175
----------------------------------------------------------------------------
Dividend (US$ per Share) Nil Nil Nil Nil
----------------------------------------------------------------------------
RISK FACTORS
The risks factors that could influence actual results are described in the
Company's 2010 Annual Report and Annual Information Form, including the risk
that WesternZagros's ability to access the equity or debt markets in the future
may be affected by further drilling challenges and related increases to
exploration well costs. Any financial market instability may also impact
WesternZagros's ability, and that of other exploration and development
companies, to access equity or debt markets at all or with acceptable terms. The
inability to access the equity or debt markets for sufficient capital, at
acceptable terms and within required time frames, could have a material adverse
effect on WesternZagros's financial condition, results of operations and
prospects.
An investment in WesternZagros should be considered highly speculative due to
the nature of its activities, the present stage of its development, the need for
continued participation of the Company's co-venturers in the PSC activities, the
timing and likelihood of the Garmian TPPI being assigned and the Company's
potential need for additional financing in the future for any acquisition,
exploration, development and production of oil and gas reserves beyond current
funding levels. WesternZagros's risk factors include, but are not limited to,
all the risks normally incidental to the exploration, development and operation
of crude oil and natural gas properties and the drilling of crude oil and
natural gas wells, including geological risk, encountering unexpected formations
or pressures, potential environmental damage, and blow-outs, fires and spills,
all of which could result in personal injuries, loss of life and damage to
property of WesternZagros and others; premature declines of reservoirs;
environmental risks; delays or changes in plans with respect to exploration or
development projects or capital expenditures; the ability to attract key
personnel and; the risk of commodity price and foreign exchange rate
fluctuations.
All of WesternZagros's assets are located in the Kurdistan Region of Iraq. As
such, WesternZagros is subject to political, economic, and other uncertainties,
including, but not limited to, the uncertainty of negotiating with foreign
governments, expropriation of property without fair compensation, adverse
determinations or rulings by governmental authorities, changes in energy
policies or the personnel administering them, nationalization, currency
fluctuations and devaluations, disputes between various levels of authorities,
arbitrating and enforcing claims against entities that may claim sovereignty,
authorities claiming jurisdiction, potential implementation of exchange
controls, royalty and government take increases and other risks arising out of
foreign governmental sovereignty over the areas in which WesternZagros's
operations are conducted, as well as risks of loss due to civil strife, acts of
war, guerrilla activities and insurrections. WesternZagros's operations may be
adversely affected by changes in government policies and legislation or social
instability and other factors which are not within the control of WesternZagros
including, among other things, adverse legislation in Iraq and/or the Kurdistan
Region, a change in crude oil or natural gas pricing policy, the risks of war,
terrorism, abduction, expropriation, nationalization, renegotiation or
nullification of existing concessions and contracts, taxation policies, economic
sanctions, the imposition of specific drilling obligations and the development
and abandonment of fields.
For a detailed list of risk factors please refer to the Company's Annual
Information Form, which is available at www.westernzagros.com or on SEDAR at
www.sedar.com. In addition to such risk factors, readers should consider the
following additional risks related to the Company's recent start of extended
well test operations:
Operations related to extended well tests are subject to all of the risks and
hazards typically associated with production operations, including hazards such
as fire, explosion, releases and spills, each of which could result in
substantial damage to production facilities or the environment or result in
personal injury or death.
In addition, the Company will initially be relying on trucking to transport oil
to export terminals or domestic markets. This method of transportation may be
subject to additional risks as compared to transport by pipeline, including the
risk of vehicle accident during transport. Any loss of capacity or delay in
transportation may negatively impact testing operations and the sale of oil
production.
There is no guarantee that the Company will continue to be able to effectively
market oil produced from extended well tests. If the Company is required to
deliver its crude oil to the export market there may be a delay in the
collection of revenue due to the fact that proceeds from the sale of this crude
oil will be collected by the federal government for distribution to the KRG, and
then ultimately the Company. The Company, if selling into the domestic market,
may be exposed to third-party credit risk through its contractual arrangements
with buyers of its production from extended well tests if buyers are not
required to pre-pay for production. In the event buyers fail to meet their
obligations to pay, or there are significant delays in payments from any sales
to the export market, such events could negatively affect the Company.
Adoption of International Financial Reporting Standards ("IFRS")
The Company has prepared its September 30, 2011 condensed consolidated interim
financial statements in accordance with IAS 34, "Interim Financial Reporting"
and in accordance with IFRS 1, "First Time Adoption of International Financial
Reporting Standards". The Company's first annual reporting date under IFRS will
be December 31, 2011. Accordingly, the comparative information for 2010 has been
prepared in accordance with the Company's IFRS accounting policies. The adoption
of IFRS has not had a material impact on the Company's operations, strategic
decisions, cash flow, or overall capital expenditures.
The Company's IFRS accounting policies are provided in detail in Note 3 to the
September 30, 2011 Condensed Consolidated Interim Financial Statements. Prior
period reconciliations between IFRS and previous GAAP are included within Note
24 to the September 30, 2011 Condensed Consolidated Interim Financial
Statements. In summary, Note 24 includes the following reconciliations:
-- Balance Sheets as at January 1, 2010, September 30, 2010 and December
31, 2010;
-- Statements of Comprehensive Loss for the three and nine month ended
September 30, 2010 as well as for the year ended December 31, 2010; and
-- Statements of Cash Flows for the three and nine months ended September
30, 2010 as well as for the year ended December 31, 2010.
Financial Statement Impacts Upon Conversion to IFRS
The following discussion explains the significant impacts on the financial
statements upon conversion to IFRS.
Exploration and Evaluation Expenditures "(E&E")
WesternZagros previously utilized the full cost method under Canadian GAAP for
accounting for its exploration activities in the Kurdistan Region of Iraq. Under
the full cost method, all costs associated with the acquisition of, exploration
for, and development of crude oil and natural gas, including asset retirement
obligations, were capitalized and accumulated within cost centres on a
country-by-country basis. Such costs included land acquisition, geological and
geophysical activity, drilling and testing of productive and non-productive
wells, carrying costs directly related to unproved properties, major development
projects as well as insurance and administrative costs directly related to
exploration and development activities. As WesternZagros was only operating in
the Kurdistan Region of Iraq and originally had only one PSC in that region
covering all of the PSC Lands, it capitalized all costs associated with those
exploration activities, including certain costs incurred prior to entering into
the original PSC.
IFRS 1 sets out the procedures that an entity must follow when adopting IFRS as
the basis for preparing financial statements. IFRS 1 also provides entities with
a number of optional exemptions upon conversion to IFRS, the most significant of
which that WesternZagros utilized was the exemption that allows the December 31,
2009 full cost pool under previous GAAP which are related to costs where the
technical feasibility and commercial viability have not yet been determined to
be reclassified as exploration and evaluation assets under IFRS. This resulted
in $154 million of costs being reclassified from property, plant and equipment
("PP&E") to E&E expenditures on a deemed costs basis as at January 1, 2010.
Upon conversion to IFRS, WesternZagros was also required to adopt IFRS 6,
"Exploration for and Evaluation of Mineral Resources", which is the standard
that deals with accounting for exploration and evaluation expenditures for
extractive industries. Typical costs included in the E&E expenditures are
acquisition of rights to explore, topographical, geological, geochemical and
geophysical studies, exploratory drilling, trenching, sampling, activities in
relation to evaluating the technical feasibility and commercial viability of
extracting mineral resources, as well as insurance and certain general and
administrative costs. Under IFRS 6, costs incurred prior to the legal rights to
explore an area being obtained may no longer be capitalized within E&E
expenditures. During 2010 the Company reclassified a further $27 million from
PP&E to E&E expenditures. As at December 31, 2010 a total of $181 million in
costs had been reclassified from PP&E under previous GAAP to E&E expenditures
relating to the Company's Original PSC upon conversion to IFRS.
WesternZagros was also required to complete an impairment test of E&E
expenditures as at January 1, 2010. There was no impairment of E&E assets upon
transition to IFRS.
Share Based Payments
The Company previously valued stock option issuances based on each grant as a
whole and expensed the valuation of each grant on a straight line basis over the
expected lives of the options. Upon conversion to IFRS, the Company was required
to adopt IFRS 2, "Share-Based Payment" which provides that the valuation and
expensing of share-based payment be done on a graded vesting basis. This
resulted in an accelerated expensing of share-based payments based on each
individual vesting tranche of options under IFRS as compared to previous GAAP,
less the impact of estimated forfeiture rates under IFRS that had not previously
been estimated under GAAP. As at January 1, 2010 the adoption of IFRS 2 resulted
in an increase in contributed surplus of approximately $0.9 million, with a
corresponding increase in the accumulated deficit. As at December 31, 2010 the
adoption of IFRS 2 resulted in a net minor overall decrease in contributed
surplus as compared to previous GAAP as the timing of expense recognition was
similar between IFRS and previous GAAP at that point in time.
Provision for Decommissioning Liabilities
The provisions for decommissioning obligations under IFRS are treated similarly
to previous Canadian GAAP, which had previously been disclosed as asset
retirement obligations ("ARO"). Upon conversion to IFRS, the Company was
required to adopt IAS 37, "Provisions, Contingent Liabilities and Contingent
Assets", which required that a risk-free discount rate, that was not credit risk
adjusted, be applied to the present value calculation of estimated future
abandonment costs. This resulted in a lower discount rate utilized in the
present value calculation under IFRS as compared to previous GAAP. As a result
of the lower discount rate under IFRS, the provision for decommissioning
liabilities increased by $0.3 million under IFRS as at January 1, 2010 and
remained at a $0.3 million increase as at December 31, 2010 when compared to
GAAP.
Other IFRS 1 Exemptions Utilized
IFRS 1 allows first time adopters of IFRS to utilize a number of voluntary
exemptions from the general principal of retrospective treatment. Beyond the
full-cost book value as deemed cost exemption utilized for E&E expenditures as
discussed in the E&E section of this MD&A, the Company also utilized the allowed
exemption relating to IFRS 3, "Business Combinations". Accordingly, IFRS 3 has
not been applied to acquisitions that occurred prior to January 1, 2010.
CRITICAL ACCOUNTING ESTIMATES
WesternZagros's critical accounting estimates are defined as those estimates
that have a significant impact on the portrayal of its financial position and
operations and that require management to make judgments, assumptions and
estimates in the application of IFRS. Judgments, assumptions and estimates are
based on historical experience and other factors that management believes to be
reasonable under current conditions. As events occur and additional information
is obtained, these judgments, assumptions and estimates may be subject to
change. WesternZagros believes the following are the critical accounting
estimates used in the preparation of its consolidated financial statements,
which can also be found in Note 5 to the September 30, 2011 Condensed
Consolidated Interim Financial Statements.
Use of Estimates
The preparation of the condensed consolidated interim financial statements in
conformity with IFRS requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities as at the date of the condensed consolidated
interim financial statements, and the reported amounts of revenues and expenses
during the reporting period. Such estimates relate to unsettled transactions and
events as of the date of the condensed consolidated interim financial
statements. Accordingly, actual results may differ from these estimated amounts
as future confirming events occur. Significant estimates used in the preparation
of the condensed consolidated interim financial statements include, but are not
limited to, recovery of asset carrying values, provision for decommissioning
liabilities, incomes tax, and share-based payments.
Recoverability of asset carrying values
At each reporting date, the Company assesses its exploration and evaluation and
property, plant and equipment expenditures for possible impairment if events or
circumstances indicate the carrying values of the assets might not be
recoverable. Relevant indicators include the following: the continued
progression of Management's operational plans; new information obtained from
wells that have been drilled or tested; changes or restrictions in access to
drilling sites; changes in legal, regulatory, market, environmental,
technological, or political factors that could impact ongoing operations; the
ability of the Company to continue fulfilling ongoing commitments; and
significant changes in the Company's market value.
If factors indicate that the Company may need to recognize impairment, the
carrying value of the assets for each cash-generating-unit is compared to the
greater of value-in-use or fair-value less costs to sell. It is anticipated that
the value-in-use model, based on discounted estimated future net cash flows,
would be more readily computed. Determination of the value-in-use amount and any
resulting impairment involves the use of significant estimates and assumptions
about future events and factors such as future commodity prices, the impact of
inflation on operating expenses, discount rates, production profiles, the
ability to produce and export crude oil and natural gas, the future capital
costs needed to develop reserves, as well as the future marketability and
availability of transportation for crude oil and natural gas that is produced.
At the reporting date, the Company is still in the exploration phase of
operations on its PSC Lands. The Company has not recognized any impairment for
exploration and evaluation expenditures nor for property, plant, and equipment.
Provision for decommissioning obligations
The Company recognizes both an asset and a provision for decommissioning
obligations in the period in which they are incurred by estimating the fair
value of the obligation. Provisions for environmental clean-up and remediation
costs associated with the Company's drilling operations are based on current
legal and constructive requirements, technology, price levels and expected plans
for remediation. Actual costs and cash outflows and the timing of those cash
outflows can differ from estimates because of changes in laws and regulations,
public expectations, prices, discovery and analysis of site conditions, future
performance of wells drilled, and changes in clean-up technology. Estimating the
timing and amount of cash outflows required to settle these obligations are
inherently difficult and are based on Management's current experience. A risk
free rate has been used in the calculations. Any differences between actual and
estimated decommissioning obligations would impact both the asset and the
provision which then would impact future depletion on the asset as well as
accretion on the provision.
Income tax
Tax regulations and legislation and the interpretations thereof in the
jurisdictions that the Company operates are subject to change. As such, income
taxes are subject to measurement uncertainty. Deferred income tax assets are
assessed by Management based on all available information at the end of the
reporting period to determine the likelihood that they will be realized from
future taxable earnings.
Share-based payments
The estimates, assumptions, and judgements made in relation to the fair value of
share-based payments and the associated expense recognition is subject to
measurement uncertainty. The fair value of employee stock options is measured
using a Black Scholes option pricing model. Measurement inputs include share
price on measurement date, exercise price of the instrument, expected
volatility, expected life of the instrument, estimated forfeitures, expected
dividends, and the risk-free interest rate.
Recent accounting pronouncements issued but not yet effective
The IASB has issued the following standards which are effective for annual
periods beginning on or after January 1, 2013, with early adoption permitted.
The Company is currently evaluating the impact, if any, of each of these new
standards, which are briefly summarized as follows:
IAS 27 - Separate Financial Statements:
IAS 27 replaces the existing IAS 27, "Consolidated and Separate Financial
Statements". IAS 27 contains accounting and disclosure requirements for
investments in subsidiaries, joint ventures and associates when an entity
prepares separate financial statements. IAS 27 requires an entity preparing
separate financial statements to account for those investments at cost or in
accordance with IFRS 9, "Financial Instruments".
IAS 28 - Investments in Associates and Joint Ventures:
IAS 28 prescribes the accounting for investments in associates and sets out the
application of the equity method when accounting for investments in associates
and joint ventures.
IFRS 9 - Financial Instruments:
IFRS 9 is the first part of a new standard on classification and measurement of
financial assets and liabilities that will replace IAS 39, "Financial
Instruments: Recognition and Measurements".
For financial assets, IFRS 9 has two measurement categories: amortized cost and
fair value. All equity instruments are measured at fair value. A debt instrument
is at amortized cost only if the entity is holding it to collect contractual
cash flows and the cash flows represent principal and interest. Otherwise it is
at fair value through profit and loss.
For financial liabilities, although the classification criteria for financial
liabilities will not change under IFRS 9, the approach to the fair value option
for financial liabilities may require different accounting for changes to the
fair value of a financial liability as a result of changes to an entity's own
credit risk.
IFRS 10 - Consolidated Financial Statements:
IFRS 10 establishes the principles for the presentation and preparation of
consolidated financial statements when an entity controls one or more other
entities. IFRS 10 replaces IAS 27 "Consolidated and Separate Financial
Statements" and SIC-12 "Consolidation - Special Purpose Entities".
IFRS 11 - Joint Arrangements:
IFRS 11 establishes principles for financial reporting by parties to a joint
arrangement, and requires entities to classify interests in joint arrangements
as either a joint venture or a joint operation. Joint ventures will be accounted
for using the equity method of accounting whereas for joint operations the
entity will recognize it share of the assets, liabilities, revenue and expenses
of the joint operation. IFRS 11 replaces IAS 31 "Interests in Joint Ventures"
and SIC-13 "Jointly Controlled Entities - Non-monetary Contributions by
Venturers".
IFRS 12 - Disclosure of Interests in Other Entities:
IFRS 12 establishes disclosure requirements relating to an entity's interests in
other entities such as joint arrangements, associates or unconsolidated
structured entities, including special purpose vehicles and off balance sheet
vehicles. The standard carries forward existing disclosure requirements and also
introduces significant additional disclosure requirements that address the
nature and risk associated with interests in other entities.
IFRS 13 - Fair Value Measurements:
IFRS 13 defines fair value and sets out a single IFRS framework for measuring
fair value and the required disclosures about fair value measurements for use
across all IFRS standards. IFRS 13 is intended to eliminate the inconsistencies
in fair value measurement and the disclosure requirements contained in various
other IFRS standards that refer to fair value.
Condensed consolidated interim statements of financial position
(United States dollars thousands)
(Unaudited)
December January
September 31, 2010 1, 2010
Note 30, 2011 (Note 24) (Note 24)
----------------------------------------------------------------------------
Assets
Current assets
Cash and cash equivalents 7 $ 35,162 $ 31,482 $ 76,708
Trade and other receivables 8 284 8,648 6,880
Insurance recoveries
receivable - 17,597 -
Deposits held in trust 11 - 420 -
Prepaid expenses 237 39 183
Income tax recoverable 12 1,847 887 1,738
----------------------------------------------------------------------------
Total current assets 37,530 59,073 85,509
Non-current assets
Deposits held in trust 11 - - 420
Property, plant and equipment 10 110 261 814
Exploration and evaluation
expenditures 9 237,347 180,770 154,097
Deferred tax assets 12 91 186 371
----------------------------------------------------------------------------
Total non-current assets 237,548 181,217 155,702
----------------------------------------------------------------------------
Total assets $ 275,078 $ 240,290 $ 241,211
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Liabilities
Current liabilities
Trade and other payables 13 $ 17,176 $ 21,525 $ 18,297
----------------------------------------------------------------------------
Total current liabilities 17,176 21,525 18,297
Non-current liabilities
Provision for decommissioning
obligations 14 1,250 509 432
Deferred tax liabilities 12 167 140 134
----------------------------------------------------------------------------
Total non-current liabilities 1,417 649 566
----------------------------------------------------------------------------
Total liabilities 18,593 22,174 18,863
----------------------------------------------------------------------------
Equity
Share capital 15 295,784 253,583 253,583
Contributed surplus 16 12,300 11,223 9,654
Deficit (51,599) (46,690) (40,889)
----------------------------------------------------------------------------
Total equity 256,485 218,116 222,348
----------------------------------------------------------------------------
Total equity and liabilities $ 275,078 $ 240,290 $ 241,211
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Commitments and contingencies (Note 22)
Subsequent events (Note 23)
The notes are an integral part of these condensed consolidated interim financial
statements.
These condensed consolidated interim financial statements were authorized for
issue by the Audit Committee of the Board of Directors on November 18, 2011.
They are signed on the Company's behalf by:
Fred J. Dyment, Director
Randall Oliphant, Director
Condensed consolidated interim statements of comprehensive loss
(United States dollars thousands, except per share amounts)
(Unaudited)
Three months ended Nine months ended
September 30, September 30,
Note 2011 2010 2011 2010
----------------------------------------------------------------------------
Other Income
Other Income
$ 16 $ 38 $ 67 $ 74
Expenses
General and
administrative expenses 17, 18 1,958 929 5,601 4,175
Depreciation 50 132 151 443
Accretion 14 5 4 17 12
Foreign exchange
(gain)loss 259 (140) 330 105
----------------------------------------------------------------------------
Total expenses 2,272 925 6,099 4,735
----------------------------------------------------------------------------
Loss before taxation 2,256 887 6,032 4,661
Taxation
Current 12 (327) (111) (1,244) (1,014)
Deferred 12 84 43 121 151
----------------------------------------------------------------------------
Total taxation (recovery) (243) (68) (1,123) (863)
----------------------------------------------------------------------------
Total loss and
comprehensive loss for
the period attributable
to the shareholders $ 2,013 $ 819 $ 4,909 $ 3,798
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Net loss per share
- basic and diluted 19 $ 0.007 $ 0.004 $ 0.018 $ 0.018
----------------------------------------------------------------------------
----------------------------------------------------------------------------
The notes are an integral part of these condensed consolidated interim financial
statements.
Condensed consolidated interim statements of changes in equity
(United States dollars thousands)
(Unaudited)
Number of
Note shares Share capital
----------------------------------------------------------------------------
Balance January 1, 2010 24 207,464,320 $ 253,583
Share based payments - -
Loss for the period - -
----------------------------------------------------------------------------
Balance September 30, 2010 24 207,464,320 253,583
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Share based payments - -
Loss for the period - -
----------------------------------------------------------------------------
Balance December 31, 2010 24 207,464,320 253,583
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Issuance of common shares 89,665,352 44,227
Options exercised 16 79,800 64
Share issuance costs - (2,090)
Share based payments 16, 17 - -
Loss for the period - -
----------------------------------------------------------------------------
Balance September 30, 2011 297,209,472 $ 295,784
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Contributed Accumulated
surplus deficit Total equity
----------------------------------------------------------------------------
Balance January 1, 2010 $ 9,654 $ (40,889) $ 222,348
Share based payments 544 - 544
Loss for the period - (3,798) (3,798)
----------------------------------------------------------------------------
Balance September 30, 2010 10,198 (44,687) 219,094
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Share based payments 1,025 - 1,025
Loss for the period - (2,003) (2,003)
----------------------------------------------------------------------------
Balance December 31, 2010 11,223 (46,690) 218,116
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Issuance of common shares - - 44,227
Options exercised (21) 43
Share issuance costs - - (2,090)
Share based payments 1,098 - 1,098
Loss for the period - (4,909) (4,909)
----------------------------------------------------------------------------
Balance September 30, 2011 $ 12,300 (51,599) $ 256,485
----------------------------------------------------------------------------
----------------------------------------------------------------------------
The notes are an integral part of these condensed consolidated interim financial
statements.
Condensed consolidated interim statements of cash flows
(United States dollars thousands)
(Unaudited)
Three months ended Nine months ended
September 30, September 30,
Note 2011 2010 2011 2010
----------------------------------------------------------------------------
Cash flow from operating
activities
Net loss before taxation $ (2,256) $ (887) $ (6,032) $ (4,661)
Adjustments for
Depreciation 50 132 151 443
Accretion 14 5 4 17 12
Share based payments 16, 17 197 106 635 593
Income taxes recovered 283 - 283 598
Change in non-cash
operating working
capital 21 1,516 402 (182) 143
----------------------------------------------------------------------------
Net cash from (used in)
operating activities (205) (243) (5,128) (2,872)
----------------------------------------------------------------------------
Cash flow from investing
activities
Expenditures on
exploration and
evaluation 21 (19,731) (23,710) (54,481) (59,400)
Disposals of assets 2 - 463 -
Insurance recoveries 4,446 10,284 20,646 15,664
----------------------------------------------------------------------------
Net cash from (used in)
investing activities (15,283) (13,426) (33,372) (43,736)
----------------------------------------------------------------------------
Cash flow from financing
activities
Issuance of common
shares, net of costs (56) - 42,137 -
Proceeds from options
exercised 38 - 43 -
----------------------------------------------------------------------------
Net cash from (used in)
financing activities (18) - 42,180 -
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Change in cash and cash
equivalents (15,506) (13,669) 3,680 (46,608)
----------------------------------------------------------------------------
Cash and cash equivalents,
beginning of period 50,668 43,769 31,482 76,708
----------------------------------------------------------------------------
Cash and cash equivalents,
end of period $ 35,162 $ 30,100 $ 35,162 $ 30,100
----------------------------------------------------------------------------
----------------------------------------------------------------------------
The notes are an integral part of these condensed consolidated interim financial
statements.
Notes to the condensed consolidated interim financial statements
For the three and nine months ended September 30, 2011 and 2010
(Tabular amounts in United States dollars thousands)
(Unaudited)
1. General information
WesternZagros Resources Ltd. (the "Company" or "WesternZagros") is headquartered
in Calgary, Canada. The Company is incorporated under the laws of the Province
of Alberta, Canada. The address for the Company is Suite 600, 440 - 2nd Avenue
S.W., Calgary, Alberta, T2P 5E9.
WesternZagros is a publicly-traded, Calgary-based, international oil and gas
company engaged in acquiring properties and exploring for, developing and
producing crude oil and natural gas in Iraq. WesternZagros holds two Production
Sharing Contracts ("PSCs") with the Kurdistan Regional Government ("KRG") in the
Kurdistan Region of Iraq. Each PSC governs a separate contract area. The
northern contract area (comprising some 340 square kilometres) is governed by
the Kurdamir PSC which is an amended version of the original February 28, 2008
PSC that governed all of the Kalar-Bawanoor Block (the "Original PSC") and is
now called the Kurdamir Block. The southern contract area (comprising some 1,780
square kilometres) is governed by the Garmian PSC and is named the Garmian
Block. WesternZagros holds a 40 percent working interest in both the Kurdamir
and Garmian PSCs. The KRG holds a 20 percent working interest in both PSCs. The
remaining 40 percent working interest (the third party participation interest or
"TPPI") of the Kurdamir PSC is held by a wholly-owned subsidiary of Talisman
Energy Inc. ("Talisman"). The remaining 40 percent TPPI of the Garmian PSC is
held by the KRG and it is to be assigned to a third party participant (refer to
Note 22 "Commitments and contingencies" for a description of the PSCs).
The Company has its listing on the TSX Venture Exchange under the symbol "WZR.V".
Authorization of financial statements
These condensed consolidated interim financial statements as at and for the
three and nine months ended September 30, 2011 were authorized for issuance in
accordance with a resolution of the Audit Committee of the Board of Directors on
November 18, 2011.
2. Basis of preparation
These condensed consolidated interim financial statements, including prior year
comparative information, have been prepared in accordance with International
Accounting Standard ("IAS") 34, Interim Financial Reporting, and International
Financial Reporting Standard 1, First Time Adoption of IFRS, using accounting
policies consistent with International Financial Reporting Standards ("IFRS") as
issued by the International Accounting Standards Board ("IASB"), and
interpretations issued by the IFRS Interpretations Committee, that are published
at the time of preparation and that are effective or available for early
adoption on December 31, 2011, the Company's first annual reporting date under
IFRS. Prior to 2011, the Company prepared its consolidated annual and
consolidated interim financial statements in accordance with Canadian generally
accepted accounting principles ("GAAP").
These condensed consolidated interim financial statements have been prepared on
a going concern basis under the historical cost convention. These condensed
consolidated interim financial statements should be read in conjunction with the
Company's annual financial statements and the notes thereto in the Company's
annual report for the year ended December 31, 2010, which were prepared in
accordance with previous GAAP.
As is typical with exploration stage companies, the Company has incurred losses
from operations and negative cash flows from operating activities, and has an
accumulated deficit at September 30, 2011. During the three months ended
September 30, 2011, the Company had expenditures of $0.2 million for operating
activities and $19.7 million for investing activities related to exploration and
evaluation assets, including changes in non-cash working capital. During the
nine months ended September 30, 2011, the Company had expenditures of $5.1
million for operating activities and $54.5 million for investing activities
related to exploration and evaluation assets, including changes in non-cash
working capital. The Company may require additional funding over time to
maintain ongoing exploration programs and property commitments, as well as for
administration expenses. In general, the Company's ability to continue
operations and exploration activities is dependent upon its ability to obtain
additional funding over time. While the Company has been successful in obtaining
its required funding, including its recent Cdn $46.6 million equity financing
described in Note 23 "Subsequent events", there is no assurance that sufficient
funds will be available to the Company in the future, or if available, available
on favourable terms. Factors that could affect the availability of financing
include the continued support of its shareholders; the results of exploration
activities; the potential assignment by the KRG of the third party participant
interest in the Garmian PSC and timing thereof (see Note 22 "Commitment and
contingencies" for a description of the PSCs); the results and timing associated
with potential future production and sales; the political climate in Iraq and
the general effect it has on the oil and gas industry; and the overall state of
the capital markets. This requirement for funding may occur during the next
twelve months of operations and is dependent on the level and timing of
exploration and appraisal activities pursued by the Company and the funding
requirement of the Company under the relevant PSCs.
3. Significant accounting policies
The significant accounting policies used in the preparation of these condensed
consolidated interim financial statements are described below.
A. Conversion to IFRS
The Canadian Accounting Standards Board ("AcSB") confirmed in February 2008 that
IFRS would replace Canadian generally accepted accounting principles for
publicly accountable enterprises for financial periods beginning on or after
January 1, 2011.
These condensed consolidated interim financial statements present the Company's
financial results of operations and financial position as at and for the three
and nine months ended September 30, 2011. The Company's transition date to IFRS
is January 1, 2010. Consequently, the comparative figures for 2010 and the
Company's consolidated statement of financial position as at January 1, 2010
have been restated from GAAP to comply with IFRS. The reconciliations between
previously reported GAAP and IFRS are explained in Note 24 of these condensed
consolidated interim financial statements.
B. Basis of measurement
These condensed consolidated interim financial statements have been prepared on
a historical costs basis, and have been prepared using the accrual basis of
accounting, except for certain cash flow information. The accounting policies,
as described in further detail in this note, have been consistently applied to
all periods presented in these condensed consolidated interim financial
statements. They also have been applied in preparing an opening statement of
financial position at January 1, 2010 for the purposes of transition to IFRS as
required by IFRS 1, First Time Adoption of International Financial Reporting
Standards.
These condensed consolidated interim financial statements, unless otherwise
indicated, are expressed in United States dollars ("US"). The company has
adopted the US dollar as its functional and reporting currency since most of its
expenses are directly or indirectly denominated in US dollars. When revenues are
realized, it is expected that US dollars would be received. All references
herein to U.S. $ or to $ are to United States dollars and references herein to
Cdn $ are to Canadian dollars. These condensed consolidated interim financial
statements are rounded to the nearest thousand (U.S. $000) except where
otherwise indicated.
The preparation of these condensed consolidated interim financial statements in
conformity with IFRS requires the use of critical accounting estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the reporting date, as well
as the reported amounts of revenues and expenses during the reporting period.
Such estimates relate to unsettled transactions and events at the reporting
date. Accordingly, actual results may ultimately differ from the estimated
amounts as future confirming events occur. Areas that involve a higher degree of
judgment or complexity, or areas where assumptions and estimates are significant
to the condensed consolidated interim financial statements are disclosed in Note
5.
C. Basis of consolidation
These condensed consolidated interim financial statements include the accounts
of the Company and its wholly-owned subsidiaries as follows:
Wholly-owned subsidiary Jurisdiction Nature of operations
----------------------------------------------------------------------------
WesternZagros Resources Inc. Canada Holding Company
Western Oil International Holdings Limited Cyprus Holding Company
WesternZagros (Garmian) Limited Cyprus Holding Company
WesternZagros Limited Cyprus Exploration Company
These subsidiaries are entities over which the Company has the power to govern
the financial and operating policies. The Company has 100 percent direct
ownership of these entities. Accordingly, the subsidiaries are fully
consolidated within the Company's condensed consolidated interim financial
statements.
Inter-company transactions and balances, including unrealized income and
expenses arising from inter-company transactions, are eliminated in full in
preparing these condensed consolidated interim financial statements.
D. Jointly controlled assets under the PSCs
The jointly controlled assets under the PSCs offer joint ownership by the
Company and its co-venturers to the PSCs for assets contributed to the ongoing
exploration project in the Kurdistan Region of Iraq. The Company recognizes its
share of the jointly controlled assets and its share of the joint liabilities
incurred under the PSCs (refer to Note 22 "Commitments and contingencies" for a
description of the PSCs).
E. Foreign currency translation
These condensed consolidated interim consolidated financial statements are
presented in U.S. dollars, which is the Company's functional and reporting
currency.
Transactions in currencies other than the functional currency are recorded at
the rates of exchange prevailing on the dates of the transactions. At the
reporting date, monetary assets and liabilities that are denominated in foreign
currencies are translated at the exchange rates prevailing at the date of the
statement of financial position. Non-monetary items are measured at historical
exchange rates.
F. Exploration and evaluation expenditures
Crude oil and natural gas exploration and evaluation expenditures ("E&E
expenditures") are accounted for using a modified 'successful efforts' method of
accounting. Accordingly, the Company accounts for its share of costs relating to
the acquisition of, exploration for, and evaluation of crude oil and natural gas
assets, including related provisions for decommissioning liabilities, as E&E
expenditures. E&E expenditures include, but are not limited to, license and land
acquisition costs; topographical, geological, geochemical, and geophysical costs
or studies; drilling and testing of exploratory and non-productive wells; costs
related to evaluating the technical feasibility or commercial viability of
extracting mineral reserves; carrying costs directly related to unproved
properties; major development projects; and administrative costs directly
related to exploration and evaluation activities.
The costs continue to be carried as E&E expenditures until such time that the
technical feasibility and commercial viability of the crude oil and natural gas
hydrocarbons has been demonstrated and development has been sanctioned. At that
point the E&E expenditures are assessed for impairment and then transferred to
development expenditures. Prior to sanctioning development, any production is
considered to be test production and any associated proceeds received, net of
applicable costs, are credited to E&E expenditures. As at the date of these
financial statements the Company is an exploration stage company and has not yet
incurred any development expenditures.
Accumulated E&E expenditures are assessed for impairment if: a) sufficient data
exists to determine technical feasibility and commercial viability; and b) facts
or circumstances suggest the carrying amount exceeds the recoverable amount.
Indicators of impairment are considered at least annually or whenever facts and
circumstances indicate potential impairment. For the purposes of impairment
testing, E&E expenditures are allocated on a cash-generating unit ("CGU") basis.
The Company has established that each PSC entered into will be identified as a
separate CGU. An impairment loss is recognized for the amount by which the E&E
expenditure's carrying value exceeds its recoverable amount. The recoverable
amount is the higher of the E&E expenditure's fair value less costs to sell and
their value in use. Impairment losses are recognized immediately in the
statement of comprehensive income (loss). If facts and circumstances
subsequently indicate that a reversal of a previous impairment loss is
warranted, the carrying value is increased up to the recoverable amount, with
the reversal limited to the original loss amount. As at the reporting date no
impairment has been recognized.
No depreciation or amortization is charged against exploration and evaluation
assets.
G. Property, plant and equipment ("PP&E")
Property, plant and equipment are stated at historical cost, less depreciation,
and are depreciated on a straight-line basis over their estimated useful lives
based on the following annual rates:
Furniture, fixtures and office equipment 20-33%
Computer hardware and software 33-50%
Whenever events or circumstances dictate, the Company compares the carrying
value of other property, plant and equipment to estimated net recoverable
amounts, based on estimated discounted future cash flows, to determine whether
there is any indication of impairment.
H. Cash and cash equivalents
Cash and cash equivalents consist of cash in the bank, less outstanding cheques,
and short-term deposits with original maturity dates of three months or less.
I. Financial instruments
Financial assets and liabilities are recognized on the Company's statement of
financial position when the Company becomes party to the contractual provisions
of the instrument. Financial assets are de-recognized when the contractual
rights to the cash flows from the financial assets expire or when the
contractual rights to those assets are transferred. Financial liabilities are
derecognized when the obligation specified in the contract is discharged,
cancelled, or expired.
Upon initial recognition, the Company classifies its financial instruments into
one of the following categories based on the purpose for which the instruments
were acquired:
Financial assets and liabilities at fair value through profit or loss - this
category is comprised of derivatives, or assets acquired or incurred principally
for the purpose of selling or repurchasing in the near term, except for those
derivatives designated as hedges. They are carried in the statement of financial
position at fair value with changes in fair value recognized in the
comprehensive statement of income (loss) for the period. The Company has not
classified any instruments in this category, and has not identified any material
embedded derivatives in any of its financial instruments.
Available-for-sale financial assets - this category is comprised of
non-derivative investments designated as available for sale and can include
marketable securities and investments in debt and equity securities.
Available-for-sale investments are recognized initially at fair value plus
transaction costs and are subsequently carried at fair value. Gains or losses
arising from changes in fair value are recognized in other comprehensive income.
Available-for-sale investments are classified as non-current, unless the
investments mature within twelve months, or management expects to dispose of
them within twelve months. The Company has not classified any instruments in
this category.
Loans and receivables - this category is comprised of non-derivative financial
assets with fixed or determinable payments that are not quoted in an active
market. The Company's loans and receivables are comprised of cash and cash
equivalents, trade and other receivables, insurance recoveries receivable,
deposits held in trust and income tax recoverable and are included in current
assets due to their short-term nature.
Loans and receivables are initially recognized at the amount expected to be
received less, when material, a discount to reduce the loans and receivables to
fair value. Subsequently, loans and receivables are measured at amortized cost
using the effective interest rate method.
Financial liabilities at amortized cost - this category is comprised of
financial liabilities measured at amortized cost using the effective interest
rate method, which includes trade and other payables.
J. Impairment of financial instruments
At each reporting date, the Company assesses whether there is objective evidence
that a financial asset is impaired. If such evidence exists, the Company
recognizes an impairment loss as follows:
Financial assets carried at amortized cost - the impairment loss is the
difference between the amortized cost of the loan or receivable and the present
value of the estimated future cash flows, discounted using the instrument's
original effective interest rate. The carrying amount of the asset is reduced by
this amount either directly or indirectly through the use of an allowance
account.
Available for sale financial assets - the impairment loss is the difference
between the original cost of the asset and its fair value at the measurement
date, less any impairment losses previously recognized in the statement of loss.
This amount represents the cumulative loss in accumulated other comprehensive
income that is reclassified to net income.
Impairment losses on financial instruments carried at amortized cost are
reversed in subsequent periods if the amount of the loss decreases and the
decrease can be related objectively to an event occurring after the impairment
was recognized. Impairment losses on available-for-sale equity instruments are
not reversed.
K. Provision for decommissioning obligations
Provision for decommissioning obligations are recognized when the Company has a
present legal or constructive obligation as a result of past events, and it is
probable that an outflow of resources will be required to settle the obligation,
and a reliable estimate of the amount of obligation can be made. Provision is
made for the present value of the future cost of abandonment of oil and gas
wells and related facilities. The Company recognizes the initial spud date as
the obligating event for each well location. The Company currently has no other
facilities or infrastructure relating to petroleum operations that would require
future abandonment activities. When the provision is first recognized a
corresponding amount equivalent to the provision is also currently recognized as
part of the cost of E&E expenditures.
The amount recognized is the estimated cost of decommissioning activities based
on internal engineering estimates prevailing at the reporting date, discounted
to its present value utilizing a pre-tax risk-free interest rate. Changes in the
estimated timing of decommissioning or decommissioning cost estimates are dealt
with prospectively by recording an adjustment to the provision, with a
corresponding adjustment to E&E expenditures, and are updated at each reporting
date to reflect the current market assessments of the time value of money and
the risks specific to the obligation.
The liability is increased each period due to the passage of time and the
associated accretion is expensed to income in the period.
L. Taxation including deferred taxation
Tax expense represents current tax and deferred tax. Income tax is recognized in
the statement of income or loss except to the extent that it relates to items
directly in equity, in which case the related income tax impact is recognized in
equity.
Current tax is based on the taxable profits for the period and any adjustment to
tax payable or receivable in respect of previous years.
Deferred tax assets and liabilities are determined on a non-discounted basis,
using the liability method, based on the differences between the carrying values
in the condensed consolidated interim financial statements and the tax bases of
assets and liabilities. Deferred tax assets are recognized to the extent that it
is probable that the assets can be recovered. Deferred income tax assets and
liabilities are presented as non-current.
Deferred taxes are calculated using tax rates that have been enacted or
substantively enacted by the reporting date.
Taxes on income in interim periods are accrued using the tax rate that would be
applicable to expected total annual earnings.
M. Share capital
Common shares are classified as equity. Incremental costs directly attributable
to the issuance of shares are recognized as a deduction from equity.
N. Share-based payments
The Company has established a Stock Option Plan for the issuance of options to
directors, officers, employees and consultants to purchase Common Shares of the
Company. The vesting period and expiry date for each option grant is set at the
discretion of the Board of Directors. Each vesting tranche is considered a
separate award with its own vesting period. The fair value of each tranche is
measured at the grant date using the Black-Scholes option pricing model.
Compensation costs are recognized over the vesting period for each particular
tranche based on the number of awards expected to vest, with a corresponding
increase to contributed surplus. Compensation costs directly related to
exploration activities are capitalized, costs related to non-exploration
activities are treated as general and administrative expenses. The number of
option awards expected to vest is reviewed at least annually, with any impact
being recognized immediately.
The cash proceeds received, net of any directly attributable transaction costs,
together with the amount recorded to contributed surplus are credited to share
capital when the options are exercised.
O. Other income
The Company recognizes other income on an accrual basis and is related to the
interest income earned on the Company's cash and cash equivalents balances.
P. Fair value
The fair value of instruments, trade and other receivables, and trade and other
payables approximate their carrying amounts due to the short term maturity of
the instruments.
Q. Loss per share
The Company presents the basic and diluted loss per share data for its common
shares, calculated by dividing the loss attributable to the shareholders of the
Company by the weighted-average number of common shares outstanding during the
period. Diluted income per share is determined by adjusting the income
attributable to the common shareholders and the average number of common shares
outstanding for the period for the effects of all potential dilutive common
shares. Note that by definition, for periods in which there is a loss
attributable to the common shareholders, there can be no dilutive impact on the
loss per share calculation.
R. Recent accounting pronouncements issued but not yet effective
The IASB has issued the following standards which are effective for annual
periods beginning on or after January 1, 2013, with early adoption permitted.
The Company is currently evaluating the impact, if any, of each of these new
standards, which are briefly summarized as follows:
IAS 27 - Separate Financial Statements:
IAS 27 replaces the existing IAS 27, "Consolidated and Separate Financial
Statements". IAS 27 contains accounting and disclosure requirements for
investments in subsidiaries, joint ventures and associates when an entity
prepares separate financial statements. IAS 27 requires an entity preparing
separate financial statements to account for those investments at cost or in
accordance with IFRS 9, "Financial Instruments".
IAS 28 - Investments in Associates and Joint Ventures:
IAS 28 prescribes the accounting for investments in associates and sets out the
application of the equity method when accounting for investments in associates
and joint ventures.
IFRS 9 - Financial Instruments:
IFRS 9 is the first part of a new standard on classification and measurement of
financial assets and liabilities that will replace IAS 39, "Financial
Instruments: Recognition and Measurements".
For financial assets, IFRS 9 has two measurement categories: amortized cost and
fair value. All equity instruments are measured at fair value. A debt instrument
is at amortized cost only if the entity is holding it to collect contractual
cash flows and the cash flows represent principal and interest. Otherwise it is
at fair value through profit and loss.
For financial liabilities, although the classification criteria for financial
liabilities will not change under IFRS 9, the approach to the fair value option
for financial liabilities may require different accounting for changes to the
fair value of a financial liability as a result of changes to an entity's own
credit risk.
IFRS 10 - Consolidated Financial Statements:
IFRS 10 establishes the principles for the presentation and preparation of
consolidated financial statements when an entity controls one or more other
entities. IFRS 10 replaces IAS 27 "Consolidated and Separate Financial
Statements" and SIC-12 "Consolidation - Special Purpose Entities".
IFRS 11 - Joint Arrangements:
IFRS 11 establishes principles for financial reporting by parties to a joint
arrangement, and requires entities to classify interests in joint arrangements
as either a joint venture or a joint operation. Joint ventures will be accounted
for using the equity method of accounting whereas for joint operations the
entity will recognize it share of the assets, liabilities, revenue and expenses
of the joint operation. IFRS 11 replaces IAS 31 "Interests in Joint Ventures"
and SIC-13 "Jointly Controlled Entities - Non-monetary Contributions by
Venturers".
IFRS 12 - Disclosure of Interests in Other Entities:
IFRS 12 establishes disclosure requirements relating to an entity's interests in
other entities such as joint arrangements, associates or unconsolidated
structured entities, including special purpose vehicles and off balance sheet
vehicles. The standard carries forward existing disclosure requirements and also
introduces significant additional disclosure requirements that address the
nature and risk associated with interests in other entities.
IFRS 13 - Fair Value Measurements:
IFRS 13 defines fair value and sets out a single IFRS framework for measuring
fair value and the required disclosures about fair value measurements for use
across all IFRS standards. IFRS 13 is intended to eliminate the inconsistencies
in fair value measurement and the disclosure requirements contained in various
other IFRS standards that refer to fair value.
4. Financial risk management
The Company's financial instruments consist of cash and cash equivalents, trade
and other receivables, insurance recoveries receivable, deposits held in trust,
and trade and other payables. The main risks that could adversely affect the
Company's financial instruments are credit risk, liquidity and funding risk, and
market and interest rate risk.
Risk management is carried out by senior management, and reviewed regularly by
the Board of Directors. The risk management policies employed by the Company are
discussed below:
Credit risk is the risk of loss associated with the counterparty's inability to
fulfill its payment obligations. The Company is currently exposed to credit risk
on its cash and cash equivalents to the extent these balances are invested with
various institutions. The Board of Directors of the Company has approved an
Investment Policy to dictate the various types of instruments and institutions
that can be invested in and monitors these against this policy on a regular
basis. Currently, the Company has entered into transactions for cash equivalents
with major Canadian financial institutions with investment grade credit ratings.
The Company is also normally exposed to credit risk on trade and other
receivables, mainly associated with its role as operator in the Garmian PSC, its
share of related expenditures and the potential reimbursement of costs incurred
under the Garmian PSC that may ultimately be due upon assignment by the KRG of
the third party participant in the Garmian PSC, and Talisman's 40 percent
interest in the Kurdamir PSC for gross costs incurred by WesternZagros while
operator under the Kurdamir PSC. Accordingly, the ability of the Company to
successfully carry out the exploration, appraisal and development of its PSC
contract areas may be impacted by the continued participation of the parties in
these activities and the potential assignment of the third party participant
interest in the Garmian PSC by the KRG and any corresponding reimbursement of
costs incurred under the Garmian PSC (refer to Note 22 "Commitments and
contingencies" for a description of the PSCs).
With respect to the Company's financial assets, the maximum exposure to credit
risk due to default of a counter party is equal to the carrying value of these
instruments. The maximum exposure to credit risk as at the reporting date is as
follows:
As at September 30, 2011 December 31, 2010
----------------------------------------------------------------------------
Cash and cash equivalents $ 35,162 $ 31,482
Trade and other receivables 284 8,648
Insurance recoveries receivable - 17,597
Deposits held in trust - 420
----------------------------------------------------------------------------
Total $ 35,446 $ 58,147
----------------------------------------------------------------------------
----------------------------------------------------------------------------
The Company does not expect any losses from non-performance by these
counterparties, and has not recorded a provision against any of these amounts as
it does not consider the balances to be impaired.
Liquidity and funding risk
Liquidity and funding risk is the risk that the Company may be unable to
generate or obtain sufficient cash or its equivalent in a timely and
cost-effective manner to meet its commitments as they become due. The Company is
engaged in acquiring properties and exploring for crude oil and natural gas and
is in the exploration phase, and subsequent to September 30, 2011 has commenced
an extended well test and the sale of crude oil test production from the
Sarqala-1 exploration well. The Company funds its share of all commitments from
existing cash balances, the proceeds from any sales of test production resulting
from the extended well test and by accessing additional sources of funding from
debt or equity markets.
The Company's capital structure consists of shareholder's equity and working
capital. The Company has not entered into any debt financing arrangements as at
the reporting date and is not subject to any externally imposed capital
requirements. Trade and other payables of $17.2 million are all current
liabilities due in less than 1 year. Certain commitments of approximately $3.2
million identified in Note 22 "Commitments and contingencies" are also due
within 1 year of the reporting date. The Company will adjust its capital
structure to manage its drilling program though the issuance of shares and
adjustments to capital spending.
The Company's objectives when managing its capital structure are as follows:
i. Ensure adequate levels of available cash and cash equivalents to meet
the Company's commitments under the Garmian and Kurdamir PSCs (also
refer to Note 22 "Commitments and contingencies"); and
ii. To prudently fund expenditures related to the acquisition of properties,
and for exploration, appraisal and development of crude oil and natural
gas properties.
The Board of Directors regularly reviews the Company's cash and cash equivalents
against the Company's expenditure commitments and assesses the need and timing
for additional financing. This review includes assessing the likelihood and
timing of an assignment of the third party participant interest by the KRG under
the Garmian PSC and any corresponding reimbursement of costs under the Garmian
PSC (refer to Note 22 "Commitments and contingencies" for a description of the
PSCs), as well as an assessment of any potential proceeds to be derived from
crude oil sales during any extended well testing. Management has a reasonable
expectation that the Company can raise the additional capital required in order
to meet future expenditures. However, the Company's results will impact its
access to the capital necessary to meet these expenditure commitments. There can
be no assurance that debt or equity financing will be available or sufficient to
meet those commitments, or for other corporate purposes, or if debt or equity
financing is available, that it will be on terms acceptable to the Company. The
inability of the Company to access sufficient capital for its operations could
have a material adverse impact on the Company's financial condition, results of
operations and prospects.
The Company realizes that the combination of circumstances and risks represent
an uncertainty that may cast doubt upon the Company's ability to realize its
assets and discharge its liabilities in the normal course of business.
Nevertheless, after considering the uncertainties, Management has a reasonable
expectation that the Company has adequate resources or can raise the additional
resources required in order to continue to adopt the going concern basis of
accounting in preparing the financial statements.
Market and interest rate risk
Market risk is the risk of loss that may arise from changes in market factors
such as interest rates, foreign exchange rates and equity or commodity prices.
The Company is exposed to interest rate risk to the extent that changes in
market interest rates will impact interest earned on the Company's cash and cash
equivalents. The Company is also exposed to foreign exchange risk, as the
majority of costs are anticipated to be incurred in U.S. dollars while the funds
it will have available to it may be in other currencies.
The Company's Investment Policy dictates the various types of instruments and
institutions that can be invested in and monitors these against this policy on a
regular basis. The Board of Directors has also approved a Foreign Exchange
Policy to dictate the currencies held by the Company and the instruments that
can be utilized by the Company to meet its day to day requirements. This Foreign
Exchange Policy requires the Company to hold the majority of its cash and cash
equivalents and short term investments in U.S. dollars and sets out the type and
duration of instruments that can be used to meet the Company's day to day
foreign exchange requirements. The Foreign Exchange Policy does allow the
Company to hold other balances, mainly Canadian dollars, to meet its funding
needs for general and administrative and other spending requirements in these
currencies. Neither aforementioned policy permits the Company to enter into any
economic hedging as it relates to interest or foreign exchange risks. As at
September 30, 2011, had the U.S. dollar changed by one percent against the
Canadian dollar, with all other variables held constant, the Company's foreign
exchange gain (loss) would have been affected by approximately $0.02 million.
The marketability and price of crude oil and natural gas that may be acquired or
discovered by the Company is, and will continue to be, affected by numerous
factors beyond its control including the impact that the various levels of
government may have on the ultimate price received for crude oil and natural gas
sales. The Company's ability to market its crude oil and natural gas may depend
on its ability to secure transportation. The Company may also be affected by
deliverability uncertainties related to the proximity of its potential
production to pipelines and processing facilities and operational problems
affecting such pipelines and facilities as well as potential government
regulation relating to price, the export of crude oil and natural gas and other
aspects of the crude oil and natural gas business.
Both crude oil and natural gas prices are subject to wide fluctuation. During
the nine months ended September 30, 2011, Brent daily spot crude prices ranged
in value from $93 to $126 per barrel. WesternZagros originally negotiated the
economic terms of the Original PSC in 2007 in a crude oil price environment of
approximately $50 per barrel. Any significant and sustained decline in crude oil
prices from that price may impact the feasibility of WesternZagros's business
plan.
5. Critical accounting judgments, estimates and assumptions
The preparation of these condensed consolidated interim financial statements in
conformity with IFRS requires the use of critical accounting estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities as at the reporting date, as
well as the reported amounts of revenues and expenses during the reporting
period. Such estimates relate to unsettled transactions and events as at the
reporting date. Accordingly, actual results may ultimately differ from the
estimated amounts as future confirming events occur. Areas that involve a higher
degree of judgment or complexity, or areas where assumptions and estimates are
significant to the condensed consolidated interim financial statements are
disclosed below.
A. Recoverability of asset carrying values
At each reporting date, the Company assesses its exploration and evaluation and
property, plant and equipment expenditures for possible impairment if events or
circumstances indicate the carrying values of the assets might not be
recoverable. Relevant indicators include the following: the continued
progression of Management's operational plans; new information obtained from
wells that have been drilled or tested; changes or restrictions in access to
drilling sites; changes in legal, regulatory, market, environmental,
technological, or political factors that could impact ongoing operations; the
ability of the Company to continue fulfilling ongoing commitments; and
significant changes in the Company's market value.
If factors indicate that the Company may need to recognize impairment, the
carrying value of the assets for each cash-generating-unit is compared to the
greater of value-in-use or fair-value less costs to sell. The determination of
the value-in-use amount, which is based on discounted future cash flows, and any
resulting impairment involves the use of significant estimates and assumptions
about future events and factors such as future commodity prices, the impact of
inflation on operating expenses, discount rates, production profiles, the
ability to produce and export crude oil and natural gas, the future capital
costs needed to develop reserves, as well as the future marketability and
availability of transportation for crude oil and natural gas that is produced.
At the reporting date, the Company is still in the exploration phase of
operations on the Garmian and Kurdamir Blocks. The Company has not recognized
any impairment for E&E expenditures nor for property, plant, and equipment.
B. Provision for decommissioning obligations
The Company recognizes both an asset and a provision for decommissioning
obligations in the period in which they are incurred by estimating the fair
value of the obligation. The fair value calculations are based on a risk-free
discount rate. Provisions for environmental clean-up and remediation costs
associated with the Company's drilling operations are based on current legal and
constructive requirements, technology, price levels and expected plans for
remediation. Actual costs and cash outflows and the timing of those cash
outflows can differ from estimates because of changes in laws and regulations,
public expectations, prices, discovery and analysis of site conditions, future
performance of wells drilled, and changes in clean-up technology. Estimating the
timing and amount of cash outflows required to settle these obligations are
inherently difficult and are based on Management's current experience. Any
differences between actual and estimated decommissioning obligations would
impact both the asset and the provision, which would then impact future
depreciation of the asset as well as accretion on the provision.
C. Income tax
Tax regulations and legislation and the interpretations thereof in the
jurisdictions that the Company operates are subject to change. As such, income
taxes are subject to measurement uncertainty. Deferred income tax assets are
assessed by Management based on all available information at the end of the
reporting period to determine the likelihood that they will be realized from
future taxable earnings.
D. Share-based payments
The estimates, assumptions, and judgments made in relation to the fair value of
share-based payments and the associated expense recognition is subject to
measurement uncertainty. The fair value of employee stock options is measured
using a Black Scholes option pricing model. Measurement inputs include share
price on measurement date, exercise price of the instrument, expected
volatility, expected life of the instrument, expected dividends, and the
risk-free interest rate.
6. Segment reporting
The Company has only one significant asset related to its interest in the PSCs
with the KRG in respect of an exploration project in the Kurdistan Region of
Iraq. The Company is still in the exploration phase and has identified one
segment for operational activities carried out in the country of Iraq. Also
refer to Note 22 "Commitments and contingencies" for a description of the PSCs.
7. Cash and cash equivalents
September 30, 2011 December 31, 2010 January 1, 2010
----------------------------------------------------------------------------
Bank balances $ 3,064 $ 3,613 $ 6,609
Term deposits 32,098 27,869 70,099
----------------------------------------------------------------------------
Cash and cash
equivalents $ 35,162 $ 31,482 $ 76,708
----------------------------------------------------------------------------
----------------------------------------------------------------------------
8. Trade and other receivables
September 30, December 31, January 1,
Current 2011 2010 2010
----------------------------------------------------------------------------
Joint venture receivables $ - $ 7,675 $ 6,636
Other receivables 284 973 53
Loan receivable from related
party - - 191
----------------------------------------------------------------------------
Total trade and other
receivables $ 284 $ 8,648 $ 6,880
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Other receivables include a GST receivable as well as balances owing from
certain payables vendors that have yet to be realized. The loan receivable at
January 1, 2010 was in respect of a loan to a senior officer, this loan was
fully repaid in the third quarter of 2010.
All classes within trade and other receivables do not contain any impaired assets.
9. Exploration and evaluation expenditures
September 30, December 31, January 1,
As at 2011 2010 2010
----------------------------------------------------------------------------
Costs $ 237,347 $ 180,770 $ 154,097
Accumulated impairment - - -
----------------------------------------------------------------------------
Net book value $ 237,347 $ 180,770 $ 154,097
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Nine months ended Twelve months ended
September 30, 2011 December 31, 2010
----------------------------------------------------------------------------
Opening net book value $ 180,770 $ 154,097
Additions, net of insurance
recoveries 57,040 26,673
Disposals (463) -
Impairment - -
----------------------------------------------------------------------------
Closing net book value $ 237,347 $ 180,770
----------------------------------------------------------------------------
----------------------------------------------------------------------------
All E&E expenditures pertain to the Kurdistan Region Exploration Project with
respect to the Company's PSCs and have been capitalized in accordance with the
Company's exploration and evaluation accounting policy. Included in E&E
expenditures as at September 30, 2011 is $0.9 million related to provisions for
decommissioning obligations (December 31, 2010: $0.2 million). For the nine
months ended September 30, 2011, the Company has capitalized $3.1 million of
general and administrative costs (September 30, 2010: $1.4 million), including
$0.5 million of share-based compensation costs (September 30, 2010: negligible
amount) directly related to exploration activities. All E&E expenditures are
excluded from depreciation.
As at September 30, 2011, the Company had approximately $227 million relating to
the Kurdamir and Garmian PSCs, net to WesternZagros, of recoverable costs
available that may ultimately be recovered from future crude oil or natural gas
sales in accordance with the PSCs (refer to Note 22 "Commitments and
contingencies" for a description of the PSCs). Under each PSC, costs subject to
recovery include all costs and expenditures incurred for exploration,
development, production and decommissioning operations, as well as any other
costs and expenditures incurred directly or indirectly from these activities.
10. Property plant and equipment
As at the reporting date, property, plant and equipment is comprised of office
and computer equipment and leasehold improvements. As the Company is still in
the exploration stage all oil and gas assets, including assets related to
provisions for decommissioning obligations, are classified within exploration
and evaluation assets.
September 30, December 31, January 1,
As at 2011 2010 2010
----------------------------------------------------------------------------
Costs $ 1,830 $ 1,830 $ 1,830
Accumulated impairment - - -
Accumulated depreciation (1,720) (1,569) (1,016)
----------------------------------------------------------------------------
Net book value $ 110 $ 261 $ 814
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Nine months ended Twelve months ended
Period ended September 30, 2011 December 31, 2010
----------------------------------------------------------------------------
Opening net book value $ 261 $ 814
Additions - -
Impairment - -
Depreciation (151) (553)
----------------------------------------------------------------------------
Closing net book value $ 110 $ 261
----------------------------------------------------------------------------
----------------------------------------------------------------------------
11. Deposits held in trust
The Company had deposited in trust for a supplier amounts to be utilized to fund
certain expenditures for drilling operations. During the first quarter of 2011
these funds held in trust were released back to the Company.
12. Income taxes
For the nine months ended September 30 2011 2010
----------------------------------------------------------------------------
Current income tax recovery $ (1,244) $ (1,014)
Future income tax expense (recovery) 121 151
----------------------------------------------------------------------------
Income tax expense (recovery) $ (1,123) $ (863)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
The deferred income tax asset is comprised of:
September 30, December 31, January 1,
Deferred income tax asset as at 2011 2010 2010
----------------------------------------------------------------------------
Share issue costs $ 82 $ 204 $ 408
Temporary differences on
property, plant and equipment 9 (18) (37)
----------------------------------------------------------------------------
Total deferred income tax asset $ 91 $ 186 $ 371
----------------------------------------------------------------------------
----------------------------------------------------------------------------
The deferred income tax liability is comprised of:
Deferred income tax liability as September 30, December 31, January 1,
at 2011 2010 2010
----------------------------------------------------------------------------
Temporary differences on
property, plant and equipment $167 $140 $161
Non-capital loss carryforwards - - (27)
----------------------------------------------------------------------------
Total deferred income tax
liability $ 167 $ 140 $ 134
----------------------------------------------------------------------------
----------------------------------------------------------------------------
13. Trade and other payables
Current September 30, December 31, January 1,
2011 2010 2010
----------------------------------------------------------------------------
Trade payables $ 370 $ 4,052 $ 6,705
Accruals 16,806 17,473 11,592
----------------------------------------------------------------------------
Total trade and other payables $ 17,176 $ 21,525 $ 18,297
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Trade payables are non-interest bearing and are normally settled on 30 to 60 day
terms. Accruals relate mainly to E&E and other expenditures incurred as at the
reporting date.
14. Provision for decommissioning obligations
Decommissioning liabilities are recognized when the Company has a present legal
or constructive obligation as a result of past events, and it is probable that
an outflow of resources will be required to settle the obligation, and a
reliable estimate of the amount of obligation can be made. Provisions are made
for the present value of the future cost of abandonment of oil and gas wells and
related facilities.
The amount recognized is the estimated cost of decommissioning activities based
on internal engineering estimates prevailing at the reporting date, discounted
to its present value utilizing a pre-tax risk-free interest rate. Changes in the
estimated decommissioning costs or the estimated timing of decommissioning costs
are dealt with prospectively by recording an adjustment to the provision, with a
corresponding adjustment to exploration and evaluation assets, and are updated
at each reporting date to reflect the current market assessments of the time
value of money and the risks specific to the obligation.
These costs are assumed to be incurred in the years 2035 and 2036 in respect of
well locations as at the reporting date. The Company's share of the total
undiscounted amount of estimated cash flow required to settle the obligation is
$2.4 million. The Company has used the Bank of Canada long-term bond yield rate
and an inflation rate of 4 percent to calculate the net present value of the
future obligations. The additional obligations incurred in 2011 relate to the
Company's 100 percent working interest funding for the Sarqala-1 re-entry
operation as well as the drilling operations at Mil Qasim-1 (also refer to Note
22 "Commitments and contingencies" for a description of the PSCs).
The following table presents the reconciliation of the Company's provision for
decommissioning liabilities:
Nine months ended Twelve months ended
September 30, 2011 December 31, 2010
----------------------------------------------------------------------------
Balance, beginning of period 509 432
Additional obligations incurred $ 662 $ -
Changes in estimates or timing of
cash flows 62 61
Accretion 17 16
----------------------------------------------------------------------------
Balance, end of period $ 1,250 $ 509
----------------------------------------------------------------------------
----------------------------------------------------------------------------
15. Share capital
As at September 30, 2011, the Company is authorized to issue an unlimited number
of common shares and preferred shares, issuable in series. The common shares are
without nominal or par value.
16. Share based payments
Pursuant to the stock option plan, the Board of Directors may grant options to
directors, officers, employees and other service providers. The aggregate number
of shares that may be reserved for issuance pursuant to stock options may not
exceed 10 per cent of the issued and outstanding common shares of the Company on
a non-diluted basis as at the time of granting. Stock options expire not more
than five years from the date of grant, or earlier if the individual ceases to
be associated with the Company, and the option vesting period is determined at
the discretion of the Board of Directors when granted. These options are equity
settled share based payment transactions.
The following tables present the reconciliation of stock options granted:
Weighted
For the year ended December 31, 2010 average
exercise
Number of options price ($Cdn)
----------------------------------------------------------------------------
Outstanding, beginning of year 13,007,334 $ 1.50
Granted 9,764,900 0.49
Exercised - -
Forfeited and expired (2,417,334) 1.67
----------------------------------------------------------------------------
Outstanding, end of year 20,354,900 $ 1.00
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Exercisable at December 31, 2010 12,143,965 $1.30
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Weighted
For the three months ended September 30, average
2011 exercise
Number of Options price ($Cdn)
----------------------------------------------------------------------------
Outstanding, beginning of period 19,585,033 $ 0.97
Granted 535,000 0.55
Exercised (70,600) 0.51
Forfeited and expired (1,192,066) 0.85
----------------------------------------------------------------------------
Outstanding, end of period 18,857,367 $ 0.97
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Weighted
For the nine months ended September 30, average
2011 exercise
Number of Options price ($Cdn)
----------------------------------------------------------------------------
Outstanding, beginning of period 20,354,900 $ 1.00
Granted 582,000 0.56
Exercised (79,800) 0.51
Forfeited and expired (1,999,733) 1.17
----------------------------------------------------------------------------
Outstanding, end of period 18,857,367 $ 0.97
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Exercisable at September 30, 2011 10,727,898 $ 1.31
----------------------------------------------------------------------------
----------------------------------------------------------------------------
The fair value of all options granted have been estimated at the grant date
using the Black-Scholes option pricing model and are summarized in the following
table:
----------------------------------------------------------------------------
Nine months ended Twelve months ended
September 30, 2011 December 31, 2010
----------------------------------------------------------------------------
Weighted average fair value of
stock options granted $ 0.37 $ 0.29
Average Risk Free Interest Rate $ 1.16% 1.62%
Expected Life 3 years 2 - 3 years
Average Expected Volatility 108% 120%
Dividend Per Share Nil Nil
----------------------------------------------------------------------------
----------------------------------------------------------------------------
During the nine months ended September 30, 2011, the Company recognized $0.6
million (2010: $0.6 million) of stock based compensation as general and
administrative expense and capitalized $0.5 million (2010: negligible amount).
17. General and administrative expenses, by nature
For the nine months ended September 30 2011 2010
----------------------------------------------------------------------------
Staff expenses $ 4,379 $ 3,492
Share-based payments 635 593
Travel expenses 725 337
Professional fees 924 924
Office costs 823 820
Regulatory and corporate project costs 414 538
Other administrative expenses 370 314
Less capitalized general and administrative costs
(2,669) (2,843)
----------------------------------------------------------------------------
Total administrative expenses $ 5,601 $ 4,175
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Key management personnel have been identified as the Board of Directors and the
Executive Management Team. Details of key management remuneration are shown in
Note 18.
18. Related party transactions and balances
All wholly-owned subsidiaries as listed in Note 3(c) have been included in the
consolidated accounts.
The remuneration of the eleven key management personnel of the Company, which
includes the Directors and Officers and other Executive Management personnel, is
set out below in aggregate:
For the nine months ended September 30 2011 2010
----------------------------------------------------------------------------
Salaries and employee benefits $ 1,335 $ 945
Share-based compensation expense 636 505
----------------------------------------------------------------------------
Total $ 1,971 $ 1,450
----------------------------------------------------------------------------
----------------------------------------------------------------------------
19. Loss per share, basic and diluted
The basic loss per share is calculated by dividing the loss attributable to
shareholders of the Company by the weighted average number of common shares
issued during the period. In computing diluted per share amounts, all of the
Company's options at the reporting date totaling 18,857,367 (September 30, 2010
- 11,482,334) have been excluded as they are anti-dilutive. Accordingly no
additional common shares were added to the basic weighted average shares
outstanding to account for dilution.
The basic and diluted loss per share was calculated as follows:
Three months ended Nine months ended
September 30, September 30,
2011 2010 2011 2010
----------------------------------------------------------------------------
Loss for the period $ 2,013 $ 819 $ 4,909 $ 3,798
Weighted-average common
shares (000's) 297,191 207,464 274,816 207,464
----------------------------------------------------------------------------
Loss per share (basic and
diluted) $ 0.007 $ 0.004 $ 0.018 $ 0.018
----------------------------------------------------------------------------
----------------------------------------------------------------------------
20. Shareholder rights plan
On October 18, 2007, the Company adopted a shareholder rights plan (the "Plan").
Under the Plan, one right has been issued in respect of each currently issued
common share and one right will be issued with each additional common share
which is issued. The rights remain attached to the common shares and are not
exercisable or separable unless one or more of certain specified events occur.
If a person or group acting in concert acquires 20 per cent or more of the
common shares of the Company, the rights will entitle the holders thereof (other
than the acquiring person or group) to purchase common shares at a substantial
discount from the then market price. The rights are not triggered by a
"Permitted Bid" as defined in the Plan. The Plan will remain in effect until
termination of the annual meeting of shareholders in 2013, unless extended by
resolution of the shareholders at such meeting.
21. Supplemental cash flow information
Expenditures on exploration and evaluation assets are comprised of:
For the three months For the nine months
ended September 30, ended September 30,
2011 2010 2011 2010
----------------------------------------------------------------------------
Expenditures on exploration
and evaluation assets $ (24,651) $ (20,455) $ (59,026) $ (49,570)
Change in non-cash investing
working capital 4,920 (3,255) 4,545 (9,830)
----------------------------------------------------------------------------
$ (19,731) $ (23,710) $ (54,481) $ (59,400)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Changes in non-cash working capital is comprised of:
For the three months For the nine months
ended September 30, ended September 30,
2011 2010 2011 2010
----------------------------------------------------------------------------
Related to operating
activities
Trade and other receivables $ 1,294 $ 232 $ 16 $ 185
Prepaid expenses 222 170 (198) (42)
Trade and other payables - - - -
----------------------------------------------------------------------------
$ 1,516 $ 402 $ (182) $ 143
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Related to investing
activities
Trade and other receivables $ 1,377 $ (908) $ 8,768 $ (4,045)
Trade and other payables 3,543 (2,347) (4,223) (5,785)
----------------------------------------------------------------------------
$ 4,920 $ (3,255) $ 4,545 $ (9,830)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
22. Commitments and contingencies
A. PSC commitments
During the third quarter of 2011, the Company finalized an agreement with the
Kurdistan Regional Government and Talisman to amend the original Production
Sharing Contract ("Original PSC") that governed the Company's exploration
activities in the Kalar-Bawanoor Block in Kurdistan. The agreement divided the
contract area of the Original PSC into two contract areas named Garmian and
Kurdamir (see chart below), each of which is now operated under a distinct PSC.
WesternZagros continues to operate the southern contract area named the Garmian
Block that covers approximately 1,780 square kilometres and is now governed
under the new Garmian PSC. The northern contract area is named the Kurdamir
Block. It covers some 340 square kilometres and is now governed under an amended
version of the Original PSC (the "Kurdamir PSC"). The northern area is now
operated by Talisman. WesternZagros's production sharing terms, under both the
Garmian and Kurdamir PSCs, remain unchanged from the Original PSC.
A summary of the material amendments to the Original PSC is as follows:
----------------------------------------------------------------------------
Original PSC Amended PSC New PSC
(Kalar-Bawanoor) (Kurdamir) (Garmian)
----------------------------------------------------------------------------
First December 31, 2010 June 30, 2012 December 31, 2011
Exploration
Sub-Period
(expires)
----------------------------------------------------------------------------
Exploration Third Exploration Kurdamir-2 Mil Qasim-1
Obligation Well Exploration Well
(remaining)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Second Additional Two Additional Two Additional Two
Exploration Years Years Years
Sub-Period
----------------------------------------------------------------------------
Exploration Two Exploration One Appraisal One Exploration
Obligation Wells Well Well
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Other Extensions Two One Year Six Month One Year
Extensions Extension Extension
----------------------------------------------------------------------------
Economic Terms 10% Royalty Oil, Unchanged Unchanged
remainder
available for
Cost Recovery and
Profit Oil
----------------------------------------------------------------------------
PSC Payments $ 5 Million Additional Additional
Signature Bonus Capacity Building Capacity Building
$40 Million Support Payment Support Payment
Capacity Building payable equal to payable equal to
Support Payment 3% of 3% of
$ 1.1 Million WesternZagros WesternZagros
Annual Payments Profit Oil. Profit Oil.
Continuation of Annual payments
previous annual 50% of previous
payments. payments.
----------------------------------------------------------------------------
Operator WesternZagros Talisman WesternZagros
----------------------------------------------------------------------------
Ownership WesternZagros 40% WesternZagros 40% WesternZagros 40%
Talisman 40% Talisman 40% Unassigned TPPI
KRG 20% (i) KRG 20% (i) 40%(ii)
KRG 20% (i)
----------------------------------------------------------------------------
Contract Area 2,120 km2 340 km2 1,780 km2
----------------------------------------------------------------------------
(i) WesternZagros funds 20% of the KRG costs. Ultimately to be recovered by
WesternZagros through KRG's share of Cost Recovery Oil. For the Garmian Block,
the current PSC requires that the third party participant will be required to
pay for half of the KRG's carried share. This will be confirmed once the TPPI is
assigned.
(ii) WesternZagros initially funds the 40% of the costs for the third party
participant until it is assigned by the KRG. The amounts funded by WesternZagros
for the TPPI will be repaid upon assignment of this interest.
As at September 30, 2011, the Company estimates expenditures of approximately
$52 million to meet its remaining commitments for the first exploration
sub-periods under the PSCs. This estimate includes the Company's current 100
percent funding requirement for the remaining costs associated with drilling the
Mil Qasim-1 commitment well by December 31, 2011; the Company's 60 percent
funding requirement of costs for drilling the Kurdamir-2 commitment well by June
30, 2012; the associated supervision and local office support costs related to
both drilling operations; the Company's annual funding requirements for certain
technological, logistical, recruitment and training support under its PSCs; and
other commitments related to Kurdamir Block activities.
B. Other commitments
The Company has entered into various exploration-related contracts, including
contracts for drilling equipment, services, tangibles and consulting service
contracts. The following table summarizes the estimated commitments in relation
to these exploration-related contracts relating to the Garmian PSC and other
contractual obligations at September 30, 2011:
For the Years Ending December 31,
2011 2012 2013 2014 2015+ Total
----------------------------------------------------------------------------
Exploration $ 1,437 - - - - $ 1,437
Office $ 162 $ 602 $ 559 $ 456 - $ 1,779
----------------------------------------------------------------------------
$ 1,599 $ 602 $ 559 $ 456 - $ 3,216
----------------------------------------------------------------------------
----------------------------------------------------------------------------
C. Contingencies
i. Litigation
From time to time, the Company may become involved in legal or administrative
proceedings in the normal conduct of business. The Company is currently in
disputes with two contractors, one is related to compensation owing to a
contractor under a terminated agreement and the other is over a potential breach
of contract by a contractor related to services provided to the Company.
Although there has been no formal claim of monetary damages to date in either of
the matters, the Company does not currently expect that the matters,
individually or in aggregate, would have a material impact on the Company's
financial position. The Company continues to pursue resolution of these
disputes, and will enforce its contractual rights through arbitration if
necessary. Notice of arbitration has been received by the Company with respect
to one of these disputes. Given the early stage of the disputes, there is no
certainty as to the ultimate outcome of such proceedings. Amounts involved in
such matters are not reasonably estimable due to uncertainty as to the final
outcome.
ii. Regulatory
Oil and gas operations are subject to extensive controls and regulations imposed
by various levels of government that may be amended from time to time. The
Company's operations may require licenses and permits from various governmental
authorities in the countries in which it operates. Under the Garmian and
Kurdamir PSCs, the KRG is obligated to assist in obtaining all permits and
licenses from any government agencies in the Kurdistan Region and from any other
government administration in Iraq. There can be no assurance that the Company
will be able to obtain all necessary licenses and permits that may be required
to carry out exploration and development of its projects.
The political and security situation in Iraq is unsettled and volatile. The
Kurdistan Region is the only "Region" of Iraq that is constitutionally
established pursuant to the Iraq Constitution, which expressly recognizes the
Kurdistan Region. The political issues of federalism and the autonomy of the
Regions of Iraq are matters about which there are major differences between the
various political factions in Iraq. These differences could adversely impact the
Company's interest in the Kurdistan Region including the ability to export any
hydrocarbons as a result of our activities.
23. Subsequent events
Subsequent to September 30, 2011, WesternZagros completed a private placement of
common shares in which 74 million common shares were issued to the Abu Dhabi
National Energy Company PJSC at a price of Cdn $0.63 per share. Total gross
proceeds received were Cdn $46.6 million. Also subsequent to September 30, 2011,
WesternZagros sold its first oil produced from the Sarqala-1 extended well test.
WesternZagros has executed two sales contracts for total delivery of
approximately 66,500 barrels of oil and has received payments totaling $3.8
million in advance of delivery for this test production. Deliveries under these
sales agreements to November 17, 2011 have totaled approximately 47,000 barrels
of oil.
24. Explanation of transition to IFRS
These condensed consolidated interim financial statements present the Company's
financial results of operations and financial position, prepared in accordance
with IFRS, as at and for the three and nine months ended September 30, 2011, in
respect of the Company's first annual reporting date under IFRS of December 31,
2011. Previously the Company prepared its consolidated annual and consolidated
interim financial statements in accordance with Canadian generally accepted
accounting principles. In accordance with IFRS 1, First Time Adoption of IFRS,
certain disclosures relating to the transition to IFRS are given in this note.
These disclosures are prepared under IFRS as set out in the basis of preparation
in Note 2.
IFRS 1 allows first time adopters of IFRS to utilize a number of voluntary
exemptions from the general principal of retrospective restatement. The Company
has utilized the following exemptions:
A. IFRS 3 Business combinations
This standard has not been applied to acquisitions that occurred before January
1, 2010, the Company's transition date.
B. Full-cost book value as deemed costs
In July 2009, the IASB published an amendment to IFRS 1, Additional Exemptions
for First-Time Adopters, to allow a first time adopter that had previously
utilized full-cost accounting for oil and gas activities under previous GAAP to
elect to measure exploration and evaluation assets at the date of transition at
the book value amount determined under the adopter's previous GAAP. The Company
did follow a full cost approach under previous GAAP and has elected to utilize
this exemption to measure E&E expenditures on a deemed cost basis at the date of
transition to IFRS.
C. Reconciliation of equity from Canadian GAAP to IFRS as at the date of IFRS
transition - January 1, 2010 (United States dollars thousands):
Effect of
Canadian transition to
Notes GAAP IFRS IFRS
----------------------------------------------------------------------------
Assets
Current assets
Cash and cash
equivalents $ 76,708 $ - $ 76,708
Trade and other
receivables 6,880 - 6,880
Prepaid expenses 183 - 183
Income tax recoverable 1,738 - 1,738
Future income tax
assets a 231 (231) -
----------------------------------------------------------------------------
Total current assets 85,740 (231) 85,509
Non-current assets
Property, plant and
equipment b 154,911 (154,097) 814
Exploration and
evaluation
expenditures b - 154,097 154,097
Deposits held in trust 420 - 420
Deferred tax assets a 6 365 371
----------------------------------------------------------------------------
Total non-current
assets 155,337 365 155,702
----------------------------------------------------------------------------
Total assets $ 241,077 $ 134 $ 241,211
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Liabilities
Current liabilities
Accounts payable and
accrued liabilities $ 18,297 $ - $ 18,297
----------------------------------------------------------------------------
Total current
liabilities 18,297 - 18,297
Non-current liabilities
Provision for
decommissioning
obligations c 175 257 432
Deferred tax
liabilities a - 134 134
----------------------------------------------------------------------------
Total non-current
liabilities 175 391 566
----------------------------------------------------------------------------
Total liabilities 18,472 391 18,863
----------------------------------------------------------------------------
Equity
Share capital 253,583 - 253,583
Contributed surplus d 8,749 905 9,654
Deficit e (39,727) (1,162) (40,889)
----------------------------------------------------------------------------
Total equity 222,605 (257) 222,348
----------------------------------------------------------------------------
Total equity and
liabilities $ 241,077 $ 134 $ 241,211
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Explanation of the effect of transition to IFRS (United States dollars thousands):
a. Reclassification of the current portion of future income tax assets
recognized under previous GAAP to non-current assets in accordance with IAS 12,
Income Taxes. Net effect was a decrease in current future income tax assets of
$0.2 million. In addition, the presentation of net deferred tax assets and
liabilities are based on a separate legal entity basis which resulted in a net
increase of $0.4 million in deferred tax assets and an increase of $0.1 million
in deferred tax liabilities. The net overall change to deferred taxes was NIL.
b. Reclassification of E&E expenditures previously classified as property, plant
and equipment under previous GAAP in accordance with IFRS 1, First Time Adoption
of IFRS. The Company utilized the exemption under IFRS 1 that allows entities
following a full-cost approach under previous GAAP to recognize exploration and
evaluation assets on a deemed cost basis upon transition to IFRS. Net effect was
a decrease in property, plant and equipment of $154.1 million with a
corresponding increase in exploration and evaluation assets.
c. Upon adoption of IAS 37, Provisions, Contingent Liabilities, and Contingent
Assets, the provision for decommissioning obligations (previously referred to as
"asset retirement obligation") was increased due to a change in the discount
rate utilized for the present value calculation of these obligations. Under
previous GAAP a credit adjusted risk-free rate was utilized, but under IFRS a
non-credit adjusted risk-free rate is utilized in the valuation of the
discounted cash flows associated with estimated future abandonment costs. Net
effect was an increase in the provision for decommissioning liabilities of $0.3
million, with a corresponding increase in the accumulated deficit.
d. Upon adoption of IFRS 2, Share Based Payments, the expense relating to
options granted to employees was recognized over the vesting period for each
individual vesting tranche, as opposed to previous GAAP which recognized the
expense on a straight-line basis over the total vesting period of the entire
grant. Upon transition to IFRS this resulted in an accelerated recognition of
the expense associated with share-based payments, but was partially offset by a
reduction in expense due to estimated forfeitures associated with unvested
options not previously estimated under GAAP. Net effect was an increase in
contributed surplus of $0.9 million, with a corresponding increase in the
accumulated deficit.
e. The cumulative effect of these transition adjustments on the accumulated
deficit as at the date of transition to IFRS is based on the combination of
items (c) and (d). The net effect was an increase in the accumulated deficit of
$1.2 million.
D. Reconciliation of equity from Canadian GAAP to IFRS as at the end of the
prior year comparative interim period - September 30, 2010 (United States
dollars thousands):
Effect of
Canadian transition
Notes GAAP to IFRS IFRS
----------------------------------------------------------------------------
Assets
Current assets
Cash and cash equivalents $ 30,100 $ - $ 30,100
Trade and other receivables 10,739 - 10,739
Insurance recoveries
receivable a 21,270 (20,108) 1,162
Prepaid expenses 225 - 225
Income tax recoverable 2,155 - 2,155
Future income tax assets b 127 (127) -
----------------------------------------------------------------------------
Total current assets 64,616 (20,235) 44,381
Non-current assets
Property, plant and equipment c 169,519 (169,148) 371
Exploration and evaluation
expenditures c - 188,373 188,373
Deposits held in trust 420 - 420
Deferred income tax assets b - 225 225
----------------------------------------------------------------------------
Total non-current assets 169,939 19,450 189,389
----------------------------------------------------------------------------
Total assets $ 234,555 $ (785) $ 233,770
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Liabilities
Current liabilities
Accounts payable and accrued
liabilities $ 14,011 $ - $ 14,011
----------------------------------------------------------------------------
Total current liabilities 14,011 - 14,011
Non-current liabilities
Provision for decommissioning
obligations d 186 339 525
Deferred tax liabilities b 42 98 140
----------------------------------------------------------------------------
Total non-current liabilities 228 437 665
----------------------------------------------------------------------------
Total liabilities 14,239 437 14,676
----------------------------------------------------------------------------
Equity
Share capital 253,583 - 253,583
Contributed surplus e 10,284 (86) 10,198
Deficit f (43,551) (1,136) (44,687)
----------------------------------------------------------------------------
Total equity 220,316 (1,222) 219,094
----------------------------------------------------------------------------
Total equity and liabilities $ 234,555 $ (785) $ 233,770
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Explanation of the effect of transition to IFRS (United States dollars thousands):
a. Upon transition to IFRS, an adjustment was required for the timing of
recognition related to the insurance recoveries receivable. Under IFRS,
receivables could only be recognized to the extent that they were
"virtually certain" to be realized. Virtual certainty was defined as the
point in time the adjuster approved the interim claims, rather than
Management's estimate of the receivable as calculated under previous
GAAP. The resulting adjustment as at Sept 30, 2010 was a decrease in the
insurance recoveries receivable of $20.1 million. Note that the total
insurance recoveries for year ended December 31, 2010 were unchanged.
b. Reclassification of the current portion of future income tax assets
recognized under previous GAAP to non-current assets in accordance with
IAS 12, Income Taxes. Net effect is a decrease in current future income
tax assets of $0.1 million. In addition, the presentation of net
deferred tax assets and liabilities are based on a separate legal entity
basis which resulted in a net increase of $0.2 million in deferred tax
assets and an increase of $0.1 million in deferred tax liabilities. The
net overall change to deferred taxes was NIL.
c. Adjustments to property, plant and equipment as well as E&E expenditures
were as follows:
i. E&E expenditures previously classified as property, plant and
equipment under GAAP were reclassified in accordance with IFRS 1,
First Time Adoption of IFRS. The Company utilized the IFRS 1
exemption allowing entities following a full-cost approach under
previous GAAP to recognize exploration and evaluation assets on a
deemed cost basis upon transition to IFRS. In addition, E&E
expenditures incurred during the nine months ended September 30,
2010 were also reclassified in accordance with IFRS 6, Exploration
for and Evaluation of Mineral Resources. The net effect was a
decrease in property, plant and equipment of $169.1 million with an
associated increase in E&E expenditures.
ii. Certain corporate projects that were previously capitalized within
the full cost pool as allowed under previous Canadian GAAP, but
which were unrelated to the Company's PSC contract areas, have been
expensed as part of General and administrative costs for the nine
months ended September 30, 2010 after conversion to IFRS. The net
effect was a decrease in E&E expenditures of $0.3 million.
iii.Share-based payment amounts associated with employees that directly
contribute to exploration and evaluation activities are recognized
as part of E&E expenditures. Upon adoption of IFRS 2, Share Based
Payments, the expense relating to options granted to those employees
is recognized over the vesting period for each individual vesting
tranche, as opposed to previous GAAP which recognized the expense on
a straight-line basis over the total vesting period of the entire
grant. The net effect of the change in the timing of recognition of
share-based payments associated with those employees that directly
contributed to exploration and evaluation activities during the nine
months ended September 30, 2010 resulted in a decrease in E&E
expenditures of $0.7 million.
iv. Upon adoption of IAS 37, Provisions, Contingent Liabilities, and
Contingent Assets, the provision for decommissioning obligations
(previously referred to as "asset retirement obligation") is
prospectively adjusted each period for any changes in the estimated
future decommissioning expenditures or the timing of estimated
future decommissioning expenditures. Changes to estimates during the
nine months ended September 30, 2010 resulted in an overall increase
in the provision for decommissioning obligations of $0.1 million.
Accordingly, this resulted in a $0.1 million corresponding increase
in E&E expenditures.
v. The corresponding impact of item (a) above related to the change in
timing for recognition of insurance recoveries credits resulted in
an increase of $20.1 million for E&E expenditures.
vi. The total net impact of items (i) through (v) was an increase in
exploration and evaluation assets of $188.4 million, including other
minor adjustments of $0.1 million.
d. Upon adoption of IAS 37, Provisions, Contingent Liabilities, and
Contingent Assets, the provision for decommissioning obligations
(previously referred to as "asset retirement obligation") increased due
to a change in the discount rate utilized for the present value
calculation of these obligations upon conversion to IFRS. Under previous
GAAP a credit adjusted risk-free rate was utilized, but under IFRS a
non-credit adjusted risk-free rate is utilized in the valuation of the
discounted cash flows associated with estimated future abandonment
costs. In addition, during the nine months ended September 30, 2010, the
provision for decommissioning obligations was also adjusted
prospectively each period for changes in the estimated future
decommissioning expenditures or the timing of estimated future
decommissioning expenditures. The total net effect of these changes was
an increase in the provision for decommissioning obligations of $0.3
million.
e. Upon adoption of IFRS 2, Share Based Payments, the expense relating to
options granted to employees is recognized over the vesting period for
each individual vesting tranche, as opposed to previous GAAP which
recognized the expense on a straight-line basis over the total vesting
period of the entire grant. Upon transition to IFRS this resulted in an
accelerated recognition of the expense associated with share-based
payments, but was also impacted by a reduction in expense associated
with estimated forfeitures associated with unvested options which were
not estimated under previous GAAP. The net effect at September 30, 2010
was a decrease in contributed surplus of $0.1 million.
f. The cumulative change in the accumulated deficit is summarized as
follows:
i. Impact of increased provision for decommissioning obligation at
January 1, 2010 was an increase in accumulated deficit of $0.3
million.
ii. Impact of increased contributed surplus related to share based
payments at January 1, 2010 was an increase in accumulated deficit
of $0.9 million.
iii.Impact of expensing certain Corporate projects that had been
capitalized under previous GAAP during the nine months ended
September 30, 2010 was an increase in the accumulated deficit of
$0.3 million.
iv. Due to the timing difference between IFRS and previous GAAP for
recognition of the expense associated with share-based payments as
well as the impact of estimated forfeitures under IFRS for the nine
months ended September 30, 2010, there was a decrease in the
accumulated deficit of $0.3 million.
v. The total impact of items (i) through (iv) was an increase in the
accumulated deficit of $1.1 million as at September 30, 2010,
including other minor adjustments of $(0.1) million.
E. Reconciliation of equity from Canadian GAAP to IFRS as at the end of the last
reporting year under Canadian GAAP - December 31, 2010 (United States dollars
thousands):
Effect of
Canadian transition
Notes GAAP to IFRS IFRS
----------------------------------------------------------------------------
Assets
Current assets
Cash and cash equivalents $ 31,482 $ - $ 31,482
Trade and other receivables 8,648 - 8,648
Insurance recoveries
receivable 17,597 - 17,597
Deposits held in trust 420 - 420
Prepaid expenses 39 - 39
Income tax recoverable 887 - 887
Future income tax assets a 102 (102) -
----------------------------------------------------------------------------
Total current assets 59,175 (102) 59,073
Non-current assets
Property, plant and equipment b 182,056 (181,795) 261
Exploration and evaluation
expenditures b - 180,770 180,770
Future income tax assets a - 186 186
----------------------------------------------------------------------------
Total non-current assets 182,056 (839) 181,217
----------------------------------------------------------------------------
Total assets $ 241,231 $ (941) $ 240,290
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Liabilities
Current liabilities
Accounts payable and accrued
liabilities $ 21,525 $ - $ 21,525
----------------------------------------------------------------------------
Total current liabilities 21,525 - 21,525
Non-current liabilities
Provision for decommissioning
obligations c 189 320 509
Deferred tax liabilities 56 84 140
----------------------------------------------------------------------------
Total non-current liabilities 245 404 649
----------------------------------------------------------------------------
Total liabilities 21,770 404 22,174
----------------------------------------------------------------------------
Equity
Share capital 253,583 - 253,583
Contributed surplus d 11,353 (130) 11,223
Deficit e (45,475) (1,215) (46,690)
----------------------------------------------------------------------------
Total equity 219,461 (1,345) 218,116
----------------------------------------------------------------------------
Total equity and liabilities $ 241,231 $ (941) $ 240,290
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Explanation of the effect of transition to IFRS (United States dollars thousands):
a. Reclassification of the current portion of future income tax assets
recognized under previous GAAP to non-current assets in accordance with
IAS 12, Income Taxes. Net effect is a decrease in current future income
tax assets of $0.1 million. In addition, the presentation of net
deferred tax assets and liabilities are based on a separate legal entity
basis which resulted in a net increase of $0.2 million in deferred tax
assets and an increase of $0.1 million in deferred tax liabilities. The
net overall change to deferred taxes was NIL.
b. Adjustments to property, plant, and equipment as well as E&E
expenditures were as follows:
i. E&E expenditures previously classified as property, plant and
equipment under GAAP were reclassified in accordance with IFRS 1,
First Time Adoption of IFRS. The Company utilized the IFRS 1
exemption allowing entities following a full-cost approach under
previous GAAP to recognize exploration and evaluation assets on a
deemed cost basis upon transition to IFRS. In addition, E&E
expenditures incurred during the year ended December 31, 2010 were
also reclassified in accordance with IFRS 6, Exploration for and
Evaluation of Mineral Resources. The net effect was a decrease in
property, plant and equipment of $181.8 million and an associated
increase in E&E expenditures of $181.8 million.
ii. Certain corporate projects that were previously capitalized within
the full cost pool as allowed under previous Canadian GAAP, but
which were unrelated to the Company's PSC contract areas, have been
expensed as part of General and administrative costs for the year
ended December 31, 2010. The net effect was a decrease in E&E
expenditures of $0.3 million.
iii.Share-based payment amounts associated with employees that directly
contribute to exploration and evaluation activities are recognized
as part of intangible E&E expenditures. Upon adoption of IFRS 2,
Share Based Payments, the expense relating to options granted to
those employees is recognized over the vesting period for each
individual vesting tranche, as opposed to previous GAAP which
recognized the expense on a straight-line basis over the total
vesting period of the entire grant. The net effect of the change in
the timing of recognition of share-based payments associated with
those employees that directly contributed to exploration and
evaluation activities during the year ended December 31, 2010
resulted in a decrease in E&E expenditures of $0.8 million.
iv. Upon adoption of IAS 37, Provisions, Contingent Liabilities, and
Contingent Assets, the provision for decommissioning obligations
(previously referred to as "asset retirement obligation") is
prospectively adjusted each period for changes in the estimated
future decommissioning expenditures or the timing of estimated
future decommissioning expenditures. Changes to estimates during the
year ended December 31, 2010 resulted in an overall increase in the
provision for decommissioning obligations of $0.1 million. The net
effect was a corresponding increase in E&E expenditures of $0.1
million.
v. The total net impact of items (i) through (iv) was an increase in
exploration and evaluation assets of $180.8 million.
c. Upon adoption of IAS 37, Provisions, Contingent Liabilities, and
Contingent Assets, the provision for decommissioning obligations
(previously referred to as "asset retirement obligation") increased due
to a change in the discount rate utilized for the present value
calculation of these obligations upon conversion to IFRS. Under previous
GAAP a credit adjusted risk-free rate was utilized, but under IFRS a
non-credit adjusted risk-free rate is utilized in the valuation of the
discounted cash flows associated with estimated future abandonment
costs. In addition, during the year ended December 31, 2010, the
provision for decommissioning obligations was also adjusted
prospectively each period for changes in the estimated future
decommissioning expenditures or the timing of estimated future
decommissioning expenditures. The total net effect of these changes was
an increase in the provision for decommissioning obligations of $0.3
million.
d. Upon adoption of IFRS 2, Share Based Payments, the expense relating to
options granted to employees is recognized over the vesting period for
each individual vesting tranche, as opposed to previous GAAP which
recognized the expense on a straight-line basis over the total vesting
period of the entire grant. Upon transition to IFRS this resulted in an
accelerated recognition of the expense associated with share-based
payments in prior periods and resulted in less expense recognition
during 2010. In addition, the expense associated with share based
payments was slightly reduced due to estimated forfeitures associated
with unvested options that had not been estimated under previous GAAP.
The net effect at December 31, 2010 was a reduction in contributed
surplus of $0.1 million.
e. The cumulative change in the accumulated deficit is summarized as
follows:
i. Impact of increased provision for decommissioning obligation at
January 1, 2010 was an increase in accumulated deficit of $0.3
million.
ii. Impact of increased contributed surplus related to share based
payments at January 1, 2010 was an increase in accumulated deficit
of $0.9 million.
iii.Impact from expensed portion of share based payments during the year
ended December 31, 2010 was a decrease in accumulated deficit of
$0.3 million.
iv. Impact from increased accretion expense associated with
decommissioning liabilities for the year ended December 31, 2010 was
NIL.
v. Impact of expensing certain Corporate projects that had been
capitalized under previous GAAP during the year ended December 31,
2010 was an increase in the accumulated deficit of $0.3 million.
vi. The total impact of all of items (i) through (v) was an increase in
the accumulated deficit of $1.2 million.
F. Reconciliation of comprehensive loss from Canadian GAAP to IFRS for the three
months ended September 30, 2010 (United States dollars thousands):
Effect of
Canadian transition
Note GAAP to IFRS IFRS
----------------------------------------------------------------------------
Revenue
----------------------------------------------------------------------------
Interest income $ 38 $ - $ 38
----------------------------------------------------------------------------
Expenses
General and administrative
expenses a 1,208 (279) 929
Depreciation 132 - 132
Accretion on decommissioning
liabilities 4 - 4
Foreign exchange loss (140) - (140)
----------------------------------------------------------------------------
Total expenses 1,204 (279) 925
----------------------------------------------------------------------------
Loss before taxation 1,166 (279) 887
Taxation
Current (111) - (111)
Deferred 43 - 43
----------------------------------------------------------------------------
Total taxation (recovery) (68) - (68)
----------------------------------------------------------------------------
Comprehensive loss for the
period attributable to
shareholders $ 1,098 $ (279) $ 819
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Explanation of the effect of transition to IFRS (United States dollars thousands):
a. Adjustments to general and administrative expenses were comprised of the
timing difference between IFRS and previous GAAP for recognition of the expense
associated with share-based payments as well as the impact of estimated
forfeitures under IFRS for the three months ended September 30, 2011, which
resulted in a decrease in general and administrative costs of $0.3 million.
G. Reconciliation of comprehensive loss from Canadian GAAP to IFRS for the nine
months ended September 30, 2010 (United States dollars thousands):
Effect of
Canadian transition
Note GAAP to IFRS IFRS
----------------------------------------------------------------------------
Revenue
----------------------------------------------------------------------------
Interest income $ 74 $ - $ 74
----------------------------------------------------------------------------
Expenses
General and administrative
expenses a 4,202 (27) 4,175
Depreciation 443 - 443
Accretion on decommissioning
liabilities 11 1 12
Foreign exchange loss 105 - 105
----------------------------------------------------------------------------
Total expenses 4,761 (26) 4,735
----------------------------------------------------------------------------
Loss before taxation 4,687 (26) 4,661
Taxation
Current (1,014) - (1,014)
Deferred 151 - 151
----------------------------------------------------------------------------
Total taxation (recovery) (863) - (863)
----------------------------------------------------------------------------
Comprehensive loss for the period
attributable to shareholders $ 3,824 $ (26) $ 3,798
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Explanation of the effect of transition to IFRS (United States dollars thousands):
a. Adjustments to general and administrative expenses were comprised of the
following:
i. Certain corporate projects that were previously capitalized within
the full cost pool as allowed under previous Canadian GAAP, but
which were unrelated to the Company's PSC contract areas, have been
expensed as part of general and administrative costs for the nine
months ended September 30, 2010 after conversion to IFRS. The net
effect was an increase in general and administrative costs of $0.3
million.
ii. Due to the timing difference between IFRS and previous GAAP for
recognition of the expense associated with share-based payments as
well as the impact of estimated forfeitures under IFRS for the nine
months ended September 30, 2011, there was a decrease in the general
and administrative costs of $0.3 million.
iii.The total impact of items (i) and (ii) was negligible.
H. Reconciliation of comprehensive loss from Canadian GAAP to IFRS for the year
ended December 31, 2010 (United States dollars thousands):
Effect of
Canadian transition
Note GAAP to IFRS IFRS
----------------------------------------------------------------------------
Revenue
----------------------------------------------------------------------------
Interest income $ 87 $ - $ 87
----------------------------------------------------------------------------
Expenses
General and administrative expenses a 6,362 51 6,413
Depreciation 553 - 553
Accretion on decommissioning
liabilities 14 2 16
Foreign exchange loss 62 - 62
----------------------------------------------------------------------------
Total expenses a 6,991 53 7,044
----------------------------------------------------------------------------
Loss before taxation 6,904 53 6,957
Taxation
Current (1,347) - (1,347)
Deferred 191 - 191
----------------------------------------------------------------------------
Total taxation (recovery) (1,156) - (1,156)
----------------------------------------------------------------------------
Comprehensive loss for the period
attributable to shareholders $5,748 $53 $5,801
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Explanation of the effect of transition to IFRS (United States dollars thousands):
a. Adjustments to general and administrative expenses were as follows:
i. Certain corporate projects that were previously capitalized within
the full cost pool as allowed under previous Canadian GAAP, but
which were unrelated to the Company's PSC contract areas, have been
expensed as part of general and administrative costs for the year
ended December 31, 2010 after conversion to IFRS. The net effect was
an increase in general and administrative costs of $0.3 million.
ii. Share-based payment amounts associated with employees that do not
directly contribute to exploration and evaluation activities are
recognized as part of general and administrative expenses. Upon
adoption of IFRS 2, Share Based Payments, the expense relating to
options granted to those employees is recognized over the vesting
period for each individual vesting tranche, as opposed to previous
GAAP which recognized the expense on a straight-line basis over the
total vesting period of the entire grant. The net effect of the
change in the timing of recognition of share-based payments
associated with employee's activities during the year ended December
31, 2010 resulted in a decrease in general and administrative
expenses of $0.3 million.
iii.The total net impact of items (i) and (ii) was an increased net loss
of $0.1 million, including a $2k adjustment to accretion.
L. Reconciliation of statement of cash flows from Canadian GAAP to IFRS for the
three months ended September 30, 2010 (United States dollars thousands):
Effect of
Canadian transition
Note GAAP to IFRS IFRS
----------------------------------------------------------------------------
Cash flow from operating activities
Net loss prior to taxation a $ (1,098) $ 211 $ (887)
Adjustments for
Depreciation 132 - 132
Accretion on decommissioning
liabilities 4 - 4
Share based payments 385 (279) 106
Future income tax expense b 42 (42) -
Change in non-cash working capital c 292 110 402
----------------------------------------------------------------------------
Net cash from (used in) operating
activities (243) - (243)
----------------------------------------------------------------------------
Cash flow from investing activities
Expenditure on exploration and
evaluation assets d - (23,710) (23,710)
Expenditure on property, plant,
and equipment e (20,455) 20,455 -
Insurance recoveries 10,284 - 10,284
Change in non-cash working capital d (3,255) 3,255 -
----------------------------------------------------------------------------
Net cash from (used in) investing
activities (13,426) - (13,426)
----------------------------------------------------------------------------
Cash flow from financing activities
None - - -
----------------------------------------------------------------------------
Net cash from (used in) financing
activities - - -
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Change in cash and cash equivalents (13,669) - (13,669)
----------------------------------------------------------------------------
Cash and cash equivalents,
beginning of period 43,769 - 43,769
----------------------------------------------------------------------------
Cash and cash equivalents, end of
period $ 30,100 - $ 30,100
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Explanation of the effect of transition to IFRS (United States dollars thousands):
a. Adjustments to net loss, which total to $0.2 million, were as follows:
i. Presentation of net loss under IFRS is prior to taxation expense.
The net effect was an increased net loss prior to total taxation
expense (current and deferred) of $0.1 million.
ii. Decreased general and administrative expense for timing difference
between IFRS and previous GAAP for recognition of the expense
associated with share-based payments as well as the impact of
estimated forfeitures under IFRS resulted in a decreased net loss of
$0.3 million
iii.Total net effect of items (i) through (ii) is a decreased net loss
of $0.2 million.
b. Presentation of net loss under IFRS is prior to taxation, accordingly
there is no adjustment for future income tax expense, net effect was a
reduction of the adjusting item to zero.
c. Adjustment to change in non-cash working capital was due to the
presentation of net loss under IFRS prior to taxation, as a result the
change in current income tax recovery is removed from the change in non-
cash working capital which results in an increase in the change in non-
cash working capital for operating activities of $0.1 million.
d. The net change in E&E expenditures is as follows:
i. Reclassification of expenditures on property, plant and equipment of
$20.5 million.
ii. Combine changes in non-cash investing working capital with E&E
expenditures for proper presentation under IFRS, which reduces the
change in non-cash working capital to NIL.
iii.The net effect of items (i) through (ii) results in an increase in
E&E expenditures of $23.7 million, including other minor adjustments
of $0.1 million.
e. Expenditures for property, plant and equipment were reclassified as E&E
expenditures, net effect was a decrease of $20.5 million.
J. Reconciliation of statement of cash flows from Canadian GAAP to IFRS for the
nine months ended September 30, 2010 (United States dollars thousands):
Effect of
Canadian transition
Note GAAP to IFRS IFRS
----------------------------------------------------------------------------
Cash flow from operating activities
Net loss prior to taxation a $ (3,824) $ (837) $ (4,661)
Adjustments for
Depreciation 443 - 443
Accretion on decommissioning
liabilities 11 1 12
Share based payments 880 (287) 593
Income tax recovered (paid) b - 598 598
Future income tax expense c 151 (151) -
Change in non-cash working capital d (273) 416 143
----------------------------------------------------------------------------
Net cash from (used in) operating
activities (2,612) (260) (2,872)
----------------------------------------------------------------------------
Cash flow from investing activities
Expenditure on exploration and
evaluation assets e - (59,400) (59,400)
Expenditure on property, plant,
and equipment f (49,830) 49,830 -
Insurance recoveries 15,664 - 15,664
Change in non-cash working capital e (9,830) 9,830 -
----------------------------------------------------------------------------
Net cash from (used in) investing
activities (43,996) 260 (43,736)
----------------------------------------------------------------------------
Cash flow from financing activities
None - - -
----------------------------------------------------------------------------
Net cash from (used in) financing
activities - - -
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Change in cash and cash equivalents (46,608) - (46,608)
----------------------------------------------------------------------------
Cash and cash equivalents,
beginning of period 76,708 - 76,708
----------------------------------------------------------------------------
Cash and cash equivalents, end of
period $ 30,100 - $ 30,100
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Explanation of the effect of transition to IFRS (United States dollars thousands):
a. Adjustments to net loss, which total to $(0.8) million, were as follows:
i. Presentation of net loss under IFRS is prior to taxation expense.
The net effect was an increased net loss prior to total taxation
expense (current and deferred) of $0.9 million.
ii. Increased general and administrative expense for corporate projects
previously capitalized under IFRS, the net effect was an increased
net loss of $0.3 million.
iii.Decreased general and administrative expense for timing difference
between IFRS and previous GAAP for recognition of the expense
associated with share-based payments as well as the impact of
estimated forfeitures under IFRS resulted in a decreased net loss of
$0.3 million
iv. Total net effect of items (i) through (iii) is an increased net loss
of $0.8 million, including other minor adjustments that reduced the
net loss by $0.1 million.
b. Increased $0.6 million due to presentation of actual taxes recovered
under IFRS.
c. Presentation of net loss under IFRS is prior to taxation, accordingly
there is no adjustment for future income tax expense, net effect was a
reduction of the adjusting item to zero.
d. Adjustments to change in non-cash working capital were as follows:
i. Presentation of net loss under IFRS is prior to taxation, as a
result the change in current income tax recovery is removed from the
change in non-cash working capital which results in an increase in
the change in non-cash working capital for operating activities of
$1.0 million.
ii. In addition, actual taxes recovered are reflected separately, which
results in a $0.6 million decrease to the change in non-cash working
capital for operating activities.
iii.The net effect of items (i) and (ii) resulted in an increase in the
net change for non-cash working capital items of $0.4 million.
e. The net change in E&E expenditures is as follows:
i. Reclassification of expenditures on property, plant and equipment of
$49.8 million.
ii. Decrease in expenditures of $0.3 million for corporate projects
previously capitalized under GAAP that were expensed as general and
administrative expenses under IFRS.
iii.Combine changes in non-cash investing working capital with E&E
expenditures for proper presentation under IFRS, which reduces the
change in non-cash working capital to NIL.
iv. The net effect of items (i) through (iii) results in an increase in
E&E expenditures of $59.4 million, including other minor adjustments
of $0.1 million.
f. Expenditures for property, plant and equipment were reclassified as E&E
expenditures, net effect was a decrease of $49.8 million.
K. Reconciliation of statement of cash flows from Canadian GAAP to IFRS for the
year ended December 31, 2010 (United States dollars thousands):
Effect of
Canadian transition
Note GAAP to IFRS IFRS
----------------------------------------------------------------------------
Cash flow from operating
activities
Net loss prior to taxation a $ (5,748) $ (1,209) $ (6,957)
Adjustments for
Depreciation 553 - 553
Accretion on decommissioning
liabilities 14 2 16
Share based payments b 1,568 (258) 1,310
Income tax recovered (paid) c - 2,198 2,198
Future income tax expense d 191 (191) -
Change in non-cash working
capital e 728 (851) (123)
----------------------------------------------------------------------------
Net cash from (used in)
operating activities (2,694) (309) (3,003)
----------------------------------------------------------------------------
Cash flow from investing
activities
Expenditure on exploration and
evaluation assets f - (66,626) (66,626)
Expenditure on property, plant,
and equipment g (67,162) 67,162 -
Insurance recoveries 24,403 - 24,403
Change in non-cash working
capital f 227 (227) -
----------------------------------------------------------------------------
Net cash from (used in)
investing activities (42,532) 309 (42,223)
----------------------------------------------------------------------------
Cash flow from financing
activities
None - - -
----------------------------------------------------------------------------
Net cash from (used in)
financing activities - - -
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Change in cash and cash
equivalents (45,226) - (45,226)
----------------------------------------------------------------------------
Cash and cash equivalents,
beginning of period 76,708 - 76,708
----------------------------------------------------------------------------
Cash and cash equivalents, end
of period $ 31,482 - $ 31,482
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Explanation of the effect of transition to IFRS (United States dollars thousands):
a. Adjustments to net loss, which total to $(1.2 million), were as follows:
i. Presentation of net loss under IFRS is prior to total taxation
(current and deferred). The net effect was an increased net loss
prior to taxation of $1.2 million.
ii. Decreased expense associated with share-based payments, net effect
was a decreased net loss of $0.3 million.
iii.Increased general and administrative expense for corporate projects
previously capitalized under IFRS, the net effect was an increased
net loss of $0.3 million.
iv. Total net effect of items (i) through (iii) is an increased net loss
of $1.2 million.
b. Decreased expense relating to timing of recognition of share based
payment under IFRS 2, net effect a decrease of $0.3 million.
c. For proper presentation under, actual taxes recovered of $2.2 million
are reflected directly in the cash flow statement.
d. Presentation of net loss under IFRS is prior to taxation, accordingly
there is no adjustment for future income tax expense, net effect was a
reduction of the adjusting item to zero.
e. Adjustments to change in non-cash working capital were as follows:
i. Presentation of net loss under IFRS is prior to taxation, as a
result the change in current income tax recovery is removed from the
change in non-cash working capital which results in an increase in
the change in non-cash working capital for operating activities of
$1.3 million.
ii. In addition, actual taxes recovered are reflected separately, which
results in a $2.2 million decrease to the change in non-cash working
capital for operating activities.
iii.The net effect of items (i) and (ii) resulted in a decrease in the
net change for non-cash working capital items of $0.9 million.
f. The net change in E&E expenditures is as follows:
i. Reclassification of expenditures on property, plant and equipment of
$67.2 million.
ii. Decrease in expenditures of $0.3 million for corporate projects
previously capitalized under GAAP that were expensed as general and
administrative expenses under IFRS.
iii.Combine changes in non-cash investing working capital with E&E
expenditures for proper presentation under IFRS, which reduces the
change in non-cash working capital to NIL.
iv. The net effect of items (i) through (iii) results in an increase in
E&E expenditures of $66.6 million.
g. Expenditures for property, plant and equipment were reclassified as E&E
expenditures, net effect was a decrease of $67.2 million.
About WesternZagros Resources Ltd.
WesternZagros is an international exploration and production company engaged in
acquiring properties and exploring for, developing and producing crude oil and
natural gas in the Kurdistan Region of Iraq. WesternZagros, through its
wholly-owned subsidiaries, holds two Production Sharing Contracts ("PSCs") with
the Kurdistan Regional Government, through a 40 percent working interest in both
the Garmian and Kurdamir PSCs. WesternZagros's shares trade in Canada on the TSX
Venture Exchange under the symbol "WZR".
This news release contains certain forward-looking information relating, but not
limited, to operational information, future drilling and testing plans, future
well designs and completions and future production rates and the timing
associated therewith. Forward-looking information typically contains statements
with words such as "anticipate", "plan", "estimate", "expect", "potential",
"could", or similar words suggesting future outcomes. The Company cautions
readers not to place undue reliance on forward-looking information as by its
nature, it is based on current expectations regarding future events that involve
a number of assumptions, inherent risks and uncertainties, which could cause
actual results to differ materially from those anticipated by WesternZagros.
Readers are also cautioned that disclosed test rates and AOFs may not be
indicative of ultimate production levels. In addition, the forward-looking
information is made as of the date hereof, and the Company assumes no obligation
to update or revise such to reflect new events or circumstances, except as
required by law.
Forward-looking information is not based on historical facts but rather on
management's current expectations and assumptions regarding, among other things,
plans for and results of drilling activity and testing programs, future capital
and other expenditures (including the amount, nature and sources of funding
thereof), continued political stability, and timely receipt of any necessary
government or regulatory approvals. Although the Company believes the
expectations and assumptions reflected in such forward-looking information are
reasonable, they may prove to be incorrect. Forward-looking information involves
significant known and unknown risks and uncertainties. A number of factors could
cause actual results to differ materially from those anticipated by
WesternZagros including, but not limited to, risks associated with the oil and
gas industry (e.g. operational risks in exploration; inherent uncertainties in
interpreting geological data; changes in plans with respect to exploration or
capital expenditures; interruptions in operations together with any associated
insurance proceedings; the uncertainty of estimates and projections in relation
to costs and expenses and health, safety and environmental risks), the risk of
commodity price and foreign exchange rate fluctuations, the uncertainty
associated with negotiating with foreign governments and risk associated with
international activity. For further information on WesternZagros and the risks
associated with its business, please see the Company's Annual Information Form
dated April 11, 2011, which is available on SEDAR at www.sedar.com.
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