RNS Number : 5934H
Caspian Energy Inc
06 November 2008
6 November 2008
CASPIAN ENERGY INC.
ANNOUNCES THIRD QUARTER 2008 FINANCIAL RESULTS
TORONTO, November 6, 2008 - Caspian Energy Inc. (the "Company" or "Caspian") (TSX and AIM: CEK) announced today its financial results
for the three and nine months ending September 30, 2008.
Financial highlights
* Oil revenues before transportation costs for the three months ending September 30, 2008 were $2,231,533 (Q3 2007 - $2,074,923).
* For the three months ending September 30, 2008, Caspian's net income (loss) and comprehensive income (loss) was $634,396 (Q3 2007-
$(2,295,252)).
* The Company's operations used cash of $194,528 for the three month period (Q3 2007 - provided cash of $65,943).
* Working capital position of $5.7 million at the close of the quarter.
The Company's interim unaudited financial statements for the period and related management's discussion and analysis have been filed
with Canadian securities regulatory authorities and are available for viewing at www.sedar.com.
Operational highlights
* Increase in average price per barrel from $36.53 in the same period last year to $85.02 due to the impact of international oil
markets. The Company sold an average 285 Bopd during the three month period (Q3 2007 - 617 Bopd).
* The East Zhagabulak field was shut-in on August 31, 2008 upon expiration of the term of the gas flaring permit. The field was
subsequently brought back into production on October 24, 2008 following the approval by the Gas Working Committee at the Ministry of Energy
of the permit to enable continuation of flaring by the Company until 31 December 2009
* Following resumption of production on East Zhagabulak, 24 hour tests were completed on both EZ�302 and EZ�213 with flow rates of
560 bopd and 779 Mcfd and 196 bopd and 274 Mcfd respectively.
Outlook
* The Company has completed the official State Reserves Report for East Zhagabulak,a key element in the plan of development approval
process and this was approved by the government on October 16, 2008.
* The preparation of the Technology Scheme, which outlines the detailed plan of development of the field, is now underway with
completion expected by the end of this month. Consequently, the Company anticipates a development contract for the field to be issued by
the end of 2008.
Commenting on the results, William Ramsay, Chairman and Chief Executive Officer of Caspian Energy, Inc. said:
"Strong oil prices for most of the quarter continue to buoy sales revenue and consequently our working capital position is sufficient to
meet our current obligations. Having returned the East Zhagabulak field to production, we hope to secure the development contract for the
field before the year-end."
For further information contact:
Caspian Energy Inc.
William Ramsay
President and Chief Executive Officer
00 44 (0)20 7861 3232
Bell Pottinger Corporate and Financial
Sarah Williams
00 44 (0)20 7861 3232
Jefferies International Limited
Jack Pryde / Oliver Griffiths
00 44 (0)20 7029 8000
CAUTIONARY NOTE
Some of the statements and information contained in this news release may include certain estimates, assumptions and other
forward-looking information. The actual performance, developments and/or results of the Company may differ materially from any or all of the
forward-looking statements, which include current expectations, estimates and projections, in all or in part attributable to general
economic conditions, and other risks, uncertainties and circumstances partly or totally outside the control of the Company, including oil
prices, imprecision of reserve estimates, drilling risks, future production of gas and oil, rates of inflation, changes in future costs and
expenses related to the activities involving the exploration, development, production and transportation of oil, hedging, financing
availability and other risks related to financial activities, and environmental and geopolitical risks. Further information which may cause
results to differ materially from those projected in the forward-looking statements is contained in the Company's filings with Canadian securities regulatory authorities. The Company disclaims any intention or
obligation to update or revise forward-looking information, whether as a result of new information, future events or otherwise, except in
accordance with applicable securities laws.
NOT FOR DISTRIBUTION TO UNITED STATES NEWSWIRE SERVICES OR FOR DISSEMINATION IN THE UNITED STATES.
BUSINESS PROSPECTS AND OUTLOOK
The Company has been successful in establishing itself as an operating entity in the ROK and expects to continue with future growth
through continued work there.
Prior to the end of the fourth quarter 2005, EZ�301 was drilled to a total depth of 4,846 metres and logged. The well was completed with
the drilling rig before the rig was moved to the EZ�302 location. EZ�301 was matrix acidized and the two potentially productive hydrocarbon
bearing zones were flow-tested. The lower zone (KT-2) was tested at 2,532 Bopd. The upper zone (KT-1) had difficulty maintaining an
independent flow, so it was commingled with the lower zone and the well was tied-in to the Zhagabulak production facility. Subsequently,
productions logs were ran and it was determined that the KT-1 was producing 100 Bopd. Well 301 was undergoing a government mandated pressure
survey in November 2006, when a production logging tool and cable were lost in the hole. During the second quarter, the tool and wire were
recovered and the well has resumed production. On November 3, 2008 a 24 hour test was conducted on EZ�301, with the following results: 560
Bo (barrels of oil), 17 Bw (barrels of water), 779 Mcfd (thousand cubic feet of gas per day), FTP (flowing tubing pressure) 338, SICP(shut-in casing pressure) 1,911, flow line pressure 121 psig
at a 12.0 mm choke.
The second exploration effort, EZ�302, was spud on December 25, 2005. Acidizing and testing of the well were performed following removal
of the drilling rig. The well showed indications of hydrocarbons while drilling and logging; however, the stimulation efforts failed to
cause the well to flow naturally. In well 302 a workover has been prepared to isolate the KT-II and the lower portions of the KT-I that
exhibit higher water saturations on the logs. The third location, EZ�303 is about 5.2 km southwest of EZ�302. EZ�303 spud on May 28, 2006.
The well was permitted to a depth of 5,700 metres. EZ�303 reached a total depth of 4,630 metres in a sidetrack wellbore after the initial
wellbore reached a depth of 5,430 metres, but was lost due to a drill string parting, while pulling out of the hole for logging. A total of
70 meters were perforated and acidized in both the KT-1 and KT-2 intervals. A combined test of both intervals yielded water with small
amounts of oil, while the separate test on the KT-1 yielded water. In well 303 a workover was written to isolate intervals and test separately to identify which perforations are producing water.
The original producing well, EZ�213, drilled and completed during the Soviet period, was re-entered in November 2006 and perforations
were added in the KT-1 reservoir. Due to different casing weights, problems were encountered with packer setting for the acid operation and
consequently, only one-half of the productive zones were acidized. Despite the limits on the acidization, a significant improvement of daily
production over the pre-workover rates was achieved. On November 3, 2008 a 24 hour test was conducted on EZ�213, with the following results:
196 Bo (barrels of oil), 101 Bw (barrels of water), 274 Mcfd (thousand cubic feet of gas per day), FTP (flowing tubing pressure) 250,
SICP(shut-in casing pressure) 1,720, flow line pressure 110 psig at an 8.7 mm choke. The Company has initiated the development process for
East Zhagabulak. The preparation of the official State Reserves Report for the development of the East Zhagabulak field is complete and was
approved by the government on October 16, 2008. The preparation of the Technology Scheme, which outlines the detailed plan of development of the field, is also underway and is expected to be
completed by the end of November, 2008. Supported by the completed and approved Reserve Report and Technology Scheme, the issue of a
development contract for the field is expected before the end of the calendar year.
Ongoing petrophysical analyses of all wells penetrating the below salt reservoirs is being completed and correlations of these wells
will aid in the identification of future drilling locations in the North Block. Identification and acquisition of well data within the
extended territory is also be evaluated for inclusion into this process.
The Baktygaryn 3-D seismic program was completed in early November 2005. PGS-GIS, in Almaty, ROK was awarded the processing contract.
Due to the presence of large salt bodies in the Baktygaryn Area, the 3-D data set was processed through PSDM (Pre-Stack Depth Migration) and
interpretation of this data has been completed. PSTM (Pre-Stack Time Migration) analysis, for the above salt section has also been
conducted. The acquisition of the 367 kilometre regional 2-D seismic survey covering the west and north areas of the North Block and tying
into the Zhagabulak and Baktygaryn 3-D seismic surveys that was completed in March 2007 has also been processed and interpreted. The
Baktygaryn 3-D program and the regional 2-D program were fully interpreted at the end of October 2006. The interpreted data from all new
seismic data acquired and from the earlier reprocessed Soviet-era 2-D seismic is being combined to create a geological model and identify
additional leads and prospects across the North Block territory.
The Baktygaryn Area presents drilling targets in both the below salt Lower Permian and Carboniferous sections and the above salt Upper
Permian and Mesozoic sections with depths ranging from approximately 400 to 2,500 metres and provides a second tier of exploration to the
Company's drilling portfolio. These targets are recognized in the forms of channel sands, traps against the Kungurian salt ridges and
underneath salt overhangs.
In addition to the ongoing interpretation work on the Baktygaryn 3-D and North Block regional 2-D seismic data and the identification of
several post-salt drilling targets in the Triassic and Permian formations, further progress on the interpretation has revealed the presence
of additional targets which are being added to the Company's prospect and lead portfolio.
The first post-salt well identified from the Baktygaryn 3-D survey, Baktygaryn �703, was spud in March 2008. It then reached total depth
of 2,521 metres in June following which it was rig-released. Numerous drilling delays were experienced due to deviation problems in the salt
and anhydrite section and mechanical failures of the drill string. The object of the vertical well was to secondarily, test Triassic
sandstones downdip on a faulted structure and primarily, Upper Permian sandstones in a trap below a Permian salt diaper overhang. The well
encountered excellent reservoir quality sandstones in the Triassic, but due to the downdip location of the well, no hydrocarbons were found.
Seismic anomalies that supported the presence of a hydrocarbon trap in the Upper Permian, below a salt overhang, were proven by drilling to
be inter-bedded claystones and anhydrite. No reservoirs in the Upper Permian were encountered and the well was plugged and abandoned.
The rig then moved to the Aransay �711 location, approximately 20 kilometres east, where it spud on July 11, 2008 and was rig-released
on July 26, 2008. On reaching its total depth of 924 metres in the Upper Permian, the well encountered approximately 298 metres of reservoir
quality rocks in the Triassic section. The Triassic was interpreted to be sandstone reservoirs trapped against a fault and was supported by
a series of flat-based seismic reflectors believed to indicate a hydrocarbon/water interface. However, no shows were encountered while
drilling and electric logging has confirmed the absence of hydrocarbons. Nevertheless, the presence of reservoir-quality sands of such
thickness in the Triassic supports the interpretation that the Triassic is a viable primary target in the area in the presence of a proper
trap and seal.
Aral has decided to release the drilling rig following plugging operations to further evaluate the portfolio of existing prospects
identified in the block.
Soviet-era seismic data interpretation, mapping and the associated shallow well drilling in the Itisay, Kozdesay and West Kozdesay
areas, located in the southwestern portion of the North Block, yielded minor positive tests and shows of oil associated with the post-salt
sediments of Jurassic, Triassic and Upper Permian ages. A review of this data has resulted in the identification of several prospects and
leads ranging from 600 to 1,800 metres in trapping positions against Permian salt ridges and under-salt overhangs. Several lines from the
Company's 2006 2-D seismic program were shot across certain of these leads and prospects to verify this premise. Interpretation of most of
the regional 2006 2-D seismic survey covering the west and north areas of the North Block has been completed. The interpreted data from all
new seismic data acquired and from the earlier reprocessed Soviet-era 2-D seismic was combined to create a geological model and identify
additional leads and prospects across the North Block territory. As a result of this work, some of the earlier leads and prospects in the post-salt sediments identified on vintage maps and seismic
in three areas in the south western portion of the North Block, known as Itisay, Kozdesay and West Kozdesay have been confirmed and in
addition several new leads and drillable prospects have been identified in trapping positions against Permian salt ridges and under salt
overhangs.
Future seismic activity includes a third 3-D seismic acquisition, pending the results of the upcoming drilling campaign and further
ongoing 2-D seismic interpretation.
The relatively shallow post salt targets at Baktygaryn offer a completely new series of opportunities for the Company. The 3-D and 2-D
seismic data have enabled several new prospects to be identified and the Company is now in the process of selecting additional drilling
locations.
The Company's work program extension, with the ROK, to December 2007 has now been extended for an additional two-year period, subject to
the terms of the original exploration contract. The work program extension to December 31, 2009 includes drilling seven wells to a combined
total of 8,500 metres with a monetary obligation of US $19.1 million. Management of Aral believes the Company is in compliance with its
commitments under the Minimum Working Program and has received authorization from the Ministry of Energy and Natural Resources and other
competent bodies to carry over fulfillment of the above shortfalls to the year ending December 31, 2008. At September 30, 2008, Aral had
expended approximately US $11.3 million toward discharging these obligations.
Balance Sheet Sept 30 2008$ Dec 31 2007$
Assets
Current assets
Cash and cash equivalents 5,323,091 4,373,919
Accounts receivable 945,198 935,773
Prepaids and other deposits 2,773,997 2,310,302
Inventory (note 3) 1,121,699 454,302
10,163,985 8,074,296
Restricted cash(note 5) 272,095 253,132
Property, plant and equipment(note 4) 132,068,980 124,795,793
142,505,060 133,123,221
Liabilities
Current liabilities
Accounts payable and accrued liabilities 4,502,781 3,458,427
Asset retirement obligation(note 5) 295,844 252,279
Loan payable(note 6) 7,380,512 6,947,055
Future income taxes 1,032,217 967,400
Convertible debentures(note 7) 19,582,301 17,669,238
32,793,655 29,294,399
Shareholders* Equity
Share capital(note 8) 124,444,925 121,470,892
Warrants to purchase common shares(note 9) 1,893,416 946,508
Contributed surplus(note 10) 15,443,518 14,467,311
Deficit (32,070,454) (33,055,889)
109,711,405 103,828,822
142,505,060 133,123,221
Going concern(note 1)
See accompanying notes to consolidated financial statements.
Interim Consolidated Statement of Income (Loss), Comprehensive Income (Loss) and Deficit
(Unaudited)
Three months Three months Nine months Nine months endedSept
30,2007$
endedSept 30,2008$ endedSept 30,2007$ endedSept 30,2008$
Revenue
Oil and gas revenue, net 2,231,533 2,074,923 9,031,726
4,322,320
Interest 26,848 995,862 65,625
2,644,047
Other 80,466 (14,866) 129,010
(12,374)
2,338,847 3,055,919 9,226,361
6,953,993
Expenses
General and administrative 737,481 866,105 2,485,655
2,455,303
Accretion of convertible 77,027 74,718 227,950
239,320
debentures (note 7)
Interest 514,532 1,007,228 1,499,328
2,658,287
Operating 654,779 577,762 2,637,739
1,504,968
Transportation 768,939 201,915 1,730,209
386,628
Stock-based compensation (note 34,542 217,906 976,207
2,691,623
9)
Foreign exchange loss (gain) (1,340,899) 1,615,211 (2,347,699)
4,699,400
Depletion, depreciation and 258,050 575,140 1,031,537
1,386,868
accretion
1,704,451 5,135,985 8,240,926
16,022,397
Net income (loss) and 634,396 (2,080,066) 985,435
(9,068,404)
comprehensive income (loss)
before income taxes
Future income taxes (recovery) - 215,186 -
663,755
Net income (loss) and 634,396 (2,295,252) 985,435
(9,732,159)
comprehensive income (loss)
for the period
Deficit * Beginning of period (32,704,850) (27,284,108) (33,055,889)
(19,847,201)
Deficit * End of period (32,070,454) (29,579,360) (32,070,454)
(29,579,360)
Basic income (loss) per 0.01 0.01
(0.09)
share(note 8) (0.02)
Diluted income (loss) per 0.01 0.01
(0.09)
share(note 8) (0.02)
See accompanying notes to consolidated financial statements.
Interim Consolidated Statement of Cash Flows (Unaudited)
Three months Three months Nine months Nine months
endedSept 30,2008$ endedSept 30,2007$ endedSept 30,2008$ endedSept 30,2007$
Cash provided by (used in)
Operating activities
Net loss for the period 634,396 (2,295,252) 985,435 (9,732,159)
Items not affecting cash
Stock-based compensation 34,542 217,906 976,207 2,691,623
Unrealized foreign exchange (1,340,818) 1,289,389 (2,251,184) 4,192,333
loss (gain)
Depletion, depreciation and 258,050 575,140 1,031,537 1,386,868
accretion
Accretion of convertible 77,027 74,718 227,950 239,320
debentures
Future income taxes (recovery) - 215,186 - 663,755
Interest on convertible 142,275 461,454 748,447 1,387,246
debentures
Interest on inter-company - (472,598) - (1,204,770)
advance
(194,528) 65,943 1,718,392 (375,784)
Changes in non-cash working 1,459,479 185,311 (9,425) (151,339)
capital balances
1,264,951 251,254 1,708,967 (527,123)
Financing activities
Loan payable 257,257 1,500,124 433,457 1,500,124
Restricted cash (8,092) 8,805 (18,963) 24,498
Issuance of common shares and - - 4,347,635 -
warrants
Share issue expenses - - (426,694) -
249,165 1,508,929 4,335,435 1,524,622
Investing activities
Acquisition of property, plant (1,582,716) (1,873,654) (5,008,517) (7,557,385)
and equipment
Changes in non-cash working (613,896) 293,456 (86,713) (4,656,796)
capital balances
(2,196,612) (1,580,198) (5,095,230) (12,214,181)
Increase (decrease) in cash (682,496) 179,985 949,172 (11,216,682)
and cash equivalents
Cash and cash equivalents * 6,005,587 5,625,618 4,373,919 17,022,285
Beginning of period
Cash and cash equivalents * 5,323,091 5,805,603 5,323,091 5,805,603
End of period
Interest paid and received
Interest received 26,848 50,667 65,625 234,507
Interest paid 364,032 - 729,879 -
See accompanying notes to consolidated financial statements.
1. Nature of operations
Caspian Energy Inc. ("Caspian" or the "Company") is engaged in the exploration for and development and production of oil and gas in the
Republic of Kazakhstan. Its primary operating activities are carried out through its wholly-owned subsidiary, Caspian Energy Ltd. ("Caspian
Ltd.").
Caspian's principal assets are a 50% interest in Aral Petroleum Capital LLP ("Aral"), held by Caspian Ltd. Through its interest in Aral,
Caspian has the right to explore and develop certain oil and gas properties in Kazakhstan, known as the North Block, a 3,458 square
kilometre area located in the vicinity of the Kazakh pre-Caspian basin. The Company also has minor resource interests in Canada.
Aral's exploration and development rights to the North Block were granted pursuant to the terms of an exploration contract between the
government of Kazakhstan and Aral (the "Exploration Contract"). The initial three-year term of the Exploration Contract was extended for a
two-year period (expiring in December 2007) and a further extension of two years to December 31, 2009 with a minimum work commitment of US
$19.1 million has now been placed into effect.
Under the terms of the Exploration Contract, Aral was obligated to spend at least US $20.8 million under a minimum work program in
respect of the North Block during the initial three-year term of the contract. The expenditures include processing and reinterpretation of
geological and geophysical data of prior years, two dimensional and three dimensional seismic shoots and surveys, drilling exploration
wells, well reactivations and well surveys and testing. The minimum work program matured at the end of calendar 2005. As of December 31,
2005, Aral's financial obligation under the minimum work program had been discharged. The work program extension to December 2007 included
drilling three wells to a combined total of 8,500 metres with a monetary obligation of US $20.15 million. At December 31, 2007, Aral had
contract shortfalls aggregating US $7.1 million. The work program extension to December 31, 2009 includes drilling seven wells to a combined
total of 8,500 metres with a monetary obligation of US $19.1 million. Management of Aral believes the Company is in compliance with its commitments under the Minimum Working Program and has received
authorization from the Ministry of Energy and Natural Resources and other competent bodies to carry over fulfillment of the above shortfalls
to the year ending December 31, 2008. At , Aral had expended approximately US $11.3 million toward discharging these obligations.
Under terms of a shareholders' agreement dated June 25, 2004, among Caspian Ltd., Azden Management Limited ("Azden") and Aral, Caspian
was committed to fund Aral's US $20.8 million obligation under the initial work program. This financial commitment was satisfied, in full,
by the Company. In addition, Caspian Ltd. undertook, on a best efforts basis, to raise financing of US $84.0 million to fund Aral's
operations pursuant to the Exploration Contract. At March 31, 2007, Caspian Ltd. had discharged this undertaking. Going concern
These financial statements have been prepared in accordance with Canadian generally accepted accounting policies ("GAAP") applicable to
a going concern, which contemplates the realization of assets and the payment of liabilities in the ordinary course of business. Should the
Company be unable to continue as a going concern, it may be unable to realize the carrying value of its assets and to meet its liabilities
as they become due.
The Company reported a net income of $985,435 and funds generated from operations of $1,718,392 for the period ended September 30, 2008.
The Company had net working capital of $5,661,204. As a result, there is substantial doubt about the Company's ability to continue as a
going concern. The Company's continuation is dependent upon the ability to raise capital and the success of its drilling and exploration
program.
The accompanying financial statements do not include any adjustments relating to the recoverability and classification of recorded asset
amounts and classification of liabilities that might be necessary should the Company be unable to continue in existence. Such adjustments
could be material.
2. Significant accounting policies
The consolidated financial statements of Caspian are stated in Canadian dollars and have been prepared in accordance with Canadian
GAAP.
The preparation of financial statements in conformity with Canadian generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amount of assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and expenses during the period. Actual results could differ from
those estimates.
Cash and cash equivalents
Cash and cash equivalents are comprised of cash and short-term investments with an initial maturity date of three months or less.
Inventory
Inventory is recorded at the lower of cost calculated using the weighted average method, and net realizable value. Cost comprises direct
materials, and where applicable, direct labour costs and those overheads which have been incurred in bringing the inventories to their
present location and condition. Net realizable value represents the estimated selling price less all estimated costs of completion and costs
to be incurred in marketing, selling and distribution.
Joint ventures
The Company's oil and gas exploration and development activities are conducted mainly in Kazakhstan through its 50% interest in Aral
and, accordingly, these consolidated financial statements reflect only the Company's proportionate interest in such activities.
Property, plant and equipment
(a) Capitalized costs
The Company follows the full cost method of accounting for oil and natural gas operations, whereby all costs related to the acquisition,
exploration and development of petroleum and natural gas reserves are capitalized. Such costs include lease acquisition costs, geological
and geophysical costs, carrying charges on non-producing properties, costs of drilling both productive and non-productive wells, the cost of
petroleum and natural gas production equipment and overhead charges directly related to exploration and development activities. Proceeds
from the sale of oil and gas properties are applied against capital costs, with no gain or loss recognized, unless such a sale would change
the rate of depletion and depreciation by 20% or more, in which case, a gain or loss would be recorded.
(b) Depletion, depreciation and amortization
The capitalized costs are depleted and depreciated using the unit-of-production method based on proven petroleum and natural gas
reserves, as determined by independent consulting engineers. Oil and natural gas liquids reserves and production are converted into
equivalent units of natural gas based on relative energy content on a ratio of six thousand cubic feet of gas to one barrel of oil.
Significant development projects and expenditures on exploration properties are excluded from calculation of depletion prior to assessment
of the existence of proved reserves.
Other property, machinery and equipment are recorded at historical cost. Depreciation is calculated on a straight-line basis at the
following annual rates:
Buildings 8%
Machinery and equipment 8%
Vehicles 7%
Other fixed assets 10%
(c) Ceiling test
The Company follows the Canadian accounting guideline on full cost accounting. In applying the full cost guideline, Caspian calculates
its ceiling test for each cost centre by comparing the carrying value of oil and natural gas properties and production equipment to the sum
of undiscounted cash flows expected to result from Caspian's proved reserves. If the carrying value is not fully recoverable, the amount of
impairment is measured by comparing the carrying value of oil and gas properties and production and equipment to the estimated net present
value of future cash flows from proved plus probable reserves using a risk-free interest rate and expected future prices. Any excess
carrying value above the net present value of the future cash flows is recorded as a permanent impairment.
(d) Unproved property
Costs of acquiring and evaluating unproven properties are initially excluded from costs subject to depletion, until it is determined
whether or not proved reserves are attributable to the properties or, in the case of major development projects, commercial production has
commenced, or impairment has occurred. Impairment occurs whenever events or changes in circumstances indicate that the carrying amount may
not be recoverable. When proven reserves are determined or the property is considered to be impaired, the cost of the property or the amount
of the impairment is added to the costs subject to depletion for that country's cost centre.
(e) Asset retirement obligation
Caspian records the fair value of asset retirement obligations ("ARO") as a liability in the period in which it incurs a legal
obligation to restore an oil and gas property, typically when a well is drilled or other equipment is put in place. The associated asset
retirement costs are capitalized as part of the carrying amount of the related asset and depleted using a unit-of-production method over the
life of the proved reserves. Subsequent to initial measurement of the obligations, the obligations are adjusted at the end of each reporting
period to reflect the passage of time and changes in estimated future cash flows underlying the obligation. Actual costs incurred on
settlement of the ARO are charged against the ARO.
Income taxes
Income taxes are calculated using the liability method of tax accounting. Temporary differences arising from the difference between the
tax basis of an asset or liability and its carrying value amount on the balance sheet are used to calculate future income tax assets and
liabilities. Future income tax assets and liabilities are calculated using tax rates anticipated to apply in the periods that the temporary
differences are expected to reverse.
Stock-based compensation
The Company grants options to purchase common shares to employees and directors under its stock option plan. Under this standard, future
awards are accounted for using the fair value of accounting for stock-based compensation. Under the fair value method, an estimate of the
value of the option is determined at the time of grant using a Black-Scholes option-pricing model. The fair value of the option is
recognized as an expense and contributed surplus over the vesting period of the option. Proceeds received on exercise of stock options,
along with amounts previously included in contributed surplus, are credited to share capital.
Revenue recognition
Revenue from the sale of oil and natural gas is recognized based on volumes delivered to customers at contractual delivery points and
rates. The costs associated with the delivery, including operating and maintenance costs, transportation, and production-based royalty
expenses will be recognized in the same period in which the related revenue is earned and recorded.
Measurement uncertainty
The amounts recorded for depletion and depreciation of property, plant and equipment, the provision for asset retirement obligations and
the amounts used for ceiling test calculations are based on estimates of reserves and future costs. The Company's reserve estimates are
reviewed annually by an independent engineering firm. The amounts disclosed relating to fair values of stock options issued are based on
estimates of future volatility of the Company's share price, expected lives of options, and other relevant assumptions. By their nature,
these estimates are subject to measurement uncertainty.
Income (loss) per share
Basic per share amounts are calculated using the weighted average number of shares outstanding during the period. Diluted per share
amounts are calculated based on the treasury stock method whereby the weighted average number of shares is adjusted for the dilutive effect
of options. The Company applies the treasury stock method for the calculation of diluted net loss per share whereby the effect of the "in
the money" instruments such as stock options and warrants affect the calculation. The treasury stock method assumes that the proceeds from
the exercise are used to repurchase common shares of the Company at the weighted average market price during the year.
Financial instruments
Fair values
The fair values of accounts receivable, accounts payable and accrued liabilities, and loan payable approximate their carrying values due
to their short-term maturity.
Credit risk
Substantially all of the Company's accounts receivable are due from companies in the oil and gas industry and are subject to the normal
industry credit risks. The carrying value of accounts receivable reflects management's assessment of the associated credit risks.
Foreign currency
All operations are considered financially and operationally integrated. Results of operations are translated to Canadian dollars, using
average rates for revenues and expenses, except depreciation which is translated at the rate of exchange applicable to the related assets.
Monetary items denominated in foreign currency are translated to Canadian dollars at exchange rates in effect at the balance sheet date and
non-monetary items are translated at rates of exchange in effect when the assets were acquired or obligations incurred. Foreign exchange
gains and losses are recorded in the statement of loss.
Changes in accounting policies
On January 1, 2008, the Company adopted the following Canadian Institute of Chartered Accountants ("CICA") Handbook Sections:
* Section 1535, "Capital Disclosures". This section establishes standards for disclosing information about an entity's objectives,
policies and processes for how it manages its capital. A company must also disclose qualitative data about what the entity regards as
capital; and whether the company has complied with any capital requirements and if not, the consequences of such non-compliance. The Company
adopted this standard effective January 1, 2008 (see note 14).
* Section 3862, "Financial Instruments - Disclosures". This section describes the required disclosures to evaluate the significance
of financial instruments for the entity's financial position and performance as well as the nature and extent of risks arising from both
recognized and unrecognized financial instruments to which the entity is exposed and how the entity manages those risks. The Company adopted
this standard effective January 1, 2008 (see note 12).
* Section 3863, "Financial Instruments - Presentation". This section establishes standards for presentation of financial instruments
and non-financial derivatives. It details the presentation of the standards described in Section 3861, "Financial Instruments - Disclosure
and Presentation". The Company adopted this standard effective3 January 1, 2008 (see note 12).
3. Inventory
Sept 30 2008 Dec 31 2007
$ $
Oil inventory 421,601 187,300
Fuel 16,052 25,748
Construction materials 2,836 2,742
Spare parts 2,303 5,004
Other materials 678,907 233,508
1,121,699 454,302
4. Property, plant and equipment
Sept 30 2008 Dec 31 2007
$ $
Petroleum and natural gas assets 132,928,535 126,806,121
Other assets 5,046,722 3,122,928
137,975,257 129,929,049
Accumulated depletion and depreciation (5,906,277) (5,133,256)
132,068,980 124,795,793
Excluded from the depletable base of oil and gas assets at are unproved properties of $83,488,859 (December 31, 2007 - $72,049,847).
The Company applied the ceiling test to its capitalized assets at September 30, 2008 and December 31, 2007 and determined that there
was no impairment of such carrying costs.
WTI Crude oil price $US/bbl
2008 90.00
2009 86.70
2010 83.20
2011 79.60
2012 78.50
The prices increase by 2% for years thereafter.
During the period ended September 30, 2008, the Company capitalized $356,012 (December 31, 2007 - $269,548) of general and
administrative expenses related directly to exploration and development activities.
5. Asset retirement obligation
The Company records the fair value of asset retirement obligations as a liability in the period in which it incurs the legal
obligation.
The asset retirement obligation results from net ownership interests in petroleum and natural gas assets including well sites, gathering
systems and processing facilities. The Company estimates the total undiscounted amount of cash flows required to settle its asset retirement
obligations at September 30, 2008 is $282,605, which will be incurred between 2014 and 2019. A credit-adjusted risk-free rate of 16.5% was
used to calculate the fair value of the asset retirement obligations, and an inflation factor of 19.0%.
A reconciliation of the asset retirement obligation is provided below:
Sept 30,2008$ Dec 31,2007$
Opening balance 252,279 156,255
Liabilities incurred 16,878 94,490
Accretion 26,687 19,574
Change in estimate - (18,040)
Closing balance 295,844 252,279
Under the terms of the Exploration Contract (note 1), the Company is required to create a fund to finance actual future restoration
costs, equal to 1% of the capital costs of exploration. At September 30, 2008 and December 31, 2007, $272,095 and $253,132, respectively
have been placed in a restricted bank account related to the funding requirement.
6. Loan payable
Pursuant to the Participants Agreement By and Among Azden Management Limited and Caspian Energy Ltd. and Aral Petroleum Capital Limited
Liability Partnership, subsequent to reaching the US $84 million threshold on advances by Caspian to Aral, Caspian and Azden shall jointly
finance, in equal proportions, the next stages of exploration by Aral. As at September 30, 2008 and December 31, 2007, respectively,
$7,380,512 and $6,947,055 had been advanced by Azden to Aral and is recorded as a loan payable in Aral's accounts.
7. Convertible debentures
On March 1, 2006, the Company received US $16 million and issued 10% per annum, convertible debentures in a like amount secured with
Caspian Ltd. shares. The debentures mature on March 2, 2011 and are convertible at any time and from time to time into common shares of the
Company at a conversion price of $2.45 per share. The Company may repay the principal amount of the debentures, in whole or in part, or
require conversion into common shares of the Company if the volume-weighted average trading price of the common shares, for 40 consecutive
trading days, is at least $4.08.
Face amount Fair value of Accretion Interest Carrying
$ conversion option $ $ value
$ $
Debentures issued, opening 15,712,000 (1,483,805) 674,480 2,766,563 17,669,238
balance
Accretion of discount - - 227,950 - 227,950
Translation adjustment 390,743 - - 545,923 936,666
Interest accrual - - - 748,447 748,447
Balance - September 30, 2008 16,102,743 (1,483,805) 902,430 4,060,933 19,582,301
8. Share capital
Authorized
Unlimited number of voting common shares, without stated par value
Issued
Number of shares Amount$
Issued and outstanding as at December 84,327,163 75,220,762
31, 2005
Exercise of warrants (i) 357,100 888,505
Private placement (ii) 19,609,000 49,056,442
Exercise of options (iii) 50,000 87,500
Share issue costs (iv) - (3,782,317)
Issued and outstanding as at December 104,343,263 121,470,892
31,2007and 2006
Warrants expired (v) - 946,508
Issued pursuant to Rights Offering (vi) 17,390,543 2,454,220
Share issue costs (iv) - (426,695)
Issued and outstanding as atSeptember 121,733,806 124,444,925
30, 2008
(i) During the period, 357,100 broker warrants were exercised. The warrants had an exercise price of $2.00 per common share.
(ii) On April 5, 2006 a private placement of 19,609,000 common shares were issued at $2.55 per share.
(iii) On April 10, 2006, 50,000 common shares at $1.75 per were issued pursuant to the Company's stock option plan.
(iv) Share issue costs have not been tax-effected.
(v) On April 5, 2008, 588,270 broker warrants, with fair value of $945,508, which entitled the holder to purchase one common share at a
price of $2.77 expired unexercised.
(vi) A Rights Offering, which closed May 28, 2008, placed 17,390,543 units at a price of $0.25 per unit. Each unit comprised one common
share in the Company and one-half of one share purchase warrant.
Stock options
The Company has a stock option plan (the "Plan") under which it may grant options to directors, officers and employees for the purchase
of up to 15% of the number of common shares from time to time. Options are granted at the discretion of the board of directors. The exercise
price, vesting period and expiration period are also fixed at the time of grant at the discretion of the Board of Directors in accordance
with terms of the Plan.
Changes to the Company's stock options are summarized as follows:
Number of options Weighted average option price$
Balance * December 31, 2005 9,166,499 1.72
Granted 1,943,433 1.29
Exercised (50,000) 1.75
Balance * December 31, 2006 11,059,932 1.64
Granted 2,668,845 0.88
Expired (400,000) 2.15
Balance *December 31,2007 13,328,777 1.47
Granted 2,869,527 0.36
Balance *September 30, 2008 16,198,304 1.28
Exercisable *September 30, 15,831,637 1.28
2008
The following is a summary of stock options outstanding and exercisable as at September 30, 2008:
Options outstanding Options exercisable
Range of exercise price Options outstanding Weighted average Weighted average Options exercisable
remaining exercise price
contractuallife in
years
$0.36 2,869,527 $0.36 2,869,527
4.7
$0.75 2,079,090 $0.75 2,079,090
1.0
$0.86 800,000 $0.86 733,333
3.4
$0.89 1,868,845 $0.89 1,868,845
3.5
$1.25 1,043,433 $1.25 1,043,433
3.0
900,000 $1.34 600,000
$1.34 3.3
$1.61 843,271 $1.61 843,271
1.7
$1.75 1,100,000 $1.75 1,100,000
1.7
$2.00 1,050,000 $2.00 1,050,000
1.3
$2.15 3,644,138 $2.15 3,644,138
1.0
16,198,304 $1.28 15,831,637
Per share amounts
The weighted average number of common shares outstanding during the period ended September 30, 2008 of 121,733,805 (September 30, 2007
- 104,343,263 shares) was used to calculate income (loss) per share amounts.
In computing diluted income (loss) per share, no shares were added to the weighted average number of common shares outstanding during
the period ended (September 30, 2007 - nil) as they are anti-dilutive.
Warrants
8,695,262 share purchase warrants are outstanding at September 30, 2008. Each warrant is exercisable at an exercise price of $0.45 until
the earlier of May 28, 2011 or 30 days following the receipt of a notice from the Company that the closing price of the shares for any 20
consecutive trading days exceeded $0.75. The fair value of the outstanding warrants using the Black-Scholes method was $1,893,416.
On April 5, 2008, 588,270 broker warrants, with a fair value of $945,508, which entitled the holder to purchase one common share at a
price of $2.77, expired unexercised.
9. Stock-based compensation
Options granted to both employees and non-employees are accounted for using the fair value method. The fair value of common share
options granted in the period ended September 30, 2008 was estimated to be $872,581 as at the grant date. The cost of options granted is
amortized using a Black-Scholes option-pricing model and the following assumptions:
Risk free interest rate 4.11 - 4.27%
Expected life 5 year average
Expected volatility 84 - 122%
Expected dividend yield 0%
The estimated fair value of the options is amortized to expense and credited to contributed surplus over the option vesting period on a
straight-line basis.
10. Contributed surplus
Sept 30 2008 Dec 31 2007
$ $
Balance - Beginning of period 14,467,311 12,030,272
Stock options issued to employees, officers 976,207 2,437,039
and directors
Balance - End of period 15,443,518 14,467.311
The term and vesting conditions of each option may be fixed by the board when the option is granted, but the term cannot exceed 5 years
from the date upon which the option is granted.
The options granted to directors, officers and employees may be exercised over five years from the date of granting and expire from time
to time to June 2013.
11. Commitments
In accordance with the shareholders' agreement in respect of Aral, Caspian was obligated to fund the initial work program of Aral
pursuant to the Exploration Contract. The minimum work program was US $20.8 million and matured at the end of calendar 2005. As at December
31, 2005, this obligation was fully discharged. The work program extension to December 2007 included drilling three wells to a combined
total of 8,500 metres with a monetary obligation of US $20.15 million. No additional seismic was required. The work program extension to
December 2009 includes drilling seven wells to a combined total of 8,500 metres with a monetary obligation of US $19.1 million. The
Company's calendar 2006 minimum work program with the Republic of Kazakhstan was approved for US $12.2 million and was discharged during
2006. The Company's calendar 2007 work program was approved for US $8.4 million with an amendment for another US $23.7 million. At December
31, 2007, Aral had contract shortfalls aggregating US $7.1 million. Management of Aral believes the Company is in compliance with its commitments under the Minimum Working Program and has received
authorization from the Ministry of Energy and Natural Resources and other competent bodies to carry over fulfillment of the above shortfalls
to the year ending December 31, 2008. At September 30, 2008 Aral had expended approximately US $11.3 million toward discharging these
obligations.
12. Financial instruments
The Company holds various forms of financial instruments. The nature of these instruments and its operations expose the Company to
market risk, credit risk and liquidity risks. The Company manages its exposure to these risks by operating in a manner that minimizes this
exposure. While management monitors and administers these risks, the Board of Directors has the overall responsibility for the establishment
and oversight of the Company's risk management framework. The Board has established policies in setting risk limits and controls and
monitors these risks in relation to market conditions.
Market risk
Market risks are generally those risks that are outside of the control of the Company. These are: commodity prices, foreign exchange
rates and interest rates. The objective of the Company is to mitigate exposure to these risks, while maximizing returns to the Company.
Commodity price risk
Due to the volatility of commodity prices the Company is exposed to adverse consequences in the event of declining prices. The Company
may enter into oil purchase contracts in order to protect its cash flow on future sales once the status of currently producing properties
has been elevated to that of "commercial" from "pilot or pre-commerciality". The purchase contracts reduce the fluctuation in sales revenue
by locking in prices with respect to future deliveries of oil. The Company has initiated the development process for the East Zhagabulak
area. The preparation of the official State Reserves Report for East Zhagabulak is complete and was approved by the government on October
16, 2008. The preparation of the Technology Scheme, which outlines the detailed plan of development of the field, is also underway and is
expected to be completed by the end of November 2008.
Credit risk
Substantially all of the accounts receivable are with customers and joint venture partners in the oil and gas industry and are subject
to normal industry credit risks. The Company generally extends unsecured credit to these customers and therefore, the collection of accounts
receivable may be affected by changes in economic or other conditions. Management believes the risk is mitigated by entering into
transactions with long-standing, reputable, counterparties and partners. Receivables related to the sale of the Company's petroleum and
natural gas production are from major marketing companies who have excellent credit ratings. The Company has not experienced any credit loss
in the collection of its accounts receivable.
Liquidity risk
Liquidity risk would occur if the Company is not able to meet its financial obligations as they come due. The Company has established a
standard of ensuring that it has enough available resources to withstand any downturn in the industry. As our industry is very capital
intensive, the majority of our spending is related to our capital programs. See note 14 for disclosure related to the management of our
capital program. The Company's goal is to prudently spend its capital while maintaining its credit reputation amongst its suppliers.
Fair values of financial instruments
The carrying value of financial instruments, which includes accounts receivable, deposits, accounts payable and accrued liabilities and
loan payable approximates amounts at which these instruments could be exchanged in a transaction between knowledgeable and willing parties.
The fair value of accounts receivable, deposits, accounts payable and accrued liabilities and loan payable approximates their carrying
amounts due to their short term nature. Caspian's convertible debentures, issued in USD, mature on March 2, 2011, bear interest at 10% per
annum have a fair market value approximating the carrying value.
As at each reporting period the Company will assess whether a financial asset, other than those classified as held-for-trading is
impaired. Any impairment loss will be included in earnings for the period.
13. Segmented information
The Company's activities are conducted in two geographic segments: Canada and Kazakhstan. All activities relate to exploration for and
development of petroleum and natural gas.
Canada$ Kazakhstan$ Total$
Revenue
Oil and gas revenue, net 19,744 9,011,982 9,031,726
Interest 65,625 - 65,625
Other 10,000 119,010 129,010
95,369 9,130,992 9,226,361
Expenses
General and administrative 2,153,264 332,391 2,485,655
Accretion of convertible 227,950 - 227,950
debentures
Interest 1,499,328 - 1,499,328
Operating 4,766 2,632,973 2,637,739
Transportation 198 1,730,011 1,730,209
Stock-based compensation 976,207 - 976,207
Foreign exchange (gain) loss (4,660,631) 2,312,932 (2,347,699)
Depletion, depreciation and 3,750 1,027,787 1,031,537
accretion
204,832 8,036,094 8,240,926
Net income (loss) for the (109,463) 1,094,898 985,435
period
Assets
Current assets 4,706,370 5,457,615 10,163,985
Restricted cash - 272,095 272,095
Property, plant and equipment, 25,423 132,043,557 132,068,980
net
4,731,793 137,773,267 142,505,060
Liabilities 20,545,692 12,247,963 32,793,655
14 Capital disclosures
The Company considers its capital structure to include shareholders' equity, convertible debentures and working capital. The Company
will adjust its capital structure to manage its current and projected requirements through the issuance of shares and other related
instruments, establishing a bank line of credit and/or adjusting its capital spending. The Company monitors its capital based on the current
and projected exploration and development expenditures pursuant to its contract commitments in Kazakhstan.
(a) The Company's objectives in managing its capital structure are to:
(b) Create and maintain flexibility so that the Company can continue to meet its financial and capital obligations; and
assure its growth either through wholly-funded exploration and development projects, joint venture relationships, including farm-out
opportunities or asset/corporate acquisitions.
The Company monitors the effectiveness of its capital structure by the preparation and revisions to an annual budget, which is updated
at the time any significant farm-out, acquisition or disposition, a change in economic circumstances outside the control of the Company, and
success or failure of capital deployed. Each of the annual budget and the quarterly updates are approved by the Board of Directors.
15 Reconciliation of international financial reporting standards
Accounting practices under Canadian GAAP and International Financial Reporting Standards ("IFRS") are, as they affect these financial
statements, substantially the same except for the following:
Property and equipment
Under Canadian GAAP, an impairment loss should be recognized when the carrying amount of a cost centre is not recoverable and exceeds
its fair value. The carrying amount is not recoverable if the carrying amount exceeds the sum of the undiscounted cash flows expected to
result from its use and eventual disposition. Unproved properties and major development projects are included in this recoverability test. A
cost centre impairment loss should be measured as the amount by which the carrying amount of assets capitalized in a cost centre exceeds the
sum of:
* the fair value of proved and probable reserves; and
* the costs (less any impairment) of unproved properties that have been subject to a separate test for impairment and contain no
probable reserves
For costs beyond the exploration and evaluation stage, IFRS requires (i) an impairment to be recognized when the recoverable amount of
an asset (cash generating unit) is less than the carrying amount; (ii) the impairment loss to be determined as the excess of the carrying
amount above the recoverable amount (the higher of fair value less costs to sell and value in use, calculated as the present value of future
cash flows from the asset), rather than the excess of the carrying amount above the undiscounted future cash flows of the asset; and (iii)
the reversal of an impairment loss when the recoverable amount changes. A ceiling test based on cash generating units did not reveal the
need for an impairment charge.
For exploration and evaluation costs, IFRS 6 has been adopted effective January 1, 2005. IFRS 6 allows for continued application of an
entity's existing policy with respect to accounting for exploration and evaluation costs.
Impairment of long-lived assets
Under Canadian GAAP, a long-lived asset should be tested for recoverability whenever events or changes in circumstances indicate that
its carrying amount may not be recoverable. An impairment loss should be recognized when the carrying amount of a long-lived asset is not
recoverable and exceeds its fair value. Under IFRS, the carrying amounts of the Company's assets, other than oil and gas properties,
inventories and deferred tax assets, are reviewed at each balance sheet date to determine whether there is any indication of impairment. If
any such indication exists, the assets' recoverable amounts are estimated. An impairment loss is recognized when the carrying amount of an
asset exceeds its recoverable amount. Impairment losses, if any, are recognized in the income statement. This difference in accounting
policy has no impact on these financial statements.
Under Canadian GAAP, the carrying amount of a long-lived asset is not recoverable if the carrying amount exceeds the sum of the
undiscounted cash flows expected to result from its use and eventual disposition. This assessment is based on the carrying amount of the
asset at the date it is tested for recoverability, whether it is in use or under development. Under IFRS, the recoverable amount of the
Company's assets other than oil and gas properties is the greater of their net selling price and value in use. In assessing value in use,
the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflect current market assessments
of the time value of money and the risks specific to the asset. For an asset that does not generate cash inflows largely independent of
those from other assets, the recoverable amount is determined for the cash-generating unit to which the asset belongs. This difference in
accounting policy has no impact on these financial statements.
In respect of impairment of assets other than oil and gas properties, under Canadian GAAP, an impairment loss is not reversed if the
fair value subsequently increases. For IFRS, an impairment loss may be reversed if there has been a change in the estimates used to
determine the recoverable value.
An impairment loss, on assets other than oil and gas properties, is only reversed to the extent that the asset's carrying amount does
not exceed the carrying amount that would have been determined, net of depreciation or amortization, if no impairment loss had been
recognized. This difference in accounting policy has no impact on these financial statements.
Asset retirement obligation
In re-measuring an asset retirement obligation for the passage of time, Canadian GAAP requires re-measurement based on the risk-free
rate that existed when the liability was initially measured. IFRS requires the use of current market assessed interest rates in each
estimate. This difference did not result in a material reconciling item.
Inventory
Under Canadian GAAP, the Company measures its supplies inventory at the lower of historical cost or net replacement cost. Under IFRS,
the lower of cost or net realizable value principle would apply. This difference did not result in a material reconciling item.
This information is provided by RNS
The company news service from the London Stock Exchange
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