-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, VX4yz6noXDBsvn8ytONUmc73BboA2jPr4CmYnIxUiSES6rloxmgywCnSPPrbVDAB ML2yMApE7hJoW8hG0Z0emg== 0001047469-99-007515.txt : 19990301 0001047469-99-007515.hdr.sgml : 19990301 ACCESSION NUMBER: 0001047469-99-007515 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 20 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990226 FILER: COMPANY DATA: COMPANY CONFORMED NAME: POGO PRODUCING CO CENTRAL INDEX KEY: 0000230463 STANDARD INDUSTRIAL CLASSIFICATION: CRUDE PETROLEUM & NATURAL GAS [1311] IRS NUMBER: 741659398 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 333-72129 FILM NUMBER: 99551145 BUSINESS ADDRESS: STREET 1: 5 GREENWAY PLAZA STE 2700 STREET 2: P O BOX 2504 CITY: HOUSTON STATE: TX ZIP: 77046-0504 BUSINESS PHONE: 7132975017 MAIL ADDRESS: STREET 1: 5 GREENWAY PLAZA SUITE 2700 STREET 2: P O BOX 2504 CITY: HOUSTON STATE: TX ZIP: 77046-0504 FORMER COMPANY: FORMER CONFORMED NAME: PENNZOIL OFFSHORE GAS OPERATORS INC /TX/ DATE OF NAME CHANGE: 19600201 10-K 1 10-K - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 -------------------------- FORM 10-K /X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998 / / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 COMMISSION FILE NO. 1-7792 POGO PRODUCING COMPANY (Exact name of registrant as specified in its charter) DELAWARE 74-1659398 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 5 GREENWAY PLAZA, P.O. BOX 2504 HOUSTON, TEXAS 77252-2504 (Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (713) 297-5000 -------------------------- Securities registered pursuant to Section 12(b) of the Act:
Title of each class: Name of each exchange on which registered: COMMON STOCK, $1 PAR VALUE NEW YORK STOCK EXCHANGE PACIFIC STOCK EXCHANGE PREFERRED STOCK PURCHASE RIGHTS NEW YORK STOCK EXCHANGE PACIFIC STOCK EXCHANGE
Securities registered pursuant to Section 12(g) of the Act: 5 1/2% CONVERTIBLE SUBORDINATED NOTES DUE JUNE 15, 2006 -------------------------- Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes /X/ No / /. Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. / / The aggregate market value of the Common Stock held by non-affiliates of the registrant (treating all executive officers and directors of the registrant, for this purpose, as if they may be affiliates of the registrant) was approximately $311,300,000 as of February 22, 1999 (based on $10.00 per share, the last sale price of the Common Stock as reported on the New York Stock Exchange Composite Tape on such date). 40,135,311 shares of the registrant's Common Stock were outstanding as of February 22, 1999. DOCUMENT INCORPORATED BY REFERENCE Portions of the Company's definitive Proxy Statement respecting the annual meeting of shareholders to be held on April 27, 1999 (to be filed not later than 120 days after December 31, 1998) are incorporated by reference in Part III of this Form 10-K. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- FORWARD LOOKING STATEMENTS The statements included or incorporated by reference in this Report on Form 10-K for the year ended December 31, 1998 (this "Annual Report") include "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. All statements included herein or therein other than statements of historical fact are forward-looking statements. When used herein or therein, the words "anticipate," "estimate," "expect," "objective," "projection," "forecast," "goal," and similar expressions are intended to identify forward-looking statements. Such forward-looking statements include, without limitation, the statements herein and therein regarding the timing of future events regarding the operations of Pogo Producing Company (the "Company") both domestically and in Thailand, and the statements set forth herein under the caption "Management's Discussion and Analysis of Financial Condition and Results of Operations--Liquidity and Capital Resources" regarding the Company's anticipated future financial position and cash requirements. Although the Company believes that the expectations reflected in such forward-looking statements are reasonable, it can give no assurance that such expectations will prove to have been correct. Important factors that could cause actual results to differ materially from the Company's expectations ("Cautionary Statements") are disclosed in this Annual Report and in other filings by the Company with the Securities and Exchange Commission (the "Commission") including, without limitation, in connection with such forward-looking statements. All subsequent written and oral forward-looking statements attributable to the Company or persons acting on its behalf are expressly qualified in their entirety by the Cautionary Statements. The Company's actual results could differ materially from those anticipated in these forward-looking statements as a result of the risk factors set forth below and other factors set forth in or incorporated by reference in this Annual Report. These factors include: - the cyclical nature of the oil and natural gas industries - uncertainties associated with the United States and worldwide economies - current and potential governmental regulatory actions in countries where the Company owns an interest - substantial competitor production increases resulting in oversupply and declining prices - the Company's ability to implement cost reductions - the Company's ability to raise additional capital or sell assets - operating interruptions (including leaks, explosions, fires, mechanical failure, unscheduled downtime, transportation interruptions, and spills and releases and other environmental risks) - fluctuations in foreign currency exchange rates in areas of the world where the Company owns an interest, particularly Southeast Asia - covenant restrictions in the Company's indebtedness - the impact of the Year 2000 issue Many of those factors are beyond the Company's ability to control or predict. Management cautions against putting undue reliance on forward-looking statements or projecting any future results based on such statements or present or prior earnings levels. All subsequent written and oral forward-looking statements attributable to the Company and persons acting on the Company's behalf are qualified in their entirety by the cautionary statements contained in this section and elsewhere in this Annual Report. 2 CERTAIN DEFINITIONS As used in this Annual Report, "Mcf" means thousand cubic feet, "MMcf" means million cubic feet, "Bcf" means billion cubic feet, "Bbl" means barrel, "MBbls" means thousand barrels and "MMBbls" means million barrels. "BOE" means barrel of oil equivalent, "Mcfe" means thousand cubic feet of natural gas equivalent, "MMcfe" means million cubic feet of natural gas equivalent and "Bcfe" means billion cubic feet of natural gas equivalent. Natural gas equivalents and crude oil equivalents are determined using the ratio of six Mcf of natural gas to one Bbl of crude oil, condensate or natural gas liquids ("NGL"). References to "$" and "dollars" refer to United States dollars. All estimates of reserves contained in this Annual Report, unless otherwise noted, are reported on a "net" basis. Information regarding production, acreage and numbers of wells are set forth on a gross basis, unless otherwise noted. 3 ITEM 1. BUSINESS The Company was incorporated in 1970 and is engaged in oil and gas exploration, development and production activities on its properties located offshore in the Gulf of Mexico, onshore in selected areas in New Mexico, Texas and Louisiana, and internationally, primarily in the Gulf of Thailand and in Canada. As of December 31, 1998, the Company had interests in 105 lease blocks offshore Louisiana and Texas, approximately 419,000 gross acres onshore in the United States and Canada, approximately 847,000 gross acres offshore in the Kingdom of Thailand and approximately 113,000 gross acres in the British North Sea. On August 17, 1998, a wholly owned subsidiary of the Company merged with and into Arch Petroleum Inc. ("Arch") in a stock-for-stock tax-free merger accounted for as a purchase. As of December 31, 1998, four significant operating areas, including the Outer Continental Shelf area of the Gulf of Mexico offshore Louisiana and Texas in water depths less than 600 feet (the "Shelf") and on the continental slope in water depths ranging from 600 feet to approximately 4,500 feet (the "Continental Slope"), the Permian Basin area in New Mexico and Block B8/32 Concession in the Kingdom of Thailand (the "Thailand Concession), accounted for approximately 76% of the Company's estimated proved natural gas reserves, approximately 97% of the Company's estimated proved oil, condensate and natural gas liquids reserves, approximately 78% of the Company's 1998 natural gas production and 94% of the Company's 1998 oil, condensate and natural gas liquids production. Reserves, as estimated by Ryder Scott, and production data, as estimated by the Company, for the four significant operating areas are shown in the following table. The percentages presented on the table are the percentage of the Company's total net proved natural gas and liquids reserves, natural gas and liquids production and total proved reserves, respectively. SIGNIFICANT OPERATING AREAS
1998 AVERAGE NET NET PROVED RESERVES(A) DAILY PRODUCTION ------------------------------------------ ------------------------------------------ NATURAL GAS LIQUIDS(B) NATURAL GAS LIQUIDS(B) -------------------- -------------------- -------------------- -------------------- MMCF % MBBLS % MCF % BBLS % --------- --------- --------- --------- --------- --------- --------- --------- DOMESTIC Gulf of Mexico--Shelf.................... 90,579 20.6 13,711 20.3 76,630 48.2 9,915 54.5 Gulf of Mexico--Continental Slope........ 34,000 7.7 1,691 2.5 -- -- -- -- New Mexico............................... 43,202 9.8 16,226 24.0 10,667 6.7 4,631 25.4 INTERNATIONAL Kingdom of Thailand...................... 168,389 38.3 33,811 50.1 36,774 23.1 2,561 14.1 --------- --- --------- --- --------- --- --------- --- TOTAL...................................... 336,170 76.4 65,439 96.9 124,071 78.0 17,107 94.0 --------- --- --------- --- --------- --- --------- --- --------- --- --------- --- --------- --- --------- --- TOTAL PROVED RESERVES(A) % ------------- DOMESTIC Gulf of Mexico--Shelf.................... 20.4 Gulf of Mexico--Continental Slope........ 5.2 New Mexico............................... 16.6 INTERNATIONAL Kingdom of Thailand...................... 43.9 --- TOTAL...................................... 86.1 --- ---
- ------------------------ (a) Net proved reserves and total net proved reserves are each as of December 31, 1998. (b) "Liquids," includes oil, condensate and NGL. DOMESTIC OFFSHORE OPERATIONS Historically, the Company's interests have been concentrated in the Gulf of Mexico, where approximately 26% of the Company's proved reserves were located as of December 31, 1998. During 1998, approximately 48% of the Company's natural gas production and approximately 55% of its oil and condensate production was from its domestic offshore properties, contributing approximately 53% of the Company's consolidated oil and gas revenues. Although the Company's operations were historically focused on the Shelf where it owns interests in 89 lease blocks, the Company has recently expanded its exploration efforts further offshore into the Continental Slope where the Company currently has interests in 16 lease blocks with water depths that range from 600 feet to approximately 4,400 feet. 4 LEASE ACQUISITIONS The Company has participated, either on its own or with other companies, in bidding on and acquiring interests in federal and state leases offshore in the Gulf of Mexico since December 1970. As a result of such purchases and subsequent activities, as of December 31, 1998, the Company owned interests in 97 federal leases and 8 state leases offshore Louisiana and Texas. Federal leases generally have primary terms of five, eight or ten years, depending on water depth, and state leases generally have terms of three or five years, depending on location, in each case subject to extension by development and production operations. As part of its strategy, the Company intends to continue an active lease evaluation program in the Gulf of Mexico in order to identify exploration and exploitation opportunities. During 1998, the Company was successful in acquiring interests in four lease blocks through federal Outer Continental Shelf oil and gas lease sales and one lease block by assignment from a third party. As in the case of prior sales, the extent to which the Company participates in future bidding on federal or state offshore lease sales will depend on the availability of funds and its estimates of hydrocarbon deposits, operating expenses and future revenues which reasonably may be expected from available lease blocks. Such estimates typically take into account, among other things, estimates of future hydrocarbon prices, federal regulations, and taxation policies applicable to the petroleum industry. It is also the Company's objective to acquire certain producing leasehold properties in areas where additional low-risk drilling or improved production methods by the Company can provide attractive rates of return. EXPLORATION AND DEVELOPMENT The scope of exploration and development programs relating to the Company's offshore interests is affected by prices for oil and gas, and by federal, state and local legislation, regulations and ordinances applicable to the petroleum industry. The Company's domestic offshore capital and exploration expenditures for 1998 were approximately $68,000,000 (excluding approximately $5,000,000 of net property acquisitions), or 21% lower than the Company's domestic offshore capital and exploration expenditures of approximately $86,300,000 for 1997 (excluding approximately $900,000 of net property acquisitions) and 26% lower than the Company's domestic offshore capital and exploration expenditures of approximately $92,400,000 for 1996. The decrease in the Company's domestic offshore capital and exploration expenditures for 1998, compared with 1997 and 1996, resulted primarily from the Company's decision to decrease its drilling activity in light of poor oil and gas prices and a decrease in construction and installation of offshore platforms, pipelines and other facilities. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." Leases acquired by the Company and other participants in its bidding groups are customarily committed, on a block-by-block basis, to separate operating agreements under which the appointed operator supervises exploration and development operations for the account and at the expense of the group. These agreements usually contain terms and conditions which have become relatively standardized in the industry. Major decisions regarding development and operations typically require the consent of at least a majority (in working interest) of the participants. Because the Company generally has a meaningful working interest position, the Company believes it can significantly influence (but not always control) decisions regarding development and operations on most of the leases in which it has a working interest even though it may not be the operator of a particular lease. The Company is the operator on all or a portion of 27 of the 105 offshore leases in which it had an interest on December 31, 1998. Platforms and related facilities are installed on an offshore lease block when, in the judgment of the lease interest owners, the necessary capital expenditures are justified. A decision to install a platform generally is made after the drilling of one or more exploratory wells with contracted drilling equipment. Platform costs vary depending on, among other factors, the number of slots, water depth, currents, and sea floor conditions. Over the four years ended December 31, 1998, the gross construction and installation cost of production platforms and related facilities located on the Shelf in which the Company shared a portion of the construction costs based on its ownership interest in the development ranged from approximately $3,000,000 to approximately $16,500,000. Wells, platforms and related facilities are typically much more 5 expensive on the Continental Slope. The Company is currently participating in the construction of one platform, one sub-sea development and related facilities on the Continental Slope at a total capital commitment of $204,045,000 dollars ($30,341,000 net to the Company's working interest), of which approximately 38% has been incurred through December 31, 1998. The Company believes that future development projects on the Continental Slope may require similar capital commitments, each of which must be justified in the then current and anticipated future product price environment. In order to better manage the risks of large projects on the Continental Slope, the Company generally seeks to have a smaller ownership interest in these lease blocks than it averages in shallower waters. SIGNIFICANT DOMESTIC OFFSHORE OPERATING AREAS DURING 1998 OUTER CONTINENTAL SHELF. The Outer Continental Shelf has been an important part of the Company's operations since the first lease in that area was purchased in 1970 and production began in 1973. As of December 31, 1998, the Company held interests in 89 blocks on the Shelf. The Company currently has 215 oil and gas wells producing from multiple reservoirs and horizons on the Shelf. During 1998, the Company participated in the drilling of five wells on the Shelf, the setting of one production platform and related facilities and the upgrading of three platforms. CONTINENTAL SLOPE. Since 1996 when the Company acquired its first interest in a lease block in the Continental Slope, the Company has been increasingly active in this area. As of December 31, 1998, the Company owns interests in 16 blocks in the Continental Slope and has interests in five wells that it has drilled there, including three that were drilled in 1998. The Company is currently participating in the construction of one platform and related facilities at Viosca Knoll Blocks 780 and 823, and one subsea facility on Garden Banks 367, on the Continental Slope. ONSHORE OPERATIONS The Company has onshore division staffs in Houston and Midland, Texas and Calgary, Canada. Its onshore activities are concentrated in known oil and gas provinces, principally the Permian Basin area of southeastern New Mexico, West Texas and Northwest Texas, in the onshore Gulf Coast areas of South Texas, East Texas and South Louisiana and in Alberta and British Columbia in Canada. The Company conducts its onshore operations in the United States directly and through its wholly owned subsidiary Arch. The Company conducts its operations in Canada through its wholly-owned subsidiary, Pogo Canada Ltd. See "--Significant Onshore Operating Areas During 1998." LEASE ACQUISITIONS Commencing in 1995 and continuing into 1998, the Company increased its activities in the onshore Gulf Coast areas of East Texas and South Louisiana through its participation in several large proprietary 3-D seismic surveys, in connection with which the Company typically purchases an option to acquire an interest in the acreage covered by the 3-D seismic survey. As it has in recent years, in 1998 the Company also successfully participated in various onshore federal, state and provincial lease sales and acquired interests in prospective acreage from private individuals. As of December 31, 1998, the Company held interests in approximately 303,000 gross (151,000 net) acres onshore in the United States and 117,000 gross (51,000 net) acres in Canada, an increase of approximately 76% from year end 1997. The increase in acreage is primarily related to the Company's acquisition of Arch and, to a lesser extent, the Company's successful participation in the lease sales and private property acquisitions described above, that was partially offset by the sale of certain properties that it no longer considered strategic and the expiration of leases in the ordinary course of business. EXPLORATION AND DEVELOPMENT The Company's primary drilling objective in the Permian Basin is the Brushy Canyon (Delaware) formation which generally produces oil from depths of 6,000 to 9,000 feet. Since the Company began exploring in the Brushy Canyon (Delaware) formation in October 1989, it has participated in drilling 389 6 wells in the Permian Basin, West and Northwest Texas areas through December 31, 1998, including 32 wells in 1998. See "--Significant Domestic Onshore Operating Areas During 1998." In Southwest Louisiana, the Company participated in drilling 20 wells since 1996, including seven wells in 1998, to test various prospects, primarily in the Hackberry and Yegua formations, almost all of which were identified on proprietary 3-D seismic surveys that the Company and its industry partners have acquired since 1995. Onshore reserves as of December 31, 1998, accounted for approximately 31% of the Company's total proved reserves. During 1998, approximately 29% of the Company's natural gas production and 31% of its oil and condensate production was from its onshore properties, contributing approximately 30% of the Company's consolidated oil and gas revenues. The Company generally conducts its onshore activities through joint ventures and other interest-sharing arrangements with major and independent oil companies. The Company operates many of its own onshore properties using independent contractors. The Company's onshore capital and exploration expenditures were approximately $48,800,000 (excluding approximately $133,100,000 of net property acquisitions, including approximately $131,500,000 related to the acquisition of Arch) for 1998, or 19% lower than the Company's onshore capital and exploration expenditures of approximately $60,000,000 (excluding approximately $1,700,000 of net property acquisitions) for 1997 and 4% higher than the Company's onshore capital and exploration expenditures of approximately $47,000,000 (excluding approximately $3,800,000 of net property acquisitions) for 1996. The decrease in the Company's onshore capital and exploration expenditures for 1998, compared to 1997, resulted primarily from the Company's decision to curtail non-essential drilling in light of poor oil and gas prices, that was not entirely offset by capital and exploration expenditures in Canada where the Company acquired its interest in Pogo Canada Ltd. in August 1998. The increase in capital and exploration expenditures for 1998, compared to 1996, primarily related to capital and exploration expenditures in Canada where the Company acquired an interest during 1998 as part of the Arch acquisition. SIGNIFICANT ONSHORE OPERATING AREAS DURING 1998 NEW MEXICO. The Company believes that during the past six years it has been one of the most active companies drilling for oil and natural gas in the southeastern New Mexico (Lea and Eddy Counties) portion of the Permian Basin where the Company has interests in over 105,000 gross acres. The Company's primary drilling objective is the Brushy Canyon (Delaware) formation. Fields in the Brushy Canyon (Delaware) formation in the southeastern New Mexico portion of the Permian Basin are generally characterized by production from relatively shallow depths (6,000 to 9,000 feet), multiple producing zones in most wells and relatively high initial rates of production (frequently equaling the top field allowables which typically range from 142 Bbls to 230 Bbls per day, depending on the depth of production from the field). The Company has achieved rapid cost recovery with respect to its New Mexico wells drilled to date because of relatively low capital costs and high initial rates of production. LOPENO FIELD. The Company acquired its initial interest in the Lopeno Field in 1983. The Lopeno Field is located within 40 miles of the border with Mexico, in 1983. As of December 31, 1998, the Company had interests in 29 producing wells in the Lopeno Field. The Lopeno Field produces from over 20 upper Wilcox sandstone reservoirs ranging in depth up to 12,500 feet. In late 1998, the Company decided to sell its interest in the Lopeno Field as part of its asset rationalization efforts. The Company currently expects to sell its interest by March 15, 1999, effective back to January 1, 1999. Proceeds from the sale will be used to reduce the Company's total debt and for general corporate purposes. INTERNATIONAL OPERATIONS The Company has conducted international exploration activities since the late 1970's in numerous oil and gas areas throughout the world. Currently, the Company maintains an office in Bangkok, Thailand from which it directs field operations on the Thailand Concession through its wholly owned subsidiary 7 Thaipo Limited ("Thaipo"). Thaipo currently owns, directly or indirectly, a 46.34% working interest in the entire Thailand Concession. The remainder of the working interest is owned, directly or indirectly by Thai Romo Ltd. (46.34%), a subsidiary of Rutherford-Moran Oil Corporation ("RMOC"), and Palang Sophon Limited ("Palang") (7.32%). RMOC has entered into an agreement to merge with, and become, a wholly owned subsidiary of Chevron Corporation ("Chevron"). It is the Company's understanding that Chevron will also acquire a majority of the stock of Palang. Based on publicly available information and communications with Chevron, RMOC and Palang, it is the Company's current understanding that Chevron's merger with RMOC, and its acquisition of a majority interest in Palang, will be consummated on or shortly after March 17, 1999. Following these transactions, Chevron will own or control, directly or indirectly, 53.66% of the working interests in the Thailand Concession. Thaipo is currently the operator of the Thailand Concession, pursuant to the joint operating agreement governing the Thailand Concession and as designated by the government of Thailand. Subject to approval by the government of Thailand and the agreement of the parties to the joint operating agreement, Thaipo has agreed to transfer operatorship to a subsidiary of Chevron on or about September 30, 1999. In addition, Chevron has agreed to lend funds to RMOC to cover its cash call obligations under the joint operating agreement until Chevron's merger with RMOC is consummated. As of December 31, 1998, the Company's proved reserves located in the Kingdom of Thailand accounted for approximately 44% of the Company's total proved reserves. During 1998, approximately 29% of the Company's natural gas production and 31% of its oil and condensate production came from its operations on the Thailand Concession, contributing approximately 17% of the Company's consolidated oil and gas revenues. EXPLORATION AND DEVELOPMENT The Company's international capital and exploration expenditures were approximately $107,400,000 for 1998, or 22% higher than the Company's international capital and exploration expenditures of approximately $88,300,000 for 1997 (excluding approximately $28,600,000 of net property acquisitions) and 67% higher than the Company's international capital and exploration expenditures of approximately $64,400,000 (excluding approximately $4,200,000 of net property acquisitions) for 1996. The increase in the Company's international capital and exploration expenditures for 1998, compared to 1997 and 1996, resulted primarily from increased platform and facilities construction costs related to development of the Benchamas Field and increased drilling activity in the Tantawan and Benchamas Fields. Substantially all of the Company's international capital and exploration expenditures for 1998 were related to the Company's license in the Kingdom of Thailand. On December 1, 1998, the Company together with two joint partners, were successful in obtaining a license from the United Kingdom governing approximately 113,000 acres in the British sector of the North Sea. Terms of the license provided for a minimum work commitment that will involve the acquisition, processing and interpretation of 3-D seismic data over the block. The initial exploratory term of this license expires on December 1, 2004, unless otherwise extended or a production license is granted. In addition, the Company continues to evaluate other international opportunities that are consistent with the Company's international exploration strategy and expertise. Platforms are installed on the Thailand Concession in fields where, in the judgment of Thaipo and its joint venture partners, the necessary capital expenditures are justified. A decision to install a platform generally is made after the drilling of one or more exploratory wells with contracted drilling equipment and the area where the platform would be located has been designated a production area by the government of the Kingdom of Thailand. See "--Contractual Terms Governing the Thailand Concession and Related Production." Platforms are used to accommodate both development drilling and additional exploratory drilling. Over the four years ended December 31, 1998, the gross cost of the first five production platforms and related facilities in the Tantawan Field has averaged approximately $20,000,000. The Company is currently participating in the construction of platforms and related facilities for the Benchamas Field at a total capital commitment of $267,470,000 dollars ($123,946,000 net to the Company's working interest), of which approximately 67% has been incurred through December 31, 1998. The Company and its joint venture partners have been working to employ advanced platform facility design and advanced drilling and completion techniques, including slimhole, batch and horizontal drilling, to reduce the cost of developing the Thailand Concession. The Company believes that future satellite platforms and related facilities may 8 be installed for as little as approximately $13,000,000 per platform in the future. Platform costs vary and more (or less) expensive platforms could be required in the future depending on, among other factors, the number of slots, water depth, currents, and sea floor conditions. See "--Significant International Operating Areas During 1998; Tantawan Field." SIGNIFICANT INTERNATIONAL OPERATING AREAS DURING 1998 TANTAWAN FIELD. In August 1995, at the request of Thaipo and its joint venture partners, the government of Thailand designated a portion of the Thailand Concession comprising approximately 68,000 acres as the Tantawan production area or the "Tantawan Field." Initial production from the Tantawan Field commenced on February 1, 1997. Currently, there are 28 wells producing from four platforms. The Company is currently planning to install a fifth platform in the Tantawan Field from which production is expected to commence in the first half of 1999. Oil and gas production from the Tantawan Field is gathered through pipelines from the platforms into a Floating Production Storage and Offloading system (an "FPSO") named the "Tantawan Explorer." The FPSO is a converted oil tanker with a capacity of slightly less than 1,000,000 Bbls, that is moored in the Tantawan Field, on which hydrocarbon processing, separation, dehydration, compression, metering and other production related equipment is installed. Following processing on board the FPSO, natural gas produced from the field is delivered to The Petroleum Authority of Thailand ("PTT") through an export pipeline. Oil and condensate produced from the field is stored on board the FPSO and transferred to shore by oil tanker. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Liquidity and Capital Resources." BENCHAMAS FIELD AND THE MALIWAN PRODUCTION AREA. In July 1997, the government of Thailand designated another portion of the Thailand Concession comprising approximately 102,000 acres as the Benchamas and Pakakrong production area or the "Benchamas Field." In September 1997, the government of Thailand designated an additional 91,000 acres of the Thailand Concession as the Maliwan production area. Current development plans call for the staged development of these fields, with the Benchamas Field to be brought on production first. The Benchamas Field development plan contemplates the initial installation of three production platforms, with natural gas and oil from these platforms delivered by undersea pipeline to a central processing and compression platform where the oil, condensate and natural gas will be processed and separated. The natural gas will then be sold to PTT and delivered into export pipelines for transportation to shore, while the oil and condensate produced from the field will be stored on board a Floating Storage and Offloading system ("FSO"), known as the "Benchamas Explorer," for sale and ultimate transfer to shore by oil tanker. The FSO will be moored in the Benchamas Field. Its capacity will be approximately 1,400,000 Bbls of crude and condensate. The Benchamas Field's current development plan calls for initial production to commence in the third quarter of 1999 with production from the Maliwan production area to begin in late 2001. OTHER AREAS. In addition to the above mentioned fields, Thaipo and its joint venture partners have identified other potentially promising areas on the Thailand Concession. Since acquiring their interest in the Thailand Concession, Thaipo and its joint venture partners have acquired 3-D seismic surveys covering approximately 673,650 acres of the Thailand Concession, including 221,650 acres during the fourth quarter of 1997 over what is known as the Jarmjuree area. Through February 1, 1999, Thaipo and its joint venture partners have drilled eight wells on areas of the Thailand Concession that are not currently designated as production areas. Interpretation of the data provided by these wells and 3-D seismic data covering these areas is ongoing. Thaipo and its joint venture partners also currently plan to drill additional exploration wells in these areas during 1999. CONTRACTUAL TERMS GOVERNING THE THAILAND CONCESSION AND RELATED PRODUCTION The Thailand Concession was granted in August 1991. The exploratory term for those portions of the Thailand Concession that have not yet been designated a production area (comprising approximately 474,000 acres) expires July 31, 2000. For those portions of the Thailand Concession that have been designated as production areas, the initial production period term is 20 years, which is also subject to 9 extension, generally for a term of ten years. See also "--Miscellaneous; Sales." Currently, the Tantawan, Maliwan, and Benchamas and Pakakrong areas have been designated as production areas. Subject to governmental approval, other portions of the Thailand Concession may be designated production areas in the future. Production resulting from the Thailand Concession is subject to a royalty ranging from 5% to 15% of oil and gas sales, plus certain fixed U.S. dollar amounts payable at specified cumulative production levels. Revenue from production in Thailand is also subject to income taxes and other similar governmental charges including a Special Remuneratory Benefit tax ("SRB"). Thaipo and its joint venture partners have entered into a thirty-year Gas Sales Agreement with PTT (the "Gas Sales Agreement"), governing gas production from the Tantawan Field and anticipated gas production from the Benchamas Field. The terms of the Gas Sales Agreement currently include a minimum daily contract quantity ("DC") of 85 MMcf per day, which the Company currently anticipates will continue until the Benchamas Field commences production, at which time the DC will, subject to certain exceptions, be based on a percentage of the remaining proved reserves, but in any event, will not be less than 125 MMcf per day. The DC is the minimum daily volume that PTT has agreed to take, or pay for if not taken, under the agreement. Likewise, Thaipo and its joint venture partners are subject to certain penalties if they are unable to meet the DC, principal among which is a decrease in sales price of up to 25% of the then current sales price. As a result of declining production from existing wells in the Tantawan Field, the need to shut-in existing wells while drilling additional wells from the same platform, and the decision to emphasize oil and condensate production from the Tantawan Field, commencing on October 1, 1998, the Company and its joint venture partners are currently delivering less natural gas than is being nominated by PTT under the Gas Sales Agreement. This could result in the Company receiving only 75% of the current contract price on a portion of its future natural gas sales to PTT. The Company is taking actions that it currently believes will minimize the penalty that it will incur on future gas sales to PTT by increasing production from the Tantawan Field. The contract sales price is subject to automatic semi-annual adjustments based upon a formula which takes into account changes in: Singapore fuel oil prices; the U.S. Bureau of Labor Statistics Oilfield Machinery and Tool Index; the Thai wholesale producer price index; and the U.S./Thai currency exchange rate. However, the Gas Sales Agreement provides for adjustment on a more frequent basis in the event that certain indices and factors on which the price is based fluctuate outside a given range. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Results of Operations; Foreign Currency Transaction Gain (Loss)" and "--Liquidity and Capital Resources; Other Matters; Southeast Asia Economic Issues." MISCELLANEOUS OTHER ASSETS The Company and a subsidiary, Pogo Offshore Pipeline Co., own interests in eight pipelines (excluding field gathering pipelines) through which offshore hydrocarbon production is transported. Through a wholly-owned subsidiary, Saginaw Pipeline Company, L.C. ("Saginaw"), which the Company acquired in its merger with Arch, the Company owns and operates the Saginaw pipeline, a six inches in diameter pipeline that runs from just outside of Fort Worth, Texas to Wichita Falls, Texas. Industrial Natural Gas, L.C., a subsidiary of Saginaw, markets the sale and transmission of natural gas through the Saginaw pipeline. In addition, the Company owns an approximately 19% interest in a cryogenic gas processing plant near Erath, Louisiana, which entitles it to process up to 186 MMcf of natural gas and 5,478 Bbls of natural gas liquids per day. The plant is not currently operating at full capacity. SALES The marketing of offshore oil and gas production is subject to the availability of pipelines and other transportation, processing and refining facilities, as well as the existence of adequate markets. As a result, even if hydrocarbons are discovered in commercial quantities, a substantial period of time may elapse before commercial production commences. If pipeline facilities in an area are insufficient, the Company 10 may have to await the construction or expansion of pipeline capacity before production from that area can be marketed. The Company's domestic offshore properties are generally located in areas where a pipeline infrastructure is well developed and there is adequate availability in such pipelines to transport the Company's current and projected future production. The Company's Thailand Concession is traversed by two major (34 inches and 36 inches in diameter, respectively) natural gas pipelines that are owned and operated by PTT and which come within approximately 25 miles of the Tantawan Field (and are slightly closer to the Benchamas Field). Thaipo and its joint venture partners in the Tantawan Field signed a long-term gas sales contract with PTT in November 1995 which has since been amended to include production from the Benchamas Field. All oil and condensate production from the Tantawan Field is initially stored aboard the FPSO and is then sold to various third parties, including PTT, on a tanker load by tanker load basis at prices based on then current world oil prices, typically with reference to the Malaysian Tapis crude oil benchmark price. The buyer is responsible for sending a tanker to off load the oil and condensate it has purchased. It is currently anticipated that when the Benchamas Field commences production, crude oil and condensate production from the Benchamas Field will be initially stored aboard the FSO and a portion of such production will be sold under a long-term contract with a single buyer and a portion will continue to be sold on a tanker load by tanker load basis, similar to the way Tantawan Field crude is currently marketed. See "--International Operations; Contractual Terms Governing the Thailand Concession and Related Production." The marketing of onshore oil and gas production is also subject to the availability of pipelines, crude oil hauling and other transportation, processing and refining facilities as well as the existence of adequate markets. Generally, the Company's onshore oil and gas production is located in areas where commercial production of economic discoveries can be rapidly effectuated. Most of the Company's North American natural gas sales are currently made in the "spot market" for no more than one month at a time at then currently available prices. Prices on the spot market fluctuate with demand. Crude oil and condensate production is also generally sold one month at a time at the price that is then currently available. Other than any futures contracts which may exist from time to time, and which are referred to in "--Miscellaneous; Competition and Market Conditions," and the Gas Sales Agreement with PTT for production from the Tantawan and Benchamas Fields (see "--International Operations; Contractual Terms Governing the Thailand Concession and Related Production"), the Company has no existing contracts that require the delivery of fixed quantities of oil or natural gas other than on a best efforts basis. Enron Corp. and its affiliates and PTT, who purchased $29,539,000 (15% of the Company's consolidated gross revenues) and $23,137,000 (12% of the Company's consolidated gross revenues) of the Company's oil and gas production during 1998, respectively, were the Company's only customers to which sales exceeded 10% of its 1998 revenues. The oil and gas sold to Enron Corp. and its affiliates was sold under a number of short term, generally month to month, contracts. COMPETITION AND MARKET CONDITIONS The Company experiences competition from other oil and gas companies in all phases of its operations, as well as competition from other energy related industries. The Company's profitability and cash flow are highly dependent upon the prices of oil and natural gas, which historically have been seasonal, cyclical and volatile. In general, prices of oil and gas are dependent upon numerous factors beyond the control of the Company, including various weather, economic, political and regulatory conditions. In the past, when natural gas prices in the United States were low, the Company at times elected to curtail certain quantities of its production. In the future, the Company may again elect to curtail certain quantities of its natural gas production. Current low oil prices continue to have a material adverse effect on the Company's cash flows and, if sustained for a significant length, could have a material adverse effect on the Company's operations and financial condition and may result in a further reduction in funds available under the Company's credit agreement. Because it is impossible to predict future oil and gas price movements with any certainty, the Company from time to time enters into contracts on a portion of its production to hedge against the volatility in oil and gas prices. Such hedging transactions, historically, have never exceeded 50% of the Company's total oil and gas production on an energy equivalent basis for any given period. While intended 11 to limit the negative effect of price declines, such transactions could effectively limit the Company's participation in price increases for the covered period, which increases could be significant. As of December 31, 1998, the Company was not a party to any natural gas futures contracts, crude oil swap agreements or other commodity hedging arrangements. When the Company does engage in such hedging activities, it may satisfy its obligations with its own production or by the purchase (or sale) of third party production. The Company may also cancel all delivery obligations by offsetting such obligations with equivalent agreements, thereby effecting a purely cash transaction. OPERATING AND UNINSURED RISKS The Company's operations are subject to risks inherent in the exploration for and production of oil and natural gas, such as blowouts, cratering, explosions, uncontrollable flows of oil, natural gas or well fluids, fires, pollution and other environmental risks. Offshore oil and gas operations are subject to the additional hazards of marine and helicopter operations, such as capsizing, collision and adverse weather and sea conditions. These hazards could result in substantial losses to the Company due to injury or loss of life, severe damage to and destruction of property and equipment, pollution and other environmental damage and suspension of operations. The Company carries insurance which it believes is in accordance with customary industry practices, but is not fully insured against all risks incident to its business. Drilling activities are subject to numerous risks, including the risk that no commercially productive hydrocarbon reserves will be encountered. The cost of drilling, completing and operating wells and of installing production facilities and pipelines is often uncertain. The Company's drilling operations may be curtailed, delayed or canceled as a result of numerous factors, including title problems, weather conditions, compliance with governmental requirements and shortages or delays in the delivery or availability of material, equipment and fabrication yards. The availability of a ready market for the Company's natural gas production depends on a number of factors, including the demand for and supply of natural gas, the proximity of natural gas reserves to pipelines, the capacity of such pipelines and government regulations. Due to the recent decline in oil and gas prices, many of the Company's partners, particularly the smaller ones, are experiencing liquidity and cash flow problems. These problems may lead to their attempting to delay or slow down the pace of drilling or project development in order to conserve cash, to a point that the Company believes is detrimental to the project. In most cases, the Company has the ability to influence the pace of development through joint operating agreements. Some partners may be unwilling or unable to pay their share of the costs of projects as they become due. At worst, a partner may declare bankruptcy and refuse or be unable to pay its share of the costs of a project. The Company would then be required to pay this partner's share of the project costs. In most instances, the Company believes that it is contractually protected from such an event through its ability to take over the non-paying partner's share of the project and by applicable oil and gas lien laws and bankruptcy laws. The Company believes that it would ultimately recover any sums that it is owed by non-paying partners that do not meet their share of the costs of a project in a timely fashion. RISKS OF FOREIGN OPERATIONS Ownership of property interests and production operations in Thailand and Canada, and in any other areas outside the United States in which the Company may choose to do business, are subject to the various risks inherent in foreign operations. These risks may include, among other things, currency restrictions and exchange rate fluctuations, loss of revenue, property and equipment as a result of hazards such as expropriation, nationalization, war, insurrection and other political risks, risks of increases in taxes and governmental royalties, renegotiation of contracts with governmental entities, changes in laws and policies governing operations of foreign-based companies and other uncertainties arising out of foreign government sovereignty over the Company's international operations. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Results of Operations; Foreign Currency Transaction Gain (Loss)," and "--Liquidity and Capital Resources; Other Matters; Southeast Asia Economic Issues." The Company's international operations may also be adversely affected by laws and policies of the United States affecting foreign trade, taxation and investment. In addition, in the event of a dispute arising from foreign operations, the Company may be subject to the exclusive jurisdiction of 12 foreign courts or may not be successful in subjecting foreign persons to the jurisdiction of the courts of the United States. The Company seeks to manage these risks by concentrating its international exploration efforts in areas where the Company believes that the existing government is stable and favorably disposed towards United States exploration and production companies. EXPLORATION AND PRODUCTION DATA In the following data "gross" refers to the total acres or wells in which the Company has an interest and "net" refers to gross acres or wells multiplied by the percentage working interest owned by the Company. ACREAGE The Company owns interests in developed and undeveloped oil and gas acreage in various parts of the world. These ownership interests generally take the form of "working interests" in oil and gas leases which have varying terms. In addition, the Company holds certain other types of mineral interests, including fee interests (which never expire) and royalty interests (which generally terminate when the underlying mineral lease expires). The Company owns varying fee and royalty interests in 10,800 gross acres in Texas and a royalty interest in 5,000 gross acres (1,250 net acres) offshore Louisiana. The following table shows the Company's interest in developed and undeveloped oil and gas acreage under lease as of December 31, 1998:
DEVELOPED UNDEVELOPED ACREAGE(A) ACREAGE(B) -------------------- --------------------- GROSS NET GROSS NET --------- --------- ---------- --------- Onshore Louisiana..................................... 2,745 559 20,146 6,338 New Mexico.................................... 31,102 20,336 74,297 55,302 Texas......................................... 37,257 14,133 133,198 54,114 Canada........................................ 22,921 2,817 93,814 48,413 Other......................................... 3,400 334 478 56 --------- --------- ---------- --------- Total Onshore............................... 97,425 38,179 321,933 164,223 --------- --------- ---------- --------- Domestic Offshore Louisiana (State)............................. 5,463 2,642 1,169 584 Louisiana (Federal)........................... 166,570 54,267 167,056 56,389 Texas (Federal)............................... 40,320 11,678 74,185 20,850 --------- --------- ---------- --------- Total Domestic Offshore..................... 212,353 68,587 242,410 77,823 --------- --------- ---------- --------- Total North America......................... 309,778 106,766 564,343 242,046 --------- --------- ---------- --------- International North Sea..................................... -- -- 112,729 45,091 Gulf of Thailand.............................. 260,407 120,682 473,733 219,530 --------- --------- ---------- --------- Total International......................... 260,407 120,682 586,462 264,621 --------- --------- ---------- --------- Total Company............................... 570,185 227,448 1,150,805 506,667 --------- --------- ---------- --------- --------- --------- ---------- ---------
- ------------------------ (a) ("Developed acreage" consists of lease acres spaced or assignable to production (including acreage held by aproduction) on which wells have been drilled or completed to a point that would permit production of commercial) quantities of oil or natural gas. "Developed acreage" in Thailand includes all acreage designated as a production area by the Thai government, which currently includes the Tantawan, Maliwan, Benchamas and Pakakrong production areas. 13 (b) ("Undeveloped acreage" includes acreage under lease or subject to lease or purchase options that the Company bcurrently expects to exercise. Approximately 9% of the Company's total domestic offshore net undeveloped acreage is )under leases that have terms expiring in 1999 (unless otherwise extended) and another approximately 12% of total domestic offshore net undeveloped acreage will expire in 2000 (unless otherwise extended). Approximately 11% of the Company's total onshore net undeveloped acreage is under leases that have terms expiring in 1999 (unless otherwise extended) and another approximately 14% of total onshore net undeveloped acreage will expire in 2000 (unless otherwise extended). All of the Company's undeveloped acreage in the Kingdom of Thailand must be relinquished to the Thai government on July 31, 2000, unless designated as a production area or unless the exploration term is extended. See "--International Operations; Contractual Terms Governing the Thailand Concession and Related Production." PRODUCTIVE WELLS AND DRILLING ACTIVITY The following table shows the Company's interest in productive oil and natural gas wells as of December 31, 1998. For purposes of this table "productive wells" are defined as wells producing hydrocarbons and wells "capable of production" (e.g., natural gas wells waiting for pipeline connections or necessary governmental certification to commence deliveries and oil wells waiting to be connected to currently installed production facilities). This table does not include exploratory or developmental wells which have located commercial quantities of oil or natural gas but which are not capable of commercial production without the installation of material production facilities or which, for a variety of reasons, the Company does not currently believe will be placed on production.
NATURAL GAS OIL WELLS(A) WELLS(A) -------------------- ---------------------- GROSS NET GROSS NET --------- --------- ----------- --------- Offshore United States........................... 125 34.2 90 27.1 Onshore (U.S. and Canada)........................ 901 454.4 189 75.7 Kingdom of Thailand.............................. -- -- 28 13.1 --------- --------- --- --------- Total........................................ 1,026 488.6 307 115.9 --------- --------- --- --------- --------- --------- --- ---------
- ------------------------ (a) One or more completions in the same bore hole are counted as one well. The data in the above table includes five gross (.6 net) oil wells and 45 gross (20.4 net) natural gas wells with multiple completions. The following table shows the number of successful gross and net exploratory and development wells in which the Company has participated and the number of gross and net wells abandoned as dry holes during the periods indicated. An onshore well is considered successful upon the installation of permanent equipment for the production of hydrocarbons or when electric logs run to evaluate such wells indicate the presence of commercial hydrocarbons and the Company currently intends to complete such wells. Successful offshore wells consist of exploratory or development wells that have been completed or are "suspended" pending completion (which has been determined to be feasible and economic) and exploratory test wells that were not intended to be completed and that encountered commercially producible 14 hydrocarbons. A well is considered a dry hole upon reporting of permanent abandonment to the appropriate agency.
1998 1997 1996 ---------------------- ---------------------- ---------------------- SUCCESSFUL DRY SUCCESSFUL DRY SUCCESSFUL DRY ----------- --------- ----------- --------- ----------- --------- Gross Wells: Offshore United States Exploratory.................................... 5.0 1.0 4.0 1.0 4.0 2.0 Development.................................... 2.0 -- 12.0 3.0 17.0 3.0 Onshore United States and Canada Exploratory.................................... 9.0 4.0 18.0 12.0 12.0 4.0 Development.................................... 32.0 1.0 50.0 3.0 39.0 1.0 Offshore Kingdom of Thailand Exploratory.................................... 12.0 -- 18.0 1.0 7.0 -- Development.................................... 12.0 -- 16.0 -- 16.0 -- ----- --- ----- --------- --- --- Total........................................ 72.0 6.0 118.0 20.0 95.0 10.0 ----- --- ----- --------- --- --- ----- --- ----- --------- --- --- Net Wells: Offshore United States Exploratory.................................... 1.07 .25 1.21 .25 1.7 1.5 Development.................................... .80 -- 4.15 1.05 4.9 1.5 Onshore United States and Canada Exploratory.................................... 5.08 2.19 11.27 7.40 6.5 0.9 Development.................................... 22.61 .34 30.18 1.41 24.4 0.7 Onshore Kingdom of Thailand Exploratory.................................... 5.56 -- 8.34 .46 2.4 -- Development.................................... 5.56 -- 5.11 -- 7.4 -- ----- --- ----- --------- --- --- Total........................................ 40.68 2.78 60.26 10.57 47.3 4.6 ----- --- ----- --------- --- --- ----- --- ----- --------- --- ---
PRODUCTION AND SALES The following table summarizes the Company's average daily production, net of all royalties, overriding royalties and other outstanding interests, for the periods indicated. Natural gas production refers only to marketable production of natural gas on an "as sold" basis.
1998 1997 1996 --------- --------- --------- Located in the United States and Canada Natural Gas (Mcf per day)...................................... 122,246 147,200 107,700 --------- --------- --------- --------- --------- --------- Liquid Hydrocarbons (Bbls per day) Crude Oil and Condensate..................................... 13,214 13,712 11,968 Natural Gas Liquids(a)....................................... 2,421 2,923 2,173 --------- --------- --------- Total North American Liquid Hydrocarbons................... 15,635 16,635 14,141 --------- --------- --------- --------- --------- --------- Located in the Kingdom of Thailand Natural Gas (Mcf per day)...................................... 36,774 34,500 -- --------- --------- --------- --------- --------- --------- Liquid Hydrocarbons (Bbls per day) Crude Oil and Condensate..................................... 2,561 2,216 -- --------- --------- --------- --------- --------- ---------
- ------------------------ (a) NGL production sales includes sales attributable to both the Company's leasehold and plant ownership. 15 The following table shows the average sales prices received by the Company for its production and the average production (lifting) costs per unit of production during the periods indicated. See "--Miscellaneous; Sales" and "--Miscellaneous; Competition and Market Conditions."
1998 1997 1996 --------- --------- --------- Sales Prices: Located in the United States and Canada Natural Gas (per Mcf)........................................... $ 2.00 $ 2.50 $ 2.40 Crude Oil and Condensate (per Bbl).............................. $ 12.97 $ 19.49 $ 22.12 Natural Gas Liquids (per Bbl)................................... $ 10.52 $ 12.89 $ 14.92 Located in the Kingdom of Thailand Natural Gas (per Mcf)........................................... $ 1.72 $ 1.93 -- Crude Oil and Condensate (per Bbl).............................. $ 13.17 $ 18.60 -- Production (lifting) Costs(a): Located in the United States and Canada Natural Gas, Crude Oil, Condensate and Natural Gas Liquids (per Mcfe)......................................................... $ .61 $ .49 $ .53 Located in the Kingdom of Thailand Natural Gas, Crude Oil and Condensate (per Mcfe)(b)............. $ 1.10 $ 1.12 --
- ------------------------ (a) Production costs were converted to common units of measure on the basis of relative energy content. Such production acosts exclude all depletion and amortization associated with property and equipment. (b) The major contributing factor to lifting costs are lease operating expenses. A substantial portion of the Company's blease operating expenses in the Kingdom of Thailand relate to lease payments made by a subsidiary of the Company in connection with its bareboat charter of the FPSO, which amounted to $11,122,000 net to the Company during 1998. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Liquidity and Capital Resources; Future Capital Requirements; Other Material Long-Term Commitments." RESERVES The following table sets forth information as to the Company's net proved and proved developed reserves as of December 31, 1998, 1997, and 1996, and the present value as of such dates (based on an annual discount rate of 10%) of the estimated future net revenues from the production and sale of those reserves, as estimated by Ryder Scott Petroleum Engineers ("Ryder Scott"), the Company's independent 16 petroleum engineers, in accordance with criteria prescribed by the Securities and Exchange Commission ("SEC").
AS OF DECEMBER 31, ---------------------------------- 1998 1997 1996 ---------- ---------- ---------- Total Proved Reserves: Oil, condensate, and natural gas liquids (MBbls) Located in the United States and Canada.................................. 33,699 29,382 28,270 Located in the Kingdom of Thailand....................................... 33,811 28,783 21,332 ---------- ---------- ---------- Total Company.......................................................... 67,510 58,165 49,602 ---------- ---------- ---------- ---------- ---------- ---------- Natural Gas (MMcf) Located in the United States and Canada.................................. 271,780 216,720 215,946 Located in the Kingdom of Thailand....................................... 168,389 184,768 144,998 ---------- ---------- ---------- Total Company.......................................................... 440,169 401,488 360,944 ---------- ---------- ---------- ---------- ---------- ---------- Present value of estimated future net revenues, before income taxes (in thousands)(a) Located in the United States and Canada.................................. $ 294,629 $ 406,161 $ 773,127 Located in the Kingdom of Thailand....................................... 200,597 56,620 181,418 ---------- ---------- ---------- Total Company.......................................................... $ 495,226 $ 462,781 $ 954,545 ---------- ---------- ---------- ---------- ---------- ---------- Total Developed Reserves: Oil, condensate, and natural gas liquids (MBbls) Located in the United States and Canada.................................. 29,070 26,168 25,898 Located in the Kingdom of Thailand....................................... 4,298 6,982 5,192 ---------- ---------- ---------- Total Company.......................................................... 33,368 33,150 31,090 ---------- ---------- ---------- ---------- ---------- ---------- Natural Gas (MMcf) Located in the United States and Canada.................................. 184,630 179,972 192,034 Located in the Kingdom of Thailand....................................... 40,424 59,760 45,998 ---------- ---------- ---------- Total Company.......................................................... 225,054 239,732 238,032 ---------- ---------- ---------- ---------- ---------- ---------- Present value of estimated future net revenues, before income taxes (in thousands)(a) Located in the United States and Canada.................................. $ 242,574 $ 377,530 $ 710,871 Located in the Kingdom of Thailand....................................... 28,244 36,692 69,062 ---------- ---------- ---------- Total Company.......................................................... $ 270,818 $ 414,222 $ 779,933 ---------- ---------- ---------- ---------- ---------- ----------
- ------------------------ (a) The Company believes, for the reasons set forth in succeeding paragraphs, that the present value of estimated future anet revenues set forth in the Annual Report and calculated in accordance with SEC guidelines are not necessarily indicative of the true present value of the Company's reserves and, due to the fact that essentially all of the Company's domestic natural gas production is currently sold on the spot market, whereas all of the Company's Thai natural gas production is sold pursuant to a long-term gas sales contract, such estimates of future net revenues from the Company's domestic and Thai reserves are, accordingly, not useful for comparative purposes. See the discussion on the following pages for the prices used in making these calculations. Natural gas liquids comprised approximately 6% of the Company's total proved liquids reserves and approximately 11% of the Company's proved developed liquids reserves as of December 31, 1998. All hydrocarbon liquid reserves are expressed in standard 42 gallon Bbls. All gas volumes and gas sales are expressed in MMcf at the pressure and temperature bases of the area where the gas reserves are located. 17 Proved reserves of crude oil, condensate, natural gas, and natural gas liquids are estimated quantities that geological and engineering data demonstrate with reasonable certainty to be recoverable in the future from known reservoirs under existing conditions. Reservoirs are considered proved if economic producibility is supported by actual production or formation tests. In certain instances, proved reserves are assigned on the basis of a combination of core analysis and electrical and other type logs which indicate the reservoirs are analogous to reservoirs in the same field which are producing or have demonstrated the ability to produce on a formation test. The area of a reservoir considered proved includes (i) that portion delineated by drilling and defined by fluid contacts, if any, and (ii) the adjoining portions not yet drilled that can be reasonably judged as economically productive on the basis of available geological and engineering data. In the absence of data on fluid contacts, the lowest known structural occurrence of hydrocarbons controls the lower proved limit of the reservoir. Proved reserves are estimates of hydrocarbons to be recovered from a given date forward. They may be revised as hydrocarbons are produced and additional data becomes available. Proved natural gas reserves are comprised of non-associated, associated and dissolved gas. An appropriate reduction in gas reserves has been made for the expected removal of liquids, for lease and plant fuel and the exclusion of non-hydrocarbon gases if they occur in significant quantities and are removed prior to sale. Reserves that can be produced economically through the application of established improved recovery techniques are included in the proved classification when these qualifications are met: (i) successful testing by a pilot project or the operation of an installed program in the reservoir provides support for the engineering analysis on which the project or program was based, and (ii) it is reasonably certain the project will proceed. Improved recovery includes all methods for supplementing natural reservoir forces and energy, or otherwise increasing ultimate recovery from a reservoir, including, (i) pressure maintenance, (ii) cycling, and (iii) secondary recovery in its original sense. Improved recovery also includes the enhanced recovery methods of thermal, chemical flooding, and the use of miscible and immiscible displacement fluids. Estimates of proved reserves do not include crude oil, condensate, natural gas, or natural gas liquids being held in underground storage. Depending on the status of development, these proved reserves are further subdivided into: (i) "developed reserves" which are those proved reserves reasonably expected to be recovered through existing wells with existing equipment and operating methods, including (a) "developed producing reserves" which are those proved developed reserves reasonably expected to be produced from existing completion intervals now open for production in existing wells, and (b) "developed non-producing reserves" which are those proved developed reserves which exist behind casing of existing wells which are reasonably expected to be produced through these wells in the predictable future where the cost of making such hydrocarbons available for production should be relatively small compared to the cost of new wells; and (ii) "undeveloped reserves" which are those proved reserves reasonably expected to be recovered from new wells on undrilled acreage, from existing wells where a relatively large expenditure is required and from acreage for which an application of fluid injection or other improved recovery technique is contemplated where the technique has been proved effective by actual tests in the area in the same reservoir. Reserves from undrilled acreage are limited to those drilling units offsetting productive units that are reasonably certain of production when drilled. Proved reserves for other undrilled units are included only where it can be demonstrated with reasonable certainty that there is continuity of production from the existing productive formation. In computing future revenues from gas reserves attributable to the Company's domestic interests, prices in effect at December 31, 1998 were used, including current market prices, contract prices and fixed and determinable price escalations where applicable. In accordance with SEC guidelines, the gas prices that were used make no allowances for seasonal variations in gas prices which are likely to cause future yearly average gas prices to be somewhat lower than December gas prices. For domestic gas sold under contract, the contract gas price including fixed and determinable escalations, exclusive of inflation adjustments, was used until the contract expires and then was adjusted to the current market price for the area and held at this adjusted price to depletion of the reserves. In computing future revenues from liquids attributable to the Company's domestic interests, prices in effect at December 31, 1998 were used and 18 these prices were held constant to depletion of the properties. The future revenues are adjusted to reflect the Company's net revenue interest in these reserves as well as any ad valorem and other severance taxes but do not include, unless otherwise noted, any provisions for corporate income taxes. In computing future revenues from the Company's gas reserves attributable to the Company's interests in the Kingdom of Thailand, the current contract price under the Gas Sales Agreement was used, without giving effect to any of the adjustments provided for in the Gas Sales Agreement, due to their indeterminate nature as of December 31, 1998, in accordance with SEC guidelines. In computing future revenues from liquids attributable to the Company's interests in the Kingdom of Thailand, a price was used which the Company believes approximates the price that the Company would have received for its production from the Thailand Concession based upon the world market price for Tapis benchmark crude on December 31, 1998, and this price was held constant until depletion of the Company's reserves in the Kingdom of Thailand. The future revenues are adjusted to reflect the Company's net revenue interest in these reserves and the Company's obligations under the Thailand Concession, including the payment of SRB and applicable production bonuses, but does not include any provisions for U.S. or Thai corporate income or other taxes. In accordance with SEC guidelines, the prices used by the Company to calculate the present value of estimated future revenues are determined on a well or field by field basis, as applicable, as described above and were held constant over the productive life of the reserves. The initial weighted average prices used by Ryder Scott were as follows:
AS OF DECEMBER 31, ------------------------------- 1998 1997 1996 --------- --------- --------- Initial Weighted Average Price (in U.S. dollars): Oil, condensate, and natural gas liquids (per Bbl) Located in the United States and Canada...................... $ 10.45 $ 16.60 $ 24.06 Located in the Kingdom of Thailand........................... $ 12.68 $ 16.00 $ 24.56 Natural Gas (per Mcf) Located in the United States and Canada...................... $ 2.01 $ 2.30 $ 3.93 Located in the Kingdom of Thailand........................... $ 1.81 $ 1.83 $ 2.09
The estimates of future net revenue from the Company's domestic and Thailand properties are based on existing law where the properties are located and are calculated in accordance with SEC guidelines. Operating costs for the leases and wells include only those costs directly applicable to the leases or wells. When applicable, the operating costs include a portion of general and administrative costs allocated directly to the leases and wells under terms of operating agreements. Development costs are based on authorization for expenditure for the proposed work or actual costs for similar projects. The current operating and development costs were held constant throughout the life of the properties. For properties located onshore, the estimates of future net revenues and the present value thereof do not consider the salvage value of the lease equipment or the abandonment cost of the lease since both are relatively insignificant and tend to offset each other. The estimated net cost of abandonment after salvage was considered for offshore properties where such costs net of salvage are significant. No deduction was made for indirect costs such as general and administrative and overhead expenses, loan repayments, interest expenses, and exploration and development prepayments. Accumulated gas production imbalances, if any, have been taken into account. Production data used to arrive at the estimates set forth above includes estimated production for the last few months of 1998. The future production rates from reservoirs now on production may be more or less than estimated because of, among other reasons, mechanical breakdowns and changes in market demand or allowables set by regulatory bodies. Properties which are not currently producing may start producing earlier or later than anticipated in the estimates of future production rates. 19 The future prices received by the Company for the sales of its production may be higher or lower than the prices used in calculating the estimates of future net revenues and the present value thereof as set forth herein, and the operating costs and other costs relating to such production may also increase or decrease from existing levels; however, such possible changes in prices and costs were, in accordance with rules adopted by the SEC, omitted from consideration in arriving at such estimates. There are numerous uncertainties in estimating the quantity of proved reserves and in projecting the future rates of production and timing of development expenditures. Oil and gas reserve engineering must be recognized as a subjective process of estimating underground accumulations of oil and gas that cannot be measured in an exact way, and estimates of other engineers might differ materially from those of Ryder Scott, the Company's reserve engineers. The accuracy of any reserve estimate is a function of the quality of available data and of engineering and geological interpretation and judgment. Results of drilling, testing and production subsequent to the date of the estimate may justify revision of such estimate, which revisions may be material. Accordingly, reserve estimates are often different from the quantities of oil and gas that are ultimately recovered. The Company is periodically required to file estimates of its oil and gas reserve data with various U.S. governmental regulatory authorities and agencies, including the Federal Energy Regulatory Commission ("FERC") and the Federal Trade Commission; with respect to reserves located in Canada, with the Alberta Energy Utilities Board and, with respect to reserves located in Thailand, the Kingdom of Thailand's Department of Mineral Resources and PTT, which the Company considers a quasi-governmental authority. In addition, estimates are from time to time furnished to governmental agencies in connection with specific matters pending before such agencies. The basis for reporting reserves to these agencies, in some cases, is not comparable to that furnished by Ryder Scott in accordance with SEC guidelines because of the nature of the various reports required. The major differences generally include differences in the time as of which such estimates are made, differences in the definition of reserves, requirements to report in some instances on a gross, net or total operator basis and requirements to report in terms of smaller geographical units. During 1998, no estimates by the Company of its total proved net oil and gas reserves were filed with or included in reports to any governmental authority or agency other than the SEC; the Alberta Energy Utilities Board for Canadian Reserves; and, with respect to reserves relating to the Company's properties located in Thailand, the Kingdom of Thailand's Department of Mineral Resources and PTT. GOVERNMENT REGULATION The Company's operations are affected from time to time in varying degrees by political developments and governmental laws and regulations. Rates of production of oil and gas have for many years been subject to governmental conservation laws and regulations, and the petroleum industry has been subject to federal and state tax laws dealing specifically with it. FEDERAL INCOME TAX The Company's operations are significantly affected by certain provisions of the federal income tax laws applicable to the petroleum industry. The principal provisions affecting the Company are those that permit the Company, subject to certain limitations, to deduct as incurred, rather than to capitalize and amortize, its domestic "intangible drilling and development costs" and to claim depletion on a portion of its domestic oil and gas properties based on 15% of its oil and gas gross income from such properties (up to an aggregate of 1,000 Bbls per day of domestic crude oil and/or equivalent units of domestic natural gas) even though the Company has little or no basis in such properties. Under certain circumstances, however, a portion of such intangible drilling and development costs and the percentage depletion allowed in excess of basis will be tax preference items that will be taken into account in computing the Company's alternative minimum tax. 20 ENVIRONMENTAL MATTERS Domestic oil and gas operations are subject to extensive federal regulation and, with respect to federal leases, to interruption or termination by governmental authorities on account of environmental and other considerations including the Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA") also known as the "Superfund Law." The recent trend towards stricter standards in environmental legislation and regulation may continue, and this could increase costs to the Company and others in the industry. Oil and gas lessees are subject to liability for the costs of clean-up of pollution resulting from a lessee's operations, and may also be subject to liability for pollution damages. The Company maintains insurance against costs of clean-up operations, but is not fully insured against all such risks. A serious incident of pollution may, as it has in the past, also result in the Department of the Interior requiring lessees under federal leases to suspend or cease operation in the affected area. The operators of the Company's properties have numerous applications pending before the Environmental Protection Agency (the "EPA") for National Pollution Discharge Elimination System water discharge permits with respect to offshore drilling and production operations. The issue generally involved is whether effluent discharges from each facility or installation comply with the applicable federal regulations. The Oil Pollution Act of 1990 (the "OPA") and regulations thereunder impose a variety of regulations on "responsible parties" related to the prevention of oil spills and liability for damages resulting from such spills in United States waters. A "responsible party" includes the owner or operator of a facility or vessel, or the lessee or permittee of the area in which an offshore facility is located. The OPA assigns liability to each responsible party for oil removal costs and a variety of public and private damages. While liability limits apply in some circumstances, a party cannot take advantage of liability limits if the spill was caused by gross negligence or willful misconduct or resulted from violation of a federal safety, construction or operating regulations. If the party fails to report a spill or cooperate fully in the cleanup, liability limits likewise do not apply. Few defenses exist to the liability imposed by the OPA. The OPA also imposes ongoing requirements on responsible parties, including proof of financial responsibility to cover at least some costs in a potential spill. For tank vessels, including mobile offshore drilling rigs, the OPA imposes on owners, operators and charterers of the vessels, an obligation to maintain evidence of financial responsibility of up to $10,000,000 depending on gross tonnage. With respect to offshore facilities, proof of greater levels of financial responsibility may be applicable. For offshore facilities that have a worst case oil spill potential of more than 1,000 Bbls (which includes many of the Company's offshore producing facilities), certain amendments to the OPA that were enacted in 1996 provide that the amount of financial responsibility that must be demonstrated for most facilities ranges from $10,000,000 to $35,000,000, depending upon location, with higher amounts, up to $150,000,000 in certain limited circumstances. The Company believes that it currently has established adequate proof of financial responsibility for its offshore facilities at no significant increase in expense over recent prior years. However, the Company cannot predict whether these financial responsibility requirements under the OPA amendments will result in the imposition of substantial additional annual costs to the Company in the future or otherwise materially adversely affect the Company. The impact, however, should not be any more adverse to the Company than it will be to other similarly situated or less capitalized owners or operators in the Gulf of Mexico. The Company's onshore operations are subject to numerous United States and Canadian federal, state, provincial and local laws and regulations controlling the discharge of materials into the environment or otherwise relating to the protection of the environment including CERCLA. Such laws and regulations, among other things, impose absolute liability on the lessee under a lease for the cost of clean-up of pollution resulting from a lessee's operations, subject the lessee to liability for pollution damages, may require suspension or cessation of operations in affected areas, and impose restrictions on the injection of liquids into subsurface aquifers that may contaminate groundwater. Such laws could have a significant impact on the operating costs of the Company, as well as the oil and gas industry in general. Federal, state, 21 provincial and local initiatives to further regulate the disposal of oil and gas wastes are also pending in certain states and Canadian provinces, and these initiatives could have a similar impact on the Company. The Company is asked to comment on the costs it incurred during the prior year on capital expenditures for environmental control facilities and the amount it anticipates incurring during the coming year. The Company believes that, in the course of conducting its oil and gas operations, many of the costs attributable to environmental control facilities would have been incurred absent environmental regulations as prudent, safe oilfield practice. During 1998, the Company incurred capital expenditures of approximately $4,600,000 for environmental control facilities, primarily relating to the installation of certain environmental control facilities on four platforms installed in the Gulf of Thailand and one platform in the Gulf of Mexico, and the drilling of three salt water disposal wells. The Company budgeted approximately $171,000 for expenditures involving environmental control facilities during 1999, including, among other things, environmental control equipment for two platforms in the Gulf of Thailand. OTHER LAWS AND REGULATIONS Various laws and regulations often require permits for drilling wells and also cover spacing of wells, the prevention of waste of oil and gas including maintenance of certain gas/oil ratios, rates of production and other matters. The effect of these laws and regulations, as well as other regulations that could be promulgated by the jurisdictions in which the Company has production, could be to limit the number of wells that could be drilled on the Company's properties and to limit the allowable production from the successful wells completed on the Company's properties, thereby limiting the Company's revenues. The Minerals Management Service of the Department of the Interior (the "MMS") administers the oil and gas leases held by the Company on federal onshore lands and offshore tracts in the Outer Continental Shelf. The MMS holds a royalty interest in these federal leases on behalf of the federal government. While the royalty interest percentage is fixed at the time that the lease is entered into, from time to time the MMS changes or reinterprets the applicable regulations governing its royalty interests, and such action can indirectly affect the actual royalty obligation that the Company is required to pay. In a letter dated May 3, 1993, the MMS announced a reinterpretation of its right to collect royalty payments from producers on certain settlements in which such producers and pipeline companies were involved a number of years ago. The MMS reinterpretation has been challenged in court by various producers and trade groups representing them. On August 27, 1996, in INDEPENDENT PETROLEUM ASSOCIATION OF AMERICA, ET AL. V. BABBIT ET AL., Nos. 95-5210 ETC., the United States Court of Appeals for the District of Columbia Circuit held that the May 3, 1993, reinterpretation was invalid and unenforceable. Unless and until this or other similar cases are resolved in favor of the MMS' reinterpretation of its regulations, it is unlikely that the Company or other producers will be legally required to pay royalties on such settlement agreements. The Company was involved in several settlement agreements with pipelines that could be subject to the MMS' new reinterpretation. The MMS has reviewed the Company's and other producers' settlement agreements, to determine whether it believes any additional royalty payments may be due and has asserted that additional royalties may be due in connection with two of the Company's settlement agreements. Based upon existing case law, the Company has asserted through the administrative appeals process, and continues to believe, that it does not owe any additional royalties beyond what it has previously paid. However, in the event that the MMS is able to successfully assert that additional royalty is due from the Company in connection with settlement agreements to which the Company is a party, the Company does not currently believe that such additional assessment will have a material adverse impact on the financial position or results of operations of the Company. Recently the MMS and various state and municipal authorities have attempted to collect alleged underpayment of royalties from various integrated oil companies in connection with sale transactions between exploration and production affiliates and pipeline affiliates of the same company. The Company has not been named in any of these collection efforts, a fact that the Company believes is primarily due to its never having sold any oil or gas production from one of its affiliates to another. The Company does not believe that it has any material liability for underpayment of royalty in connection with affiliate transactions, including those described above. 22 The FERC has recently embarked on wide-ranging regulatory initiatives relating to gas transportation rates and services, including the availability of market-based and other alternative rate mechanisms to pipelines for transmission and storage services. In addition, the FERC has announced and implemented a policy allowing pipelines and transportation customers to negotiate rates above the otherwise applicable maximum lawful cost-based rates on the condition that the pipelines alternatively offer so-called recourse rates equal to the maximum lawful cost-based rates. With respect to gathering services, the FERC has issued orders declaring that certain facilities owned by interstate pipelines primarily perform a gathering function, and may be transferred to affiliated and non-affiliated entities that are not subject to the FERC's rate jurisdiction. These orders have been generally upheld on appeal to the courts. The Company cannot predict the ultimate outcome of these developments, nor the effect of these developments on transportation rates. Inasmuch as the rates for these pipeline services can affect the gas prices received by the Company for the sale of its production, the FERC's actions may have an impact on the Company. However, the impact should not be substantially different on the Company than it will on other similarly situated gas producers and sellers. EMPLOYEES As of December 31, 1998, the Company and its subsidiaries had 185 full-time employees, including 24 in its Bangkok, Thailand office and seven in its Calgary, Canada office. None of the Company's employees are presently represented by a union for collective bargaining purposes. The Company considers its relations with its employees to be excellent. ITEM 2. PROPERTIES. The information appearing in Item 1 of this Annual Report is incorporated herein by reference. ITEM 3. LEGAL PROCEEDINGS. The Company is a party to various other legal proceedings consisting of routine litigation incidental to its businesses, but believes that any potential liabilities resulting from these proceedings are adequately covered by insurance or are otherwise immaterial at this time. See "Business--Government Regulation; Other Laws and Regulations." ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS. Not Applicable. 23 ITEM S-K 401(B). EXECUTIVE OFFICERS OF REGISTRANT. Executive officers of the Company are appointed annually to serve for the ensuing year or until their successors have been elected or appointed. The executive officers of the Company, their age as of February 15, 1999 and the year each was elected to his present position are as follows:
YEAR EXECUTIVE OFFICER EXECUTIVE OFFICE AGE ELECTED - ------------------------------------------------ ------------------------------------------------ --- ----------- Paul G. Van Wagenen............................. Chairman of the Board, President and Chief 53 1991 Executive Officer Stuart P. Burbach............................... Executive Vice President--Exploration 46 1998 Kenneth R. Good................................. Executive Vice President 61 1998 Jerry A. Cooper................................. Senior Vice President and Western Division 50 1998 Manager R. Phillip Laney................................ Senior Vice President and Manager of Worldwide 58 1998 New Ventures John O. McCoy, Jr............................... Senior Vice President and Chief Administrative 47 1998 Officer J. D. McGregor.................................. Senior Vice President--Sales 54 1998 Bruce E. Archinal............................... Vice President and Onshore Division Manager 46 1997 David R. Beathard............................... Vice President--Engineering 40 1997 Stephen R. Brunner.............................. Vice President--Operations 40 1997 Frank Davis III................................. Vice President--Land 52 1997 John W. Elsenhans............................... Vice President and Chief Financial Officer 46 1998 Thomas E. Hart.................................. Vice President and Controller 56 1988 Ronald B. Manning............................... Vice President and General Counsel 45 1995 Gerald A. Morton................................ Vice President--Law and Corporate Secretary 40 1997
Prior to assuming their present positions with the Company, the business experience of each executive officer for more than the last five years was as follows: Mr. Van Wagenen, who joined the Company in 1979, served as President and Chief Operating Officer of the Company since 1990; Mr. Burbach served as Vice President and Offshore Division Manager since rejoining the Company in 1991; Mr. Good, who joined the Company in 1977, served as Corporate Senior Vice President of the Company since 1996 and prior thereto served as the Company's Senior Vice President--Land and Budgets since 1991; Mr. Cooper, who joined the Company in 1979, served as Vice President and Western Division Manager for the Company since 1991; Mr. Laney, who joined the Company in 1977, served as Vice President and International Exploration Manager for the Company since 1991; Mr. McCoy, who joined the Company in 1978, served as Vice President and Chief Administrative Officer of the Company since 1989; Mr. McGregor, who joined the Company in 1981, served as Vice President--Sales since 1988; Mr. Archinal, who joined the Company in 1982, served as the Company's Onshore Division Manager since 1994 and prior thereto served as Offshore Division Exploration Manager for the Company since 1991; Mr. Beathard, who joined the Company in 1982, served as Manager of Petroleum Engineering for the Company since 1991; Mr. Brunner served as Resident Manager of the Company's Thailand operations since 1995, prior to which he was an Operations Manager for the Company since joining in 1994 and prior thereto held various positions in the energy industry, the most recent of which was as Operations Manager for Zilkha Energy since 1991; Mr. Davis, who joined the Company in 1978, served as Land Manager for the Company since 1991; Mr. Elsenhans, who joined the Company in 1991, served as Vice President-- Finance and Treasurer for the Company since 1995, and prior thereto was Director, Corporate Finance for the Company since 1991; Mr. Hart was Controller for the Company since joining the Company in 1977; Mr. Manning, who joined the Company in 1987, was Corporate Secretary and an Associate General Counsel for the Company since 1990; and Mr. Morton was an Associate General Counsel for the Company since 1993. 24 PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SECURITY MATTERS. The following table shows the range of low and high sales prices of the Company's Common Stock (the "Common Stock") on the New York Stock Exchange composite tape where the Common Stock trades under the symbol PPP. The Common Stock is also listed on the Pacific Stock Exchange.
LOW HIGH --------- --------- 1997 1st Quarter.............................................. 33 3/8 49 7/8 2nd Quarter.............................................. 33 1/2 41 3/8 3rd Quarter.............................................. 37 7/8 45 3/8 4th Quarter.............................................. 27 44 9/16 1998 1st Quarter.............................................. 26 1/2 34 2nd Quarter.............................................. 21 1/2 34 11/16 3rd Quarter.............................................. 11 5/8 25 7/8 4th Quarter.............................................. 9 13/16 17 1/8
As of February 22, 1999, there were 3,287 holders of record of the Company's Common Stock. In each of 1997 and 1998, the Company paid four quarterly dividends of $0.03 per share on its Common Stock. However, the declaration and payment of future dividends will depend upon, among other things, the Company's future earnings and financial condition, liquidity and capital requirements, the general economic and regulatory climate and other factors deemed relevant by the Company's Board of Directors. Pursuant to the Company's revolving credit agreement with its banks under which the Company has borrowed funds, and the Indentures relating to the Company's 8 3/4% Senior Subordinated Notes due 2007 (the "2007 Notes") and 10 3/8% Senior Subordinated Notes due 2009 (the "2009 Notes"), the Company may not, subject to certain exceptions, pay any dividends on its capital stock or make any other distributions on shares of its capital stock (other than dividends or distributions payable solely in shares of such capital stock) or apply any funds, property or assets to the purchase, redemption, sinking fund or other retirement of its capital stock, if the aggregate amount of all such dividends, purchases, and redemptions would exceed an amount determined based on the consolidated income of the Company and its consolidated subsidiaries plus the proceeds of the issuance of capital stock from and after a specified date set forth in each respective agreement or, in the case of the revolving credit agreement, if the net worth of the Company is negative. As of February 1, 1999, $15,000,000 was available for dividends under this limitation in the Indenture relating to the 2009 Notes, the agreement currently having the most restrictive covenants. 25 ITEM 6. SELECTED FINANCIAL DATA
FOR THE YEAR ENDED DECEMBER 31, ---------------------------------------------------------- 1998 1997 1996 1995 1994 ---------- ---------- ---------- ---------- ---------- (EXPRESSED IN THOUSANDS, EXCEPT PER SHARE AND PRODUCTION DATA) FINANCIAL DATA Revenues: Crude oil and condensate........................... $ 74,703 $ 112,603 $ 96,908 $ 76,557 $ 65,141 Natural gas........................................ 116,148 158,500 94,589 72,032 99,093 Natural gas liquids................................ 9,303 13,748 11,867 8,097 9,189 ---------- ---------- ---------- ---------- ---------- Oil and gas revenues............................... 200,154 284,851 203,364 156,686 173,423 Pipeline sales and other........................... 2,649 1,449 613 873 185 ---------- ---------- ---------- ---------- ---------- Total............................................ $ 202,803 $ 286,300 $ 203,977 $ 157,559 $ 173,608 ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- Income (loss) before extraordinary item.............. $ (43,098) $ 37,116 $ 33,581 $ 9,230 $ 27,374 Extraordinary losses................................. -- -- (821) -- (307) ---------- ---------- ---------- ---------- ---------- Net income (loss).................................... $ (43,098) $ 37,116 $ 32,760 $ 9,230 $ 27,067 ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- Per share data: Income (loss) before extraordinary item-- Basic............................................ $ (1.14) $ 1.11 $ 1.01 $ 0.28 $ 0.84 Diluted.......................................... $ (1.14) $ 1.06 $ 0.97 $ 0.28 $ 0.82 Cash dividends..................................... $ 0.12 $ 0.12 $ 0.12 $ 0.12 $ 0.06 Price range of common stock: High............................................. $ 34.69 $ 49.88 $ 48.38 $ 29.00 $ 24.25 Low.............................................. $ 9.81 $ 27.00 $ 24.38 $ 16.00 $ 15.63 Weighted average number of common shares outstanding........................................ 37,902 33,421 33,203 32,893 32,663 Longterm debt at year end............................ $ 434,947 $ 348,179 $ 246,230 $ 163,249 $ 149,249 Shareholders' equity at year end..................... $ 249,660 $ 146,106 $ 107,282 $ 71,708 $ 64,037 Total assets at year end............................. $ 862,396 $ 676,617 $ 479,242 $ 338,177 $ 298,826 PRODUCTION (SALES) DATA Net daily average and weighted average price: Natural gas (Mcf per day).......................... 159,000 181,700 107,700 121,000 144,800 Price (per Mcf).................................. $ 2.00 $ 2.39 $ 2.40 $ 1.63 $ 1.88 Crude oil-condensate (Bbl per day)................. 15,775 15,927 11,968 11,786 11,100 Price (per Bbl).................................. $ 12.97 $ 19.37 $ 22.12 $ 17.80 $ 16.08 Natural gas liquids (Bbl per day).................. 2,422 2,923 2,173 1,998 2,222 Price (per Bbl).................................. $ 10.52 $ 12.89 $ 14.92 $ 11.10 $ 11.33 CAPITAL EXPENDITURES Oil and gas: Domestic Offshore-- Exploration...................................... $ 20,200 $ 18,700 $ 16,800 $ 13,300 $ 2,800 Development...................................... 42,500 59,800 73,900 17,800 44,100 Purchase of reserves............................. 5,000 900 -- -- 32,600 Onshore North America-- Exploration...................................... 16,500 18,100 10,400 8,800 6,800 Development...................................... 28,100 38,400 27,800 22,400 23,700 Purchase of reserves............................. 133,100 1,700 -- 7,900 -- Kingdom of Thailand-- Exploration...................................... 11,600 21,700 8,500 5,500 5,100 Development...................................... 95,500 62,500 54,700 24,400 -- Purchase of reserves............................. -- 29,300 -- 4,200 -- ---------- ---------- ---------- ---------- ---------- Total oil and gas.................................. 352,500 251,100 192,100 104,300 115,100 Other................................................ 6,300 4,000 1,600 500 1,200 ---------- ---------- ---------- ---------- ---------- Total.............................................. $ 358,800 $ 255,100 $ 193,700 $ 104,800 $ 116,300 ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
26 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. On August 17, 1998, a wholly owned subsidiary of the Company merged with and into Arch Petroleum Inc. ("Arch") in a stock-for-stock tax-free merger accounted for as a purchase. In connection with the merger, the Company paid off $51,749,000 of Arch's existing bank debt and production payment obligations. The Company also exchanged $5,000,000 of Arch's existing convertible subordinated notes, 727,273 shares of Arch preferred stock (having a liquidation preference of $20,000,000) and 17,321,804 shares of Arch common stock for approximately 2,500,000 shares of Common Stock. RESULTS OF OPERATIONS NET INCOME (LOSS) The Company reported a net loss for 1998 of $43,098,000 or $1.14 per share, compared to net income for 1997 of $37,116,000 or $1.11 per share ($40,198,000 or $1.06 per share on a diluted basis) and net income for 1996 of $32,760,000 or $0.99 per share ($35,843,000 or $0.95 per share on a diluted basis). Among other items affecting the net loss for 1998 were non-recurring expenses totaling approximately $2,285,000 ($1,485,000 or $0.04 per share on an after-tax basis) related to the Company's acquisition of Arch and impairments to its oil and gas properties of $30,813,000, primarily resulting from poor reservoir performance and persistent low oil and gas prices. The Company recorded an extraordinary loss of $821,000 during the second quarter of 1996 related to the early retirement of the Company's 8% Convertible Subordinated Debentures, due 2005 with the proceeds from the Company's issuance on June 18, 1996, of its 5 1/2% Convertible Subordinated Notes, due 2006 (the "2006 Notes"). Earnings per common share are based on the weighted average number of common shares outstanding for 1998 of 37,902,000, compared to 33,421,000 (38,064,000 on a diluted basis) for 1997 and 33,203,000 (37,920,000 on a diluted basis) for 1996. The increase in the weighted average number of common shares outstanding for 1998, compared to 1997, resulted primarily from the issuance of 3,882,023 shares of its common stock upon the conversion of the Company's 5 1/2% Convertible Subordinated Notes due 2004 (the "2004 Notes") prior to their being redeemed on March 16, 1998, the issuance as of August 17, 1998 of approximately 2,500,000 shares of common stock to former holders of Arch capital stock and convertible debt securities in connection with the Company's acquisition of Arch and, to a lesser extent, the issuance of common stock upon the exercise of stock options pursuant to the Company's stock option plans. The increase in weighted average number of common shares outstanding for 1997, compared to 1996, resulted primarily from the issuance of common stock upon the exercise of stock options pursuant to the Company's stock option plans. The earnings per share computation on a diluted basis in 1998 is identical to the basic earnings per share computation because there were no securities of the Company that were dilutive during the period. The earnings per share computation on a diluted basis in 1997 and 1996 primarily reflect additional shares of common stock issuable upon the assumed conversion of the 2004 Notes and the elimination of related interest requirements, as adjusted for applicable federal income taxes and, to a lesser extent, the assumed exercise of options to purchase common shares. In addition, the number of common shares outstanding in the diluted computation is adjusted, in accordance with the Financial Accounting Standards Board's Statement of Financial Accounting Standards ("SFAS") No. 128, to include dilutive shares that are assumed to have been issued by the Company in connection with options exercised during the year, less treasury shares that are assumed to have been purchased by the Company from the option proceeds. SFAS No. 128 was adopted by the Company in 1997, resulting in a restatement of the earnings per share calculations for 1997 and 1996, and all preceding years. TOTAL REVENUES The Company's total revenues for 1998 were $202,803,000, a decrease of approximately 29% from total revenues of $286,300,000 for 1997, and a decrease of approximately 1% from total revenues of $203,977,000 for 1996. The decrease in the Company's total revenues for 1998, compared to 1997, resulted primarily from the substantial decrease in oil and gas revenues, that was partially offset by an increase in pipeline sales related to the Saginaw pipeline, which was acquired as part of the Arch acquisition, in the 27 third quarter of 1998. The decrease in the Company's total revenues for 1998, compared to 1996, resulted primarily from the decrease in oil and gas revenues that were nearly offset by the revenues generated by the Saginaw pipeline. OIL AND GAS REVENUES The Company's oil and gas revenues for 1998 were $200,154,000, a decrease of approximately 30% from oil and gas revenues of $284,851,000 for 1997, and a decrease of approximately 2% from oil and gas revenues of $203,364,000 for 1996. The following table reflects an analysis of variances in the Company's oil and gas revenues (expressed in thousands) between 1998 and the previous two years:
1998 COMPARED TO ---------------------- 1997 1996 ---------- ---------- Increase (decrease) in oil and gas revenues resulting from variances in: Natural gas-- Price............................................................. $ (25,802) $ (15,728) Production........................................................ (16,550) 37,287 ---------- ---------- (42,352) 21,559 Crude oil and condensate-- Price............................................................. (37,178) (40,077) Production........................................................ (722) 17,872 ---------- ---------- (37,900) (22,205) ---------- ---------- Natural Gas Liquids................................................. (4,445) (2,564) ---------- ---------- Increase (decrease) in oil and gas revenues....................... $ (84,697) $ (3,210) ---------- ---------- ---------- ----------
28 The decrease in the Company's oil and gas revenues in 1998, compared to 1997, is related to declines in the average price that the Company received for its natural gas and oil, condensate and NGL ("liquid hydrocarbons") production volumes and, to a lesser extent, declines in such production volumes. The decrease in the Company's oil and gas revenues in 1998, compared to 1996, is related to declines in the average price that the Company received for its natural gas and liquid hydrocarbon production volumes, that more than offset substantial increases in natural gas and liquid hydrocarbon production volumes.
% CHANGE % CHANGE 1998 1998 TO TO 1998 1997 1997 1996 1996 --------- --------- ----------- --------- ----------- Comparison of Increases (Decreases) in: NATURAL GAS-- Average prices North America............................................ $ 2.09 $ 2.50 (16%) $ 2.40 (13%) Kingdom of Thailand (Thai baht)(a)....................... 70 60 17% N/A N/A Company-wide average price............................. $ 2.00 $ 2.39 (16%) $ 2.40 (17%) Average daily production volumes (MMcf per day) North America............................................ 122.2 147.2 (17%) 107.7 13% Kingdom of Thailand (a).................................. 36.8 34.5 7% N/A N/A --------- --------- --------- Company-wide average daily production.................. 159.0 181.7 (12%) 107.7 48% --------- --------- --------- --------- --------- --------- CRUDE OIL AND CONDENSATE-- Average prices North America............................................ $ 12.94 $ 19.49 (34%) $ 22.12 (42%) Kingdom of Thailand(a)................................... $ 13.17 $ 18.60 (29%) N/A N/A Company-wide average price............................. $ 12.97 $ 19.37 (33%) $ 22.12 (41%) Average daily production volumes (Bbls per day) North America............................................ 13,214 13,711 (4%) 11,968 10% Kingdom of Thailand (a).................................. 2,561 2,216 16% N/A N/A --------- --------- --------- Company-wide average daily production.................. 15,775 15,927 (1%) 11,968 32% --------- --------- --------- --------- --------- --------- TOTAL LIQUID HYDROCARBONS-- Company-wide average daily production (Bbls per day)........................................... 18,197 18,851 (3%) 14,141 29% --------- --------- --------- --------- --------- ---------
- ------------------------ (a) Production from the Tantawan Field commenced in February 1997, with a start-up phase which extended through March 15, 1997. Consequently, no production figures are presented for 1996 and all Thailand production figures for 1997 reflect only nine and a half months of full production. NATURAL GAS THAILAND PRICES. The price that the Company receives under the Gas Sales Agreement for its natural gas production from the Thailand Concession normally adjusts on a semi-annual basis. However, the Gas Sales Agreement provides for adjustment on a more frequent basis in the event that certain indices and factors on which the price is based fluctuate outside a given range. See "Business--International Operations; Contractual Terms Governing the Thailand Concession and Related Production." Due to the volatility of the Thai baht and the current economic difficulties in the Kingdom of Thailand and throughout Southeast Asia, the price that the Company receives under the Gas Sales Agreement adjusted several times during 1998, and almost monthly in the latter half of 1997. The Company cannot predict what the baht to dollar exchange rate may be in the future. Moreover, it is anticipated that this exchange rate will remain volatile. See ";Foreign Currency Transaction Gain (Loss)," "--Liquidity and Capital Resources; Other Matters; Southeast Asia Economic Issues" and "Business--International Operations; Contractual Terms Governing the Thailand Concession." 29 PRODUCTION. The decrease in the Company's natural gas production during 1998, compared to 1997, was related in large measure to decreased production from the Company's East Cameron Block 334 "E" platform, and to a lesser extent, four periods in the second half of 1998 during which most of the Company's offshore production was shut-in as a precautionary measure due to hurricanes in the Gulf of Mexico and natural production declines, that was partially offset by increased production from the Company's onshore properties located in South Texas and South Louisiana. The increase in the Company's average natural gas production for 1998, compared to 1996, was related in large measure to the commencement of production from the Tantawan Field in the first quarter of 1997, and, to a lesser extent, production from the Company's East Cameron Block 334 "E" platform, which commenced production in April 1997, and production from properties that the Company acquired in its acquisition of Arch, that was only partially offset by the anticipated natural decline in deliverability from certain of the Company's properties. Commencing on October 1, 1998, the Company and its joint venture partners in the Thailand Concession have been delivering less natural gas than is being nominated by PTT under the Gas Sales Agreement. This could result in the Company receiving only 75% of the current contract price on a portion of its future natural gas sales to PTT. The Company is taking actions that it currently believes will minimize the penalty that it will incur on future gas sales to PTT by, among other things, increasing production from the Tantawan Field. As of December 31, 1998, the Company was not a party to any future natural gas sales contracts. CRUDE OIL AND CONDENSATE THAILAND PRICES. Since the inception of production from the Tantawan Field, crude oil and condensate has been stored on the FPSO until an economic quantity was accumulated for offloading and sale. The first such sale of crude oil and condensate from the Tantawan Field occurred in July 1997. Prices that the Company receives for its crude oil and condensate production from Thailand are based on world benchmark prices, which are denominated in dollars. In addition, the Company is generally paid for its crude oil and condensate production from Thailand in U.S. dollars. PRODUCTION. The decrease in the Company's crude oil and condensate production during 1998, compared to 1997, resulted primarily from a decrease in condensate production from the Company's East Cameron Block 334 "E" platform, which was in part due to damage sustained in a marine accident at the crude oil and condensate pipeline from the platform, that was only partially offset by increased production from a full year's worth of production from the Tantawan Field and the Company's ongoing development drilling and workover programs in the offshore and onshore Gulf of Mexico regions. The increase in the Company's average crude oil and condensate production for 1998, compared to 1996, was related in large measure to the commencement of production from the Tantawan Field in the first quarter of 1997 and, to a lesser extent, condensate production from the Company's East Cameron Block 334 "E" platform, which commenced production in April 1997 and production from properties that the Company acquired in its acquisition of Arch, that was only partially offset by the anticipated natural decline in deliverability from certain of the Company's properties. As of December 31, 1998, the Company was not a party to any crude oil swaps or futures contracts. NGL PRODUCTION. The Company's oil and gas revenues, and its total liquid hydrocarbon production, reflect the production and sale by the Company of NGL, which are liquid products that are extracted from natural gas production. The decrease in NGL revenues for 1998, compared with 1997, primarily related to a decrease in the average price that the Company received for its NGL and, to a lesser extent, a decrease in the Company's NGL production volumes. The decrease in NGL revenues in 1998, compared with 1996, primarily related to a decrease in price that the Company received for its NGL production, that was only partially offset by an increase in the Company's NGL production. 30 COSTS AND EXPENSES
% CHANGE % CHANGE 1998 1997 1998 TO 1997 1996 1998 TO 1996 -------------- -------------- ------------- -------------- ------------- Comparison of Increases (Decreases) in: LEASE OPERATING EXPENSES North America........................... $ 50,300,000 $ 43,934,000 14% $ 37,628,000 34% Kingdom of Thailand(a).................. $ 20,913,000 $ 19,567,000 7% N/A N/A -------------- -------------- -------------- Total Lease Operating Expenses........ $ 71,213,000 $ 63,501,000 12% $ 37,628,000 89% -------------- -------------- -------------- -------------- -------------- -------------- GENERAL AND ADMINISTRATIVE EXPENSES....... $ 26,356,000 $ 21,412,000 23% $ 18,028,000 46% EXPLORATION EXPENSES...................... $ 9,802,000 $ 10,530,000 (7%) $ 16,777,000 (42%) DRY HOLE AND IMPAIRMENT EXPENSES.......... $ 41,736,000 $ 9,631,000 333% $ 8,579,000 386% DEPRECIATION, DEPLETION AND AMORTIZATION (DD&A) EXPENSES......................... $ 110,916,000 $ 103,157,000 8% $ 61,857,000 79% DD&A rate............................... $ 1.12 $ 0.95 18% $ 0.87 29% Mcfe produced........................... 97,894,000 107,605,000 (9%) 70,472,000 39% INTEREST-- Charges................................. $ 24,682,000 $ 21,886,000 13% $ 13,203,000 87% Capitalized Interest Expense............ $ 9,381,000 $ 6,175,000 52% $ 4,244,000 121% FOREIGN CURRENCY TRANSACTION GAIN (LOSS).................................. $ 953,000 $ (7,604,000) N/A -- N/A INCOME TAX BENEFIT (EXPENSE).............. $ 27,751,000 $ (18,091,000) N/A $ (18,800,000) N/A
- ------------------------ (a) Production from the Tantawan Field commenced in February 1997, with a start-up phase which extended through March 15, 1997. No lease operating expenses were incurred in Thailand prior to commencement of production. LEASE OPERATING EXPENSES. The increase in North American lease operating expenses for 1998, compared to 1997, were affected by $2,142,000 in expenses related to purchasing natural gas for transportation and subsequent resale on the Saginaw pipeline system acquired in the merger with Arch, a non-recurring maintenance project on the Company's East Cameron 334 "E" platform during the first quarter of 1998 and by operating expenses related to the Saginaw pipeline system and other Arch properties for which no corresponding expenses were recorded during 1997. In addition, lease operating expenses for 1997 were reduced by a $1,793,000 in refunds in connection with the Company's audit of a joint venture partner and settlement of a dispute with a vendor. The increase in lease operating expenses in the Kingdom of Thailand for 1998, compared to 1997, was primarily related to the fact that prior to the commencement of production in the Tantawan Field on February 1, 1997, no lease operating expenses were incurred by the Company in Thailand. A substantial portion of the Company's lease operating expenses in the Kingdom of Thailand relate to lease payments made by Tantawan Services, L.L.C., in connection with its bareboat charter of the FPSO, which amounted to $11,122,000 and $10,200,000 (net to the Company's interest) for 1998 and 1997, respectively. See "--Liquidity and Capital Resources; Capital Requirements; Other Material Long-Term Commitments." In addition to the reasons discussed above, North American lease operating expenses for 1998, compared to 1996, also increased due to a shortage of qualified offshore service contractors, which permitted such contractors to increase the costs of their services significantly during 1997, increased expenses related to the leasing of certain equipment in the Gulf of Mexico, a year to year increase in the level of the Company's operating activities, including increased operating costs related to additional properties brought on production and an increased ownership interest in certain properties as a result of the acquisition of such interests also contributed to the increase. 31 GENERAL AND ADMINISTRATIVE EXPENSES The increase in general and administrative expenses for 1998, compared with 1997 and 1996, was related to a number of non-recurring expenses arising in connection with the Company's acquisition of Arch totaling approximately $2,285,000, that included severance payments to former officers and employees of Arch, as well as an increase in the size of the Company's work force and normal salary and concomitant benefit expense adjustments. EXPLORATION EXPENSES Exploration expenses consist primarily of rental payments required under oil and gas leases to hold non-producing properties ("delay rentals") and geological and geophysical costs which are expensed as incurred. The decreases in exploration expenses for 1998, compared to 1997 and 1996, resulted primarily from decreased geophysical activity by the Company in most of its operational areas except Canada, where the Company participated in a significant 3-D survey during 1998, and a decrease in delay rental payments. DRY HOLE AND IMPAIRMENT EXPENSES Dry hole and impairment expenses relate to costs of unsuccessful wells drilled, along with impairments resulting from the application of SFAS No. 121 due to decreases in expected reserves from producing wells. The increase in dry hole and impairment expenses for 1998, compared with 1997 and 1996, was principally related to the dry hole cost of the Company's Mustang Island Block A-51 well, and impairment expenses related a decline in reserves at the Company's East Cameron Block 334/335 Field and its Keystone Field located in Winkler County, Texas (which the Company sold at year-end 1998) and disappointing reservoir performance at the Company's South Pass Block 78 Field. DEPRECIATION, DEPLETION AND AMORTIZATION EXPENSES The Company accounts for its oil and gas activities using the successful efforts method of accounting. Under the successful efforts method, lease acquisition costs and all development costs are capitalized. Proved properties are reviewed whenever events or changes in circumstances indicate that the value of such property on the Company's books may not be recoverable. Unproved properties are reviewed quarterly to determine if there has been impairment of the carrying value, with any such impairment charged to expense in the period. Proved oil and gas properties are reviewed when circumstances suggest the need for such a review and, if required, he proved properties are written down to their estimated fair value. Estimated fair value includes the estimated present value of all reasonably expected future production, prices, and costs. As a result of poor reservoir performance and persistent low oil and gas prices, the Company performed such a review in 1998 and expensed $30,813,000 related to its domestic oil and gas properties which is included in the Consolidated Statements of Income as dry hole and impairment expense. Exploratory drilling costs are capitalized until the results are determined. If proved reserves are not discovered, the exploratory drilling costs are expensed. Other exploratory costs are expensed as incurred. The provision for DD&A expense is based on the capitalized costs, as determined in the preceding paragraph, plus future costs to abandon offshore wells and platforms, and is determined on a cost center by cost center basis using the units of production method. The Company generally creates cost centers on a field by field basis for oil and gas activities in the Gulf of Mexico and Gulf of Thailand. Generally, the Company establishes cost centers on the basis of an oil or gas trend or play for its oil and gas activities onshore in the United States and Canada. The increase in the Company's DD&A expenses for 1998, compared to 1997, resulted primarily from an increase in the Company's composite rate, that was not entirely offset by a decline in the Company's natural gas and liquid hydrocarbon production. The increase in the Company's DD&A expenses for 1998, compared to 1996, resulted primarily from an increase in the Company's natural gas and liquid hydrocarbon production and, to a lesser extent, an increase in the Company's composite DD&A rate. 32 The increase in the composite DD&A rate for all of the Company's producing fields for 1998, compared to 1997 and 1996, resulted primarily from an increased percentage of the Company's production coming from certain of the Company's fields that have DD&A rates that are higher than the Company's recent historical composite rate and a corresponding decrease in the percentage of the Company's production coming from fields that have DD&A rates that are lower than the Company's recent historical composite DD&A rate. Management currently anticipates that this trend will continue for the foreseeable future, resulting in generally increasing DD&A rates. INTEREST INTEREST CHARGES. The increase in the Company's interest charges for 1998, compared to 1997 and 1996, resulted primarily from an increase in the average amount of the Company's outstanding debt and, to a lesser extent, increased average interest rates on the debt outstanding (resulting primarily from the issuance of the 2007 Notes on May 22, 1997, which bear interest at an 8 3/4% annual interest rate). As of December 31, 1998, the Company was not a party to any interest rate swap agreements. Management currently expects the average interest rate on its outstanding debt to continue to increase due to the issuance of the 2009 Notes on January 15, 1999, which bear interest at a 10 3/8% interest rate. CAPITALIZED INTEREST. The increase in capitalized interest for 1998, compared to 1997 and 1996, resulted primarily from an increase in the amount of capital expenditures subject to interest capitalization during 1998 ($137,956,000) compared to 1997 ($96,530,000) and 1996 ($68,740,000), and from an increase in the computed rate that the Company uses to apply on such capital expenditures to arrive at the total amount of capitalized interest. A substantial percentage of the Company's capitalized interest expense during the latter half of 1997 and 1998 resulted from capitalization of interest related to capital expenditures for the development of the Benchamas Field in the Gulf of Thailand and, to a lesser extent, several development projects in the Gulf of Mexico. FOREIGN CURRENCY TRANSACTION GAIN (LOSS) The foreign currency transaction gain and loss each resulted primarily from the fluctuation against the U.S. dollar of cash and other monetary assets and liabilities denominated in Thai baht that were on the Company's subsidiary's financial statements during the respective periods. In early July 1997, the government of the Kingdom of Thailand announced that the value of the baht would be set against the dollar and other currencies under a "managed float" program arrangement. This led to a substantial decline in value of the Thai baht compared to the U.S. dollar, resulting in the foreign currency transaction losses during 1997. During 1998, the value of the Thai baht has generally strengthened against the U.S. dollar, resulting in corresponding foreign currency transaction gains. However, the Company cannot predict what the Thai baht to dollar exchange rate may be in the future. Moreover, it is anticipated that this exchange rate will remain volatile. As of December 31, 1998, the Company was not a party to any financial instrument that was intended to constitute a foreign currency hedging arrangement. INCOME TAX BENEFIT (EXPENSE) The Company's income tax benefit for 1998, compared to its income tax expenses for 1997 and 1996, resulted primarily from a pre-tax loss resulting from substantially lower revenues in the United States and the tax benefit of accrued foreign losses from the Company's operations in the Kingdom of Thailand. LIQUIDITY AND CAPITAL RESOURCES CASH FLOWS The Company's Consolidated Statement of Cash Flows for 1998 reflects net cash provided by operating activities of $70,929,000. In addition to net cash provided by operating activities, the Company received net proceeds of $1,034,000 from the exercise of stock options, $7,164,000 from the sale of certain non-strategic properties and tubular stock, and had net borrowings of $136,447,000 under its Credit 33 Agreement and other senior debt facilities. In addition, on January 15, 1999, the Company consummated the offering of $150,000,000 of its 2009 Notes. During 1998, the Company invested $201,946,000 of such cash flow in capital projects, retired a production payment obligation for $15,246,000 related to the Arch acquisition, spent $2,961,000 to purchase proved reserves, paid $4,531,000 ($0.03 per share for each quarter of 1998) in cash dividends to holders of the Company's common stock, paid $2,635,000 in debt issuance expenses and paid a net amount of $621,000 in miscellaneous other expenditures. As of December 31, 1998, the Company's cash and cash investments were $7,959,000 and its long-term debt stood at $434,947,000. FUTURE CAPITAL REQUIREMENTS The Company's capital and exploration budget for 1999, which does not include any amounts that may be expended for the purchase of proved reserves or any interest which may be capitalized resulting from projects in progress, was established by the Company's Board of Directors at $170,000,000. The Company currently anticipates that its available cash and cash investments, cash provided by operating activities, funds available under its Credit Agreement and uncommitted credit lines and amounts that the Company currently believes that it can obtain from external sources including the issuance of new debt and convertible preferred securities, or asset sales, will be sufficient to fund the Company's ongoing operating, interest and general and administrative expenses, any currently anticipated costs associated with the Company's projects during 1999, and future dividend payments at current levels (including a dividend payment of $0.03 per share to be paid on February 26, 1999 to shareholders of record on February 12, 1999). Subject to favorable market conditions and other factors, the Company also currently intends to issue convertible preferred equity securities during 1999 to assist in funding its future capital and exploration plans. The declaration of future dividends on the Company's common stock will depend upon, among other things, the Company's future earnings and financial condition, liquidity and capital requirements, its ability to pay dividends under certain covenants contained in its debt instruments, the general economic and regulatory climate and other factors deemed relevant by the Company's Board of Directors. OTHER MATERIAL LONG-TERM COMMITMENTS As of February 9, 1996, Tantawan Services, L.L.C. ("TS"), a company that is currently a wholly owned subsidiary of the Company, entered into a Bareboat Charter Agreement (the "Charter") with Tantawan Production B.V. for the charter of the FPSO for use in the Tantawan Field. See "Business--International Operations." The term of the Charter is for a period ending July 31, 2008, subject to extension. In addition, TS has a purchase option on the FPSO throughout the term of the Charter. TS has also contracted with another company, SBM Marine Services Thailand Ltd., to operate the FPSO on a reimbursable basis throughout the initial term of the Charter. Performance of both the Charter and the agreement to operate the FPSO are non-recourse to TS and the Company. However, performance is secured by a negative pledge on any hydrocarbons stored on the FPSO and is guaranteed by each of the working interest holders in the Tantawan Field, including Thaipo. Thaipo's guarantee is limited to its percentage interest in the Tantawan Field (currently 46.34%). The Charter currently provides for an estimated charter hire commitment of $24,000,000 per year ($11,122,000 net to Thaipo) for the first ten years and a decreasing amount thereafter. As of August 24, 1998, Thaipo and its joint venture partners (collectively, the "Charterers") entered into a Bareboat Charter Agreement (the "BCA") with Watertight Shipping B.V. for the charter of the FSO. See "Business--International Operations." The term of the BCA is for a period of ten years commencing on the date that the FSO is ready to begin operations in the Benchamas Field. In addition, the Charterers have a purchase option on the FSO throughout the term of the BCA. The Charterers have also contracted with another company, Tanker Pacific (Thailand) Co. Ltd, to operate the FSO on a fixed fee basis throughout the initial term of the BCA. Performance of both the BCA and the agreement to operate the FSO are non-recourse to the Company. However the obligations of each joint venturer are full recourse to each joint venturer, but the obligations are several, meaning that each joint venturer's obligations are limited to its percentage interest in the Thailand Concession. Collectively, the BCA and the operating 34 agreement currently provide for an estimated expense of chartering and operating the FSO of $11,253,000 per year ($5,215,000 net to Thaipo), which will commence after the FSO is installed in the Benchamas Field in late May or June of this year. CAPITAL STRUCTURE CREDIT AGREEMENT AND UNCOMMITTED CREDIT LINES. Effective August 1, 1997, the Company entered into an amended and restated Credit Agreement, which was amended most recently on December 21, 1998. The Credit Agreement provides for a $200,000,000 revolving/term credit facility which will be fully revolving until July 1, 2000, after which the balance will be due in eight quarterly term loan installments, commencing October 31, 2000. The amount that may be borrowed under the Credit Agreement may not exceed a borrowing base which is composed of domestic, Canadian and Thai properties. Generally, the borrowing base is determined semi-annually by the lenders in accordance with the Credit Agreement, based on the lenders' usual and customary criteria for oil and gas transactions. As of February 1, 1999, the Company's total borrowing base was set at $140,000,000, which amount cannot be reduced until after April 30, 1999. However, due to limitations on total indebtedness under the Credit Agreement, the Company is currently limited to borrowing only $135,000,000 under the Credit Agreement and its other senior debt arrangements. The Credit Agreement is governed by various financial and other covenants, including requirements to maintain positive working capital (excluding current maturities of debt) and a fixed charge coverage ratio, and limitations on indebtedness (including a total indebtedness limit of $500,000,000), creation of liens, the prepayment of subordinated debt, the payment of dividends, mergers and consolidations, investments and asset dispositions. In addition, the Company is prohibited from pledging borrowing base properties as security for other debt. Borrowings under the Credit Agreement bear interest at a rate based upon the percentage of the borrowing base that is being utilized, ranging from a base (prime) rate or LIBOR plus 1.25% to a base rate plus 0.25% or LIBOR plus 2.0%, at the Company's option. Borrowings under the Credit Agreement currently bear interest at a base rate or LIBOR plus 1.75%, at the Company's option. A commitment fee on the unborrowed amount under the Credit Agreement is also charged and is based upon the percentage of the borrowing base that is being utilized, ranging from 0.25% to 0.375%. The commitment fee is currently 0.375% per annum on the unborrowed amount under the Credit Agreement. As of February 15, 1999, there was $102,000,000 outstanding under the Credit Agreement. As of February 15, 1999, the Company is a party to separate letter agreements with two banks under which each bank may provide an uncommitted money market line of credit. One of the agreements provides for a $20,000,000 line of credit, and the other provides for a $10,000,000 line of credit. Both lines of credit are on an as available or as offered basis and neither bank has any obligation to make any advances under its line of credit. Although loans made under each letter agreement are for a maximum term of 30 days, they are reflected as long-term debt on the Company's balance sheet because the Company currently has the ability and intent to reborrow such amounts under its Credit Agreement. Each letter agreement permits either party to terminate such letter agreement at any time. Under its Credit Agreement, the Company is currently limited to incurring a maximum of $20,000,000 of additional senior debt, which would include debt incurred under both lines of credit and under the banker's acceptances discussed below. Further, the 2007 Notes and the 2009 Notes also restrict the incurrence of additional senior indebtedness. See "; 2007 Notes" and "; 2009 Notes." As of December 31, 1998, there was $4,000,000 outstanding under one of the lines of credit at an interest rate of 6.1% BANKER'S ACCEPTANCES. On June 3, 1998, the Company entered into a Master Banker's Acceptance Agreement under which one of the Company's lenders has offered to accept up to $20,000,000 in bank drafts from the Company. The banker's drafts are available on an uncommitted basis and the bank has no obligation to accept the Company's request for drafts. Drafts drawn under this agreement are for a maximum term of 182 days; however, they are reflected as long-term debt on the Company's balance sheet because the Company currently has the ability and intent to reborrow such amounts under the Credit Agreement. Under its Credit Agreement, the Company is currently limited to incurring a maximum of $20,000,000 of additional senior debt, which would include banker's acceptances as well as debt incurred 35 under the lines of credit discussed previously. Further, the 2007 Notes and the 2009 Notes offered also restrict the incurrence of additional senior indebtedness. See "; 2007 Notes" and "; 2009 Notes." The Master Banker's Acceptance Agreement permits either party to terminate the letter agreement at any time upon five business days notice. As of December 31, 1998, bank drafts in the principal amount of $10,947,000 bearing interest at an average rate of 5.9% were outstanding under this agreement. 2009 NOTES. On January 15, 1999, the Company issued $150,000,000 principal amount of 2009 Notes. The proceeds from the issuance of the 2009 Notes were used to repay amounts outstanding under the Credit Agreement. The 2009 Notes bear interest at a rate of 10 3/8%, payable semi-annually in arrears on February 15 and August 15 of each year, commencing August 15, 1999. The 2009 Notes are general unsecured senior subordinated obligations of the Company, are subordinated in right of payment to the Company's senior indebtedness, which currently includes the Company's obligations under the Credit Agreement, its unsecured credit lines and its banker's acceptances, are equal in right of payment to the 2007 Notes, but are senior in right of payment to the Company's subordinated indebtedness, which currently includes the 2006 Notes. The Company, at its option, may redeem the 2009 Notes in whole or in part, at any time on or after February 15, 2004, at a redemption price of 105.188% of their principal value and decreasing percentages thereafter. No sinking fund payments are required on the 2009 Notes. The 2009 Notes are redeemable at the option of any holder, upon the occurrence of a change of control (as defined in the indenture governing the 2009 Notes), at 101% of their principal amount. The indenture governing the 2009 Notes also imposes certain covenants on the Company that are substantially identical to the covenants contained in the indenture governing the 2007 Notes, including covenants limiting: incurrence of indebtedness including senior indebtedness; restricted payments; the issuance and sales of restricted subsidiary capital stock; transactions with affiliates; liens; disposition of proceeds of asset sales; non-guarantor restricted subsidiaries; dividends and other payment restrictions affecting restricted subsidiaries; and mergers, consolidations and the sale of assets. 2007 NOTES. On May 22, 1997, the Company issued $100,000,000 principal amount of 2007 Notes. The 2007 Notes bear interest at a rate of 8 3/4%, payable semi-annually in arrears on May 15 and November 15 of each year. The 2007 Notes are general unsecured senior subordinated obligations of the Company, are subordinated in right of payment to the Company's senior indebtedness, which currently includes the Company's obligations under the Credit Agreement, its unsecured credit lines and its banker's acceptances, are equal in right of payment to the 2009 Notes, but are senior in right of payment to the Company's subordinated indebtedness, which currently includes the 2006 Notes. The Company, at its option, may redeem the 2007 Notes in whole or in part, at any time on or after May 15, 2002, at a redemption price of 104.375% of their principal value and decreasing percentages thereafter. No sinking fund payments are required on the 2007 Notes. The 2007 Notes are redeemable at the option of any holder, upon the occurrence of a change of control (as defined in the indenture governing the 2007 Notes), at 101% of their principal amount. The indenture governing the 2007 Notes also imposes certain covenants on the Company that are substantially identical to the covenants contained in the indenture governing the 2009 Notes, including covenants limiting: incurrence of indebtedness including senior indebtedness; restricted payments; the issuance and sales of restricted subsidiary capital stock; transactions with affiliates; liens; disposition of proceeds of asset sales; non-guarantor restricted subsidiaries; dividends and other payment restrictions affecting restricted subsidiaries; and mergers, consolidations and the sale of assets. 2006 NOTES. The outstanding principal amount of 2006 Notes was $115,000,000 as of December 31, 1998. The 2006 Notes are convertible into Common Stock at $42.185 per share, subject to adjustment upon the occurrence of certain events. The 2006 Notes bear interest at a rate of 5 1/2% and will be redeemable at the option of the Company, in whole or in part, at any time on or after June 15, 1999, at a redemption price of 103.85% of their principal amount and decreasing percentages thereafter. No sinking fund payments are required on the 2006 Notes. The 2006 Notes are redeemable at the option of any holder, upon the occurrence of a repurchase event (a change of control and other circumstances as defined in the indenture governing the 2006 Notes), at 100% of the principal amount. 36 2004 NOTES. The Company's 2004 Notes were called for redemption on March 16, 1998, at a price equal to 103.30% of their principal amount. Prior thereto, holders of all but $95,000 principal amount of the 2004 Notes chose to convert their 2004 Notes into Common Stock at a conversion price of $22.188 per common share, rather than receive cash for their 2004 Notes resulting in the issuance of 3,879,726 shares of Common Stock. OTHER MATTERS INFLATION. Publicly held companies are asked to comment on the effects of inflation on their business. Currently annual inflation in terms of the decrease in the general purchasing power of the U.S. dollar is running much below the general annual inflation rates experienced in the past. While the Company, like other companies, continues to be affected by fluctuations in the purchasing power of the U.S. dollar due to inflation, such effect is not currently considered significant. SOUTHEAST ASIA ECONOMIC ISSUES. A substantial portion of the Company's oil and gas operations are conducted in Southeast Asia, and a substantial portion of its natural gas and liquid hydrocarbon production is sold there. Southeast Asia in general, and the Kingdom of Thailand in particular, have experienced severe economic difficulties which have been characterized by sharply reduced economic activity, illiquidity, highly volatile foreign currency exchange rates and unstable stock markets. The government of the Kingdom of Thailand and other governments in the region are currently acting to address these issues. However, the economic difficulties currently being experienced in Thailand, together with the volatility of the Thai baht against the U.S. dollar, will continue to have a material impact on the Company's operations in the Kingdom of Thailand, together with the prices that the company receives for its oil and natural gas production there. See "--Results of Operations; Oil and Gas Revenues" and "--Results of Operations; Foreign Currency Transaction Gain (Loss)." All of the Company's current natural gas production from the Thailand Concession is committed under a long-term Gas Sales Agreement to PTT at a price denominated in Thai baht which is determined in accordance with a formula that is intended to ameliorate, at least in part, any decline in the purchasing power of the Thai baht against the U.S. dollar. See "Business--International Operations; Contractual Terms Governing the Thailand Concession" and "Business--Miscellaneous; Sales." Although the Company currently believes that PTT will honor its commitments under the Gas Sales Agreement, a failure by PTT to honor such commitments could have a material adverse effect on the Company. The Company's crude oil and condensate production from the Thailand Concession is currently sold on a tanker load by tanker load basis. Prices that the Company receives for such production are based on world benchmark prices, which are denominated in U.S. dollars, and are typically paid in U.S. dollars. See "Business--International Operations; Contractual Terms Governing the Thailand Concession and Related Production" and "Business--Miscellaneous; Sales." The Company believes that the current economic difficulties in Southeast Asia have resulted in a decreased demand for petroleum products in the region, which has contributed to the recent general decline in crude oil and condensate prices throughout the world. This price decline has had an adverse effect on all oil and gas companies that sell their production on the world spot markets, including the Company, without regard to where their respective production is located. YEAR 2000 READINESS DISCLOSURE. Many computer software systems, as well as certain hardware and equipment using date-sensitive data, were structured to use a two-digit date field meaning that they may not be able to properly recognize dates in the year 2000. The Company is addressing this issue through a process that entails evaluation of the Company's critical software and, to the extent possible, its hardware and equipment to identify and assess Year 2000 issues and to remediate, replace or establish alternative procedures addressing non-Year 2000 compliant systems, hardware and equipment. The Company has substantially completed an inventory of its systems and equipment including computer systems and business applications. Based upon this review, the Company currently believes that all of its critical software and computer hardware systems are either Year 2000 compliant or will be within the next six months. The Company continues to inventory its equipment and facilities to determine if they 37 contain embedded date-sensitive technology. If problems are discovered, remediation, replacement or alternative procedures for non-compliant equipment and facilities will be undertaken on a business priority basis. This process will continue and, depending upon the equipment and facilities, is scheduled for completion during the first three quarters of 1999. As of December 31, 1998, the Company had incurred approximately $50,000 in expenses related to its Year 2000 compliance efforts. These costs are currently being expensed as they are incurred. However, in certain instances the Company may determine that replacing existing equipment may be more efficient, particularly where additional functionality is available. These replacements may be capitalized and therefore would reduce the estimated 1999 expenses associated with the Year 2000 issue. The Company currently expects total out-of-pocket costs to become Year 2000 compliant to be less than $1,000,000. The Company currently expects that such costs will not have a material adverse effect on the Company's financial condition, operations or liquidity. The foregoing timetable and assessment of costs to become Year 2000 compliant reflect management's current best estimates. These estimates are based on many assumptions, including assumptions about the cost, availability and ability of resources to locate, remediate and modify affected systems, equipment and facilities. Based upon its activities to date, the Company does not currently believe that these factors will cause results to differ significantly from those estimated. However, the Company cannot reasonably estimate the potential impact on its financial condition and operations if key third parties including, among others, suppliers, contractors, joint venture partners, financial institutions, customers and governments do not become Year 2000 compliant on a timely basis. The Company is contacting many of these third parties to determine whether they will be able to resolve in a timely fashion their Year 2000 issues as they may affect the Company. In the event that the Company is unable to complete the remediation or replacement of its critical systems, facilities and equipment, establish alternative procedures in a timely manner, or if those with whom the Company conducts business are unsuccessful in implementing timely solutions, Year 2000 issues could have a material adverse effect on the Company's liquidity and results of operations. At this time, the potential effect in the event the Company and/or third parties are unable to timely resolve their Year 2000 problems is not determinable; however, the Company currently believes that it will be able to resolve its own Year 2000 issues in a timely manner. The disclosure set forth in this section is provided pursuant to Securities Act Release No. 33-7558. As such it is protected as a forward-looking statement under the Private Securities Litigation Reform Act of 1995. See "Forward-Looking Statements." This disclosure is also subject to protection under the Year 2000 Information and Readiness Disclosure Act of 1998, Public Law 105-271, as a "Year 2000 Statement" and "Year 2000 Readiness Disclosure" as defined therein. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. The Company is exposed to market risk, including adverse changes in commodity prices, interest rates and foreign currency exchange rates as discussed below. COMMODITY PRICE RISK The Company produces, purchases and sells natural gas, crude oil, condensate and NGLs. As a result, the Company's financial results can be significantly affected as these commodity prices fluctuate widely in response to changing market forces. In the past, the Company has made limited use of a variety of derivative financial instruments only for non-trading purposes as a hedging strategy to manage commodity prices associated with oil and gas sales and to reduce the impact of commodity price fluctuations. See "Business--Competition and Market Conditions." As discussed earlier, the Company was not party to any derivative financial instruments during 1998. INTEREST RATE RISK From time to time, the Company has entered into various financial instruments, such as interest rate swaps, to manage the impact of changes in interest rates. Currently, the Company has no open interest rate 38 swap or interest rate lock agreements. Therefore, the Company's exposure to changes in interest rates primarily results from its short-term and long-term debt with both fixed and floating interest rates. The following table presents principal or notional amounts (stated in thousands) and related average interest rates by year of maturity for the Company's debt obligations and their indicated fair market value at December 31, 1998:
FAIR 1999 2000 2001 2002 2003 THEREAFTER TOTAL ----- --------- ---------- --------- ----- ---------- ---------- Liabilities--Long-Term Debt: Variable Rate.......................... $ 0 $ 32,992 $ 120,971 $ 65,984 $ 0 $ 0 $ 219,947 Average Interest Rate.................. -- 7.3% 7.3% 7.3% -- -- 7.3% Fixed Rate............................. $ 0 $ 0 $ 0 $ 0 $ 0 $ 215,000 $ 215,000 Average Interest Rate.................. -- -- -- -- -- 7.0% 7.0% VALUE ---------- Liabilities--Long-Term Debt: Variable Rate.......................... $ 219,947 Average Interest Rate.................. -- Fixed Rate............................. $ 172,637 Average Interest Rate.................. --
FOREIGN CURRENCY EXCHANGE RATE RISK The Company conducts business in Thai baht and the Canadian dollar and is therefore subject to foreign currency exchange rate risk on cash flows related to sales, expenses, financing and investing transactions. The Company conducts a substantial portion of its oil and gas production and sales in Southeast Asia. Southeast Asia in general, and the Kingdom of Thailand in particular, have experienced severe economic difficulties, including sharply reduced economic activity, illiquidity, highly volatile foreign currency exchange rates and unstable stock markets. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Results of Operations; Foreign Currency Transaction Gain (Loss") and "--Liquidity and Capital Resources; Other Matters; Southeast Asia Economic Issues." However, the economic difficulties in Thailand and the volatility of the Thai baht against the U.S. dollar will continue to have a material impact on the Company's Thailand operations and prices that the Company receives for its oil and gas production there. Although the Company's sales to PTT under the Gas Sales Agreement are denominated in baht, because predominantly all of the Company's crude oil sales and its capital and most other expenditures in the Kingdom of Thailand are dominated in U.S. dollars, the U.S. dollar is the functional currency for the Company's operations in the Kingdom of Thailand. Exposure from market rate fluctuations related to activities in Canada, where the Company's functional currency is the Canadian dollar, is not material at this time. 39 ITEM 8 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA ANNUAL REPORT ON FORM 10K FOR THE YEAR ENDED DECEMBER 31, 1998 POGO PRODUCING COMPANY AND SUBSIDIARIES HOUSTON, TEXAS 40 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Shareholders and Board of Directors of Pogo Producing Company: We have audited the accompanying consolidated balance sheets of Pogo Producing Company (a Delaware corporation) and subsidiaries as of December 31, 1998 and 1997, and the related consolidated statements of income, shareholders' equity and cash flows for each of the three years in the period ended December 31, 1998. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Pogo Producing Company and subsidiaries as of December 31, 1998 and 1997, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1998, in conformity with generally accepted accounting principles. ARTHUR ANDERSEN LLP Houston, Texas February 19, 1999 41 POGO PRODUCING COMPANY & SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME
YEAR ENDED DECEMBER 31, ---------------------------------- 1998 1997 1996 ---------- ---------- ---------- (EXPRESSED IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) Revenues: Oil and gas................................................................ $ 200,154 $ 284,851 $ 203,364 Pipeline sales and other................................................... 2,649 1,449 613 ---------- ---------- ---------- Total.................................................................... 202,803 286,300 203,977 ---------- ---------- ---------- Operating Costs and Expenses: Lease operating............................................................ 71,213 63,501 37,628 General and administrative................................................. 26,356 21,412 18,028 Exploration................................................................ 9,802 10,530 16,777 Dry hole and impairment.................................................... 41,736 9,631 8,579 Depreciation, depletion and amortization................................... 110,916 103,157 61,857 ---------- ---------- ---------- Total.................................................................... 260,023 208,231 142,869 ---------- ---------- ---------- Operating Income (Loss)...................................................... (57,220) 78,069 61,108 Interest: Charges.................................................................... (24,682) (21,886) (13,203) Income..................................................................... 719 453 232 Capitalized................................................................ 9,381 6,175 4,244 Foreign Currency Transaction Gain (Loss)................................... 953 (7,604) -- ---------- ---------- ---------- Income (Loss) Before Taxes and Extraordinary Item............................ (70,849) 55,207 52,381 ---------- ---------- ---------- Income Tax Benefit (Expense)................................................. 27,751 (18,091) (18,800) ---------- ---------- ---------- Income (Loss) Before Extraordinary Item...................................... (43,098) 37,116 33,581 Extraordinary Loss on Early Extinguishment of Debt, net of taxes............. -- -- (821) ---------- ---------- ---------- Net Income (Loss)............................................................ $ (43,098) $ 37,116 $ 32,760 ---------- ---------- ---------- ---------- ---------- ---------- Earnings per Share: Basic Before extraordinary item................................................ $ (1.14) $ 1.11 $ 1.01 Extraordinary item....................................................... -- -- (0.02) ---------- ---------- ---------- Net income (Loss)............................................................ $ (1.14) $ 1.11 $ 0.99 ---------- ---------- ---------- ---------- ---------- ---------- Diluted Before extraordinary item................................................ $ (1.14) $ 1.06 $ 0.97 Extraordinary item....................................................... -- -- (0.02) ---------- ---------- ---------- Net income (Loss)........................................................ $ (1.14) $ 1.06 $ 0.95 ---------- ---------- ---------- ---------- ---------- ---------- Dividends per Common Share................................................... $ 0.12 $ 0.12 $ 0.12 ---------- ---------- ---------- ---------- ---------- ----------
The accompanying notes to consolidated financial statements are an integral part hereof. 42 POGO PRODUCING COMPANY & SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
DECEMBER 31, ------------------------ 1998 1997 ----------- ----------- (EXPRESSED IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) ASSETS Current Assets: Cash and cash investments............................................................ $ 7,959 $ 19,646 Accounts receivable.................................................................. 24,054 39,540 Other receivables.................................................................... 38,977 46,951 Inventory--product................................................................... 969 713 Inventories--tubulars................................................................ 10,594 8,334 Other................................................................................ 2,814 4,087 ----------- ----------- Total current assets............................................................... 85,367 119,271 ----------- ----------- Property and Equipment: Oil and gas, on the basis of successful efforts accounting Proved properties being amortized.................................................. 1,485,125 1,321,817 Unevaluated properties and properties under development, not being amortized....... 215,244 110,231 Other, at cost....................................................................... 17,915 12,619 ----------- ----------- 1,718,284 1,444,667 Less--accumulated depreciation, depletion, and amortization, including $6,862 and $6,004 respectively, applicable to other property.................................. 992,759 917,363 ----------- ----------- 725,525 527,304 ----------- ----------- Foreign Taxes Receivable............................................................... 23,482 12,025 Debt Issue Expenses.................................................................... 7,727 7,200 Other.................................................................................. 20,295 10,817 ----------- ----------- $ 862,396 $ 676,617 ----------- ----------- ----------- ----------- LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities: Accounts payable--operating activities............................................... $ 12,197 $ 13,639 Accounts payable--investing activities............................................... 90,102 90,833 Accrued interest payable............................................................. 3,226 3,130 Accrued payroll and related benefits................................................. 1,952 1,938 Other................................................................................ 2 632 ----------- ----------- Total current liabilities.......................................................... 107,479 110,172 Long-Term Debt......................................................................... 434,947 348,179 Deferred Federal Income Tax............................................................ 53,869 57,502 Deferred Credits....................................................................... 16,441 14,658 ----------- ----------- Total liabilities.................................................................. 612,736 530,511 ----------- ----------- Shareholders' Equity: Preferred stock, $1 par; 2,000,000 shares authorized................................. -- -- Common stock, $1 par; 100,000,000 shares authorized, and 40,136,254 and 33,552,702 shares issued, respectively........................................................ 40,136 33,553 Additional capital................................................................... 290,655 144,848 Retained earnings (deficit).......................................................... (79,600) (31,971) Treasury stock (15,575 shares) and other, at cost.................................... (1,531) (324) ----------- ----------- Total shareholders' equity......................................................... 249,660 146,106 ----------- ----------- $ 862,396 $ 676,617 ----------- ----------- ----------- -----------
The accompanying notes to consolidated financial statements are an integral part hereof. 43 POGO PRODUCING COMPANY & SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31, ---------------------------------- 1998 1997 1996 ---------- ---------- ---------- (EXPRESSED IN THOUSANDS) Cash flows from operating activities: Cash received from customers................................................ $ 222,433 $ 272,004 $ 195,931 Federal income taxes received............................................... -- 7,037 -- Operating, exploration, and general and administrative expenses paid........ (116,272) (86,445) (74,512) Interest paid............................................................... (26,221) (20,713) (12,960) Federal income taxes paid................................................... -- (19,500) (12,500) Value added taxes paid...................................................... (6,161) (1,630) (1,344) Other....................................................................... (2,850) (21) (1,717) ---------- ---------- ---------- Net cash provided by operating activities................................. 70,929 150,732 92,898 ---------- ---------- ---------- Cash flows from investing activities: Capital expenditures........................................................ (201,946) (197,326) (172,032) Purchase of proved reserves................................................. (2,961) (31,234) -- Proceeds from the sale of property and tubular stock........................ 7,164 387 100 ---------- ---------- ---------- Net cash used in investing activities..................................... (197,743) (228,173) (171,932) ---------- ---------- ---------- Cash flows from financing activities: Proceeds from issuance of new debt.......................................... -- 100,000 115,000 Borrowings under senior debt agreements..................................... 449,947 502,000 208,000 Payments under senior debt agreements....................................... (313,500) (500,000) (201,000) Proceeds from exercise of stock options..................................... 1,034 3,874 3,378 Payment of cash dividends on common stock................................... (4,531) (4,012) (3,979) Debt issue expenses paid.................................................... (2,635) (3,165) (3,116) Purchase of 8% debentures due 2005.......................................... -- -- (40,699) Principal payment of production payment obligation.......................... (15,246) -- -- Other....................................................................... (621) -- -- ---------- ---------- ---------- Net cash provided by financing activities................................. 114,448 98,697 77,584 ---------- ---------- ---------- Effect of exchange rate changes on cash....................................... 679 (4,664) 23 ---------- ---------- ---------- Net increase (decrease) in cash and cash investments.......................... (11,687) 16,592 (1,427) Cash and cash investments at the beginning of the year........................ 19,646 3,054 4,481 ---------- ---------- ---------- Cash and cash investments at the end of the year.............................. $ 7,959 $ 19,646 $ 3,054 ---------- ---------- ---------- ---------- ---------- ---------- Reconciliation of net income to net cash provided by operating activities: Net income (loss)........................................................... $ (43,098) $ 37,116 $ 32,760 Adjustments to reconcile net income to net cash provided by operating activities Extraordinary losses on early extinguishments of debt, net of taxes....... -- -- 821 Foreign currency transaction (gain) loss.................................. (953) 7,604 -- (Gains) losses on sales................................................... 92 (1,100) 165 Depreciation, depletion and amortization.................................. 110,916 103,157 61,857 Dry hole and impairment................................................... 41,736 9,631 8,579 Interest capitalized...................................................... (9,381) (6,175) (4,244) (Decrease) increase in deferred income taxes.............................. (24,250) 12,999 7,175 Change in assets and liabilities: (Increase) decrease in accounts receivable.............................. 15,307 (12,483) (8,211) Increase in inventory product........................................... (259) (713) -- (Increase) decrease in other current assets............................. 1,258 (6,470) 81 Increase in other assets................................................ (20,551) (7,418) (5,228) Increase (decrease) in accounts payable................................. (1,122) 8,998 (2,079) Increase in accrued interest payable.................................... 95 1,173 243 Increase in accrued payroll and related benefits........................ 14 448 251 Increase (decrease) in other current liabilities........................ (637) 469 60 Increase in deferred credits............................................ 1,762 3,496 668 ---------- ---------- ---------- Net cash provided by operating activities..................................... $ 70,929 $ 150,732 $ 92,898 ---------- ---------- ---------- ---------- ---------- ----------
The accompanying notes to consolidated financial statements are an integral part hereof. 44 POGO PRODUCING COMPANY & SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
RETAINED TREASURY SHARES COMMON ADDITIONAL EARNINGS STOCK AND SHAREHOLDERS' OUTSTANDING STOCK CAPITAL (DEFICIT) OTHER EQUITY ----------- ----------- ----------- ----------- ----------- ------------- (DOLLARS EXPRESSED IN THOUSANDS) BALANCE AT DECEMBER 31, 1995............ 32,991,397 $ 33,007 $ 132,881 $ (93,856) $ (324) $ 71,708 Net income.............................. -- -- -- 32,760 -- 32,760 Foreign currency translation gain....... -- -- -- -- 23 23 Exercise of stock options............... 274,714 274 4,924 -- -- 5,198 Shares issued in connection with the Long-Term Incentive Plan.............. 5,896 6 246 -- -- 252 Shares issued in connection with the conversion of-- 8% Debentures....................... 32,898 33 1,267 -- -- 1,300 2004 Notes.......................... 901 1 19 -- -- 20 Dividends ($0.12 per common share)...... -- -- -- (3,979) -- (3,979) ----------- ----------- ----------- ----------- ----------- ------------- BALANCE AT DECEMBER 31, 1996............ 33,305,806 33,321 139,337 (65,075) (301) 107,282 Net income.............................. -- -- -- 37,116 -- 37,116 Foreign currency translation loss....... -- -- -- -- (23) (23) Exercise of stock options............... 229,024 230 5,461 -- -- 5,691 Shares issued in connection with the conversion of 2004 Notes.............. 2,297 2 50 -- -- 52 Dividends ($0.12 per common share)...... -- -- -- (4,012) -- (4,012) ----------- ----------- ----------- ----------- ----------- ------------- BALANCE AT DECEMBER 31, 1997............ 33,537,127 33,553 144,848 (31,971) (324) 146,106 Net loss................................ -- -- -- (43,098) -- (43,098) Foreign currency translation loss....... -- -- -- -- (1,207) (1,207) Exercise of stock options............... 147,240 147 1,835 -- -- 1,982 Shares issued in connection with the conversion of 2004 Notes.............. 3,879,726 3,880 80,712 -- -- 84,592 Shares issued for common stock of acquired company...................... 1,665,491 1,665 38,818 -- -- 40,483 Shares issued for exchangeable convertible preferred stock of acquired company...................... 699,273 699 19,301 -- -- 20,000 Shares issued for convertible debt of acquired company...................... 174,818 175 4,825 -- -- 5,000 Shares issued as compensation........... 17,004 17 316 -- -- 333 Dividends ($0.12 per common share)...... -- -- -- (4,531) -- (4,531) ----------- ----------- ----------- ----------- ----------- ------------- BALANCE AT DECEMBER 31, 1998............ 40,120,679 $ 40,136 $ 290,655 $ (79,600) $ (1,531) $ 249,660 ----------- ----------- ----------- ----------- ----------- ------------- ----------- ----------- ----------- ----------- ----------- -------------
The accompanying notes to consolidated financial statements are an integral part hereof. 45 POGO PRODUCING COMPANY & SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES NATURE OF OPERATIONS Pogo Producing Company was incorporated in 1970. Pogo Producing Company and its subsidiaries (the "Company") are engaged in oil and gas exploration, development and production activities on its properties located offshore in the Gulf of Mexico and onshore in the United States and Canada and internationally in the Gulf of Thailand and the United Kingdom. The Company has interests in 105 lease blocks offshore Louisiana and Texas, approximately 303,000 gross acres onshore in the United States, approximately 117,000 gross acres onshore in Canada, approximately 734,000 gross acres offshore in the Kingdom of Thailand and two lease blocks in the United Kingdom North Sea totaling approximately 113,000 gross acres. ACQUISITION In August 1998, a wholly-owned subsidiary of the Company merged with Arch Petroleum Inc. ("Arch") in a tax-free, stock for stock transaction, accounted for as a purchase, through which Arch became a wholly owned subsidiary of the Company. The merger agreement provided for a fixed exchange ratio of one share of the Company's common stock for each 10.4 shares of Arch common stock. In addition, holders of Arch preferred stock received one share of the Company's common stock for each 1.04 shares of Arch preferred stock held. As a result, approximately 2,500,000 shares of the Company's common stock (valued at approximately $64.8 million) were issued in exchange for Arch preferred and common stock and its convertible debt. The value of the approximately 2,500,000 shares of the Company's common stock in excess of the book value of the net assets acquired (approximately $52.9 million) has been allocated to oil and gas properties and is being amortized using the units of production method over the life of the oil and gas reserves acquired. Expenses related to the acquisition of approximately $2,285,000 ($1,485,000 after taxes) have been expensed. Under the purchase method of accounting for the acquisition, the Arch results of operations are included in the consolidated results of operations from August 17, 1998, the date of acquisition, through December 31, 1998. The following summary presents unaudited pro forma consolidated results of operations as if the acquisition had occurred at the beginning of each period presented. The pro forma results are for illustrative purposes only and are not necessarily indicative of the operating results that would have occurred had the acquisition been consummated at that date, nor are they necessarily indicative of future operating results.
YEAR ENDED DECEMBER 31, (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) ---------------------- 1998 1997 ---------- ---------- Revenues............................................................................... $ 217,915 $ 366,803 Net income (loss)...................................................................... $ (48,369) $ 36,691 Earnings (loss) per share: Basic................................................................................ $ (1.22) $ 1.02 Diluted.............................................................................. $ (1.22) $ 0.98
46 POGO PRODUCING COMPANY & SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) USE OF ESTIMATES The preparation of these financial statements requires the use of certain estimates by management in determining the Company's assets, liabilities, revenues and expenses. Depreciation, depletion and amortization of oil and gas properties and the impairment of oil and gas properties are determined using estimates of proved oil and gas reserves. There are numerous uncertainties in estimating the quantity of proved reserves and in projecting the future rates of production and timing of development expenditures. Oil and gas reserve engineering must be recognized as a subjective process of estimating underground accumulations of oil and gas that cannot be measured in an exact way. Proved reserves of crude oil, condensate, natural gas and natural gas liquids are estimated quantities that geological and engineering data demonstrate with reasonable certainty to be recoverable in the future from known reservoirs under existing conditions. PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the accounts of Pogo Producing Company and its subsidiary and affiliated companies, after elimination of all significant intercompany transactions. Majority owned subsidiaries are fully consolidated. Minority owned subsidiaries or affiliates are pro rata consolidated in the same manner as the Company, and the oil and gas industry generally, accounts for its operating or working interest in oil and gas joint ventures. PRIOR-YEAR RECLASSIFICATIONS Certain prior-year amounts have been reclassified to conform with the current year presentation. FOREIGN CURRENCY The U.S. dollar is the functional currency for all areas of operations of the Company except Canada. Accordingly, monetary assets and liabilities and items of income and expense denominated in a foreign currency are remeasured to U.S. dollars at the rate of exchange in effect at the end of each month and the resulting gains or losses on foreign currency transactions are included in the consolidated statements of income for the period. The Canadian dollar is the functional currency for the Company's Canadian operations. Accordingly, monetary assets and liabilities and items of income and expense denominated in Canadian dollars are translated to U.S. dollars at the rate of exchange in effect at the end of each month and the resulting gains or losses on Canadian currency transactions are included in the consolidated statement of shareholders' equity for the period. INVENTORY--PRODUCT Crude oil and condensate from the Company's Tantawan field located in the Kingdom of Thailand is produced into a floating production, storage and off loading ("FPSO") system and sold periodically as an economic barge quantity is accumulated. The product inventory at December 31, 1998 consists of approximately 90,000 barrels of crude oil and condensate, net to the Company's interest, and is carried at its estimated net realizable value of $10.76 per barrel. INVENTORIES--TUBULARS Tubular Inventories consist primarily of goods used in the Company's operations and are stated at the lower of average cost or market value. 47 POGO PRODUCING COMPANY & SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) INTEREST CAPITALIZED Interest costs related to financing major oil and gas projects in progress are capitalized until the projects are evaluated or until production commences if the projects are evaluated as successful. EARNINGS PER SHARE Earnings (loss) per common share (basic earnings per share) are based on the weighted average number of shares of common stock outstanding during the periods. Earnings (loss) per common share and potential common share (diluted earnings per share) consider the effect of dilutive securities as set out below in thousands, except per share amounts.
FOR THE YEAR ENDED DECEMBER 31, 1998 ---------------------------------- INCOME SHARES PER SHARE ---------- --------- ----------- BASIC AND DILUTED EARNINGS (LOSS) PER SHARE................................. $ (43,098) 37,902 $ (1.14) ---------- --------- ----------- ---------- --------- ----------- Antidilutive securities: Shares assumed not issued from options to purchase common shares as the exercise prices are above the average market price for the period or the effect of the assumed exercise would be antidilutive.................... -- 2,464 $ 19.37 Interest expense incurred, net of taxes, and shares not issued related to the assumed non-conversion at $42.185 per share of the 2006 Notes....... $ 4,111 2,726 $ 1.51 Interest expense avoided, net of taxes, and shares issued from the assumed conversion at $22.188 per share of the 2004 Notes....................... $ 478 594 $ 0.80
FOR THE YEAR ENDED DECEMBER 31, 1997 ----------------------------------- INCOME SHARES PER SHARE ----------- --------- ----------- BASIC EARNINGS PER SHARE..................................................... $ 37,116 33,421 $ 1.11 Effect of potential dilutive securities: Shares assumed issued from the exercise of options to purchase common shares, net of treasury shares assumed purchased from the proceeds, at the average market price for the period.................................. -- 758 -- Interest expense avoided, net of taxes, and shares issued from the assumed conversion at $22.188 per share of the 2004 Notes........................ 3,082 3,885 -- ----------- --------- ----------- DILUTED EARNINGS PER SHARE................................................... $ 40,198 38,064 $ 1.06 ----------- --------- ----------- ----------- --------- ----------- Antidilutive securities: Shares assumed not issued from options to purchase common shares as the exercise prices are above the average market price for the period........ -- 471 $ 40.82 Interest expense incurred, net of taxes, and shares not issued related to the assumed non-conversion at $42.185 per share of the 2006 Notes........ $ 4,111 2,726 $ 1.51
48 POGO PRODUCING COMPANY & SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
FOR THE YEAR ENDED DECEMBER 31, 1996 ----------------------------------- INCOME(A) SHARES PER SHARE ----------- --------- ----------- BASIC EARNINGS PER SHARE..................................................... $ 33,581 33,203 $ 1.01 Effect of potential dilutive securities: Shares issued from the assumed exercise of options to purchase common shares, net of treasury shares assumed purchased from the proceeds, at the average market price for the period.................................. -- 831 -- Interest expense avoided, net of taxes, and shares issued from the assumed conversion at $22.188 per share of the 2004 Notes........................ 3,083 3,886 -- ----------- --------- ----------- DILUTED EARNINGS PER SHARE................................................... $ 36,664 37,920 $ 0.97 ----------- --------- ----------- ----------- --------- ----------- Antidilutive securities: Shares assumed not issued from options to purchase common shares as the exercise prices are above the average market price for the period........ -- 20 $ 40.94 Interest expense incurred, net of taxes, and shares not issued related to the assumed non-conversion at $39.50 per share of the 8% Debentures, retired on June 28, 1996................................................. $ 1,179 521 $ 2.26 Interest expense incurred, net of taxes, and shares not issued related to the assumed non-conversion at $42.185 per share of the 2006 Notes........ $ 2,238 1,472 $ 1.52
- ------------------------ (a) Computed on income before extraordinary item PRODUCTION IMBALANCES Owners of an oil and gas property often take more or less production from a property than entitled to based on their ownership percentages in the property. This results in a condition known in the industry as a production imbalance. The Company follows the "take" (cash) method of accounting for production imbalances. Under this method, the Company recognizes revenues on production as it is taken and delivered to its purchasers. The Company's crude oil imbalances are not significant. At December 31, 1998, the Company had taken approximately 2,680 MMcf of natural gas less than it was entitled to based on its interest in those properties, and approximately 2,363 MMcf more than its entitlement on other properties placing the Company at year-end in a net under-delivered position of approximately 317 MMcf of natural gas based on its working interest ownership in the properties. OIL AND GAS ACTIVITIES AND DEPRECIATION, DEPLETION AND AMORTIZATION The Company follows the successful efforts method of accounting for its oil and gas activities. Under the successful efforts method, lease acquisition costs and all development costs are capitalized. Proved properties are reviewed whenever events or changes in circumstances indicate that the value of such property on the Company's books may not be recoverable. Unproved properties are reviewed quarterly to determine if there has been impairment of the carrying value, with any such impairment charged to expense in the period. Proved oil and gas properties are reviewed when circumstances suggest the need for such a review and, if required, the proved properties are written down to their estimated fair value. Estimated fair value includes the estimated present value of all reasonably expected future production, prices, and costs. As a result of poor reservoir performance and persistent low oil and gas prices, the Company performed such a review in 1998 and expensed $30,813,000 related to its domestic oil and gas properties which is included in the Consolidated Statements of Income as dry hole and impairment expense. Exploratory drilling costs are capitalized until the results are determined. If proved reserves are 49 POGO PRODUCING COMPANY & SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) not discovered, the exploratory drilling costs are expensed. Other exploratory costs are expensed as incurred. The provision for depreciation, depletion and amortization is based on the capitalized costs as determined above, plus future costs to abandon offshore wells and platforms, and is on a cost center by cost center basis using the units of production method. The Company generally creates cost centers on a field by field basis for oil and gas activities in the Gulf of Mexico and the Gulf of Thailand. Generally, the Company establishes cost centers on the basis of an oil or gas trend or play for its onshore oil and gas activities. In connection with the Company's ongoing asset rationalization process, the Company has designated certain domestic oil and gas properties to be disposed of during 1999. At the time of designation, no impairment loss was indicated. The carrying amount of the properties at December 31, 1998 was $29,637,000, and they contributed $7,253,000, $7,563,000 and $2,013,000 to operating income in 1998, 1997 and 1996, respectively. Other properties are depreciated using a straight-line method in amounts which in the opinion of management are adequate to allocate the cost of the properties over their estimated useful lives. CONSOLIDATED STATEMENTS OF CASH FLOWS For the purpose of cash flows, the Company considers all highly liquid investments with a maturity date of three months or less to be cash equivalents. Significant transactions may occur which do not directly affect cash balances and as such will not be disclosed in the Consolidated Statements of Cash Flows. Certain such noncash transactions are disclosed in the Consolidated Statements of Shareholders' Equity relating to shares issued in connection with the Long-Term Incentive Plan and the conversion of debentures into Common Stock in 1997 and 1998 and the acquisition of Arch in 1998. COMMITMENTS AND CONTINGENCIES The Company has commitments for operating leases for office space in Houston, Midland, Calgary and Bangkok and commitments for an operating lease and operating expenses related to an FPSO and FSO in the Gulf of Thailand. Rental expense for office space was $1,545,000 in 1998, $1,440,000 in 1997, and $1,054,000 in 1996. Expenses for the FPSO lease and related operating costs were $15,864,000 in 1998 and $14,809,000 in 1997. Expenses for the FSO lease and related operating costs are currently expected to commence in May or June of 1999, with total expenses for the floating storage and offloading system ("FSO") estimated to be approximately $3,077,000 for 1999 and $5,215,000 in the year 2000 and each year thereafter. Future minimum office and FPSO lease expenses and related FPSO operating expense payments (in thousands of dollars) at December 31, 1998, are as follows: 1999............................................................... $ 19,042 2000............................................................... 21,187 2001............................................................... 19,968 2002............................................................... 19,771 2003............................................................... 19,778 Thereafter......................................................... 89,630
50 POGO PRODUCING COMPANY & SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (2) INCOME TAXES The components of income (loss) before income taxes for each of the three years in the period ended December 31, 1998, are as follows (expressed in thousands):
1998 1997 1996 ---------- ---------- ---------- United States............................................ $ (57,112) $ 62,953 $ 56,380 Foreign.................................................. (13,737) (7,746) (3,999) ---------- ---------- ---------- Total.................................................. $ (70,849) $ 55,207 $ 52,381 ---------- ---------- ---------- ---------- ---------- ----------
The components of federal income tax expense (benefit) for each of the three years in the period ended December 31, 1998, are as follows (expressed in thousands):
1998 1997 1996 ---------- --------- --------- United States, current...................................... $ -- $ 16,000 $ 12,500 United States, deferred (a)................................. (20,750) 5,964 7,162 Foreign, deferred........................................... (7,001) (3,873) (862) ---------- --------- --------- Total..................................................... $ (27,751) $ 18,091 $ 18,800 ---------- --------- --------- ---------- --------- ---------
- ------------------------ (a) Excludes $443,000 of deferred tax benefit on extraordinary loss of $1,264,000 in 1996. Total federal income tax expense (benefit) for each of the three years in the period ended December 31, 1998, differs from the amounts computed by applying the statutory federal income tax rate to income before taxes as follows (expressed as a percent of pre-tax income):
1998 1997 1996 ----------- ----------- ----------- Federal statutory income tax rate........................... (35.0)% 35.0% 35.0% Increases (reductions) resulting from: Statutory depletion in excess of tax basis................ (0.4) (0.2) (0.2) Foreign taxes............................................. (3.8) (2.1) 1.1 Other..................................................... -- 0.1 -- ----------- ----- ----- (39.2)% 32.8% 35.9% ----------- ----- ----- ----------- ----- -----
Deferred income taxes are determined based upon the differences between the financial statement and tax basis of the Company's assets and liabilities using enacted tax rates in effect for the years in which the differences are expected to reverse. Deferred tax assets are recognized if it is more likely than not that 51 POGO PRODUCING COMPANY & SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (2) INCOME TAXES (CONTINUED) the future tax benefit will be realized. The principal components of the Company's deferred income tax assets and liabilities include the following at December 31, 1998 and 1997 (expressed in thousands):
DECEMBER 31, ------------------------ 1998 1997 ----------- ----------- Deferred tax liabilities: Intangible drilling costs, capitalized and amortized for financial statement purposes and deducted for income tax purposes................................................ $ 235,034 $ 204,218 Charges to property and equipment, expensed for financial statement purposes, and capitalized and amortized for income tax purposes................................... 29,013 12,203 Interest charges, capitalized and amortized for financial statement purposes and deducted for income tax purposes.................................................... 20,874 19,762 ----------- ----------- 284,921 236,183 Deferred tax asset: Differences in depletion and depreciation rates used for tangible assets for financial and income tax purposes............................................................. (224,271) (178,681) Net operating loss carryforwards and other ............................................. (6,781) -- ----------- ----------- (231,052) (178,681) ----------- ----------- Net deferred tax liability.............................................................. $ 53,869 $ 57,502 ----------- ----------- ----------- -----------
(3) LONG-TERM DEBT Long-term debt and the amount due within one year at December 31, 1998 and 1997, consists of the following (dollars expressed in thousands):
DECEMBER 31, ---------------------- 1998 1997 ---------- ---------- Senior debt-- Bank revolving credit agreement: LIBO Rate based loans, borrowings at December 31, 1998 and 1997, at average interest rates of 7.4% and 6.5%, respectively................................................ $ 205,000 $ 47,000 Uncommitted credit lines with banks, borrowing at December 31, 1998, at an average interest rate of 6.1%................................................................. 4,000 -- Banker's acceptance loans, borrowings at an average interest rate of 5.9%............... 10,947 -- ---------- ---------- Total senior debt......................................................................... 219,947 47,000 ---------- ---------- Subordinated debt-- 8 3/4% Senior subordinated notes, due 2007.............................................. 100,000 100,000 5 1/2% Convertible subordinated notes, due 2006......................................... 115,000 115,000 5 1/2% Convertible subordinated notes, due 2004......................................... -- 86,179 ---------- ---------- Total subordinated debt................................................................... 215,000 301,179 ---------- ---------- Total debt................................................................................ 434,947 348,179 ---------- ---------- Amount due within one year................................................................ -- -- ---------- ---------- Long-term debt............................................................................ $ 434,947 $ 348,179 ---------- ---------- ---------- ----------
52 POGO PRODUCING COMPANY & SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (3) LONG-TERM DEBT (CONTINUED) Effective August 1, 1997, the Company entered into an amended and restated bank revolving credit agreement (the "Credit Agreement"), which was amended, most recently on December 21, 1998. The Credit Agreement provides for a $200,000,000 revolving/term credit facility which will be fully revolving until July 1, 2000, after which the balance will be due in eight quarterly installments, commencing on October 31, 2000. The amount that may be borrowed under the Credit Agreement may not exceed a borrowing base which is composed of domestic, Canadian and Thai properties. Generally, the borrowing base is determined semi-annually by the lenders in accordance with the Credit Agreement, based on the lenders' usual and customary criteria for oil and gas transactions. As of February 1, 1999, the Company's total borrowing base was set at $140,000,000, which amount cannot be reduced until after April 30, 1999. The Credit Agreement is governed by various financial and other covenants, including requirements to maintain positive working capital (excluding current maturities of debt) and a fixed charge coverage ratio, and limitations on indebtedness (including a total indebtedness limit of $500,000,000), creation of liens, the prepayment of subordinated debt, the payment of dividends, mergers and consolidations, investments and asset dispositions. In addition, the Company is prohibited from pledging borrowing base properties as security for other debt. Borrowings under the Credit Agreement bear interest at a rate based upon the percentage of the borrowing base that is being utilized, ranging from a base (prime) rate or LIBOR plus 1.25% to a base rate plus 0.25% or LIBOR plus 2.0%, at the Company's option. Borrowings under the Credit Agreement currently bear interest at a base rate or LIBOR plus 1.75%, at the Company's option. A commitment fee on the unborrowed amount under the Credit Agreement is also charged and is based upon the percentage of the borrowing base that is being utilized, ranging from 0.25% to 0.375%. The commitment fee is currently 0.375% per annum on the unborrowed amount under the Credit Agreement. Due to limitations on total indebtedness under the Credit Agreement, as of February 1, 1999, the Company may borrow up to $135,000,000 under the Credit Agreement and its other senior debt arrangements. As of December 31, 1998, the Company is a party to separate letter agreements with two banks under which one of the banks may provide a $10,000,000 uncommitted money market line of credit and the other bank may provide a $20,000,000 uncommitted money market line of credit. Each line of credit is on an as available or offered basis and neither bank has an obligation to make any advances under its line of credit. Although loans made under these letter agreements are for a maximum of 30 days, they are reflected as long-term debt on the Company's balance sheet because the Company has the ability and intent to reborrow such amounts under its Credit Agreement. Both letter agreements permit either party to terminate such letter agreements at any time. Under the Credit Agreement, the Company is currently limited to incurring a maximum of $20,000,000 of additional senior debt, which would include debt incurred under these lines of credit and under the banker's acceptances discussed below. On June 3, 1998, the Company entered into a Master Banker's Acceptance Agreement under which one of the Company's lenders has offered to accept up to $20,000,000 in bank drafts from the Company. The banker's drafts are available on an uncommitted basis and the bank has no obligation to accept the Company's request for drafts. Drafts drawn under this agreement are for a maximum term of 182 days; however, they are reflected as long-term debt on the Company's balance sheet because the Company currently has the ability and intent to reborrow such amounts under the Credit Agreement. The Master Banker's Acceptance Agreement permits either party to terminate the letter agreement at any time upon five business days notice. On May 22, 1997, the Company issued $100,000,000 of 8 3/4% Senior Subordinated Notes, due 2007 (the "2007 Notes"). The 2007 Notes bear interest at a rate of 8 3/4%, payable semi-annually in arrears on May 15 and November 15 of each year. The 2007 Notes are general unsecured senior subordinated 53 POGO PRODUCING COMPANY & SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (3) LONG-TERM DEBT (CONTINUED) obligations of the Company and are subordinated in right of payment to the Company's senior indebtedness, which currently includes the Company's obligations under the Credit Agreement, its unsecured credit lines, and its banker's acceptances, are equal in right of payment to the 2009 Notes (defined below) but are senior in right of payment to its subordinated indebtedness, which currently includes the 2006 Notes. The Company, at its option, may redeem the 2007 Notes in whole or in part, at any time on or after May 15, 2002, at a redemption price of 104.375% of their principal value and decreasing percentages thereafter. No sinking fund payments are required on the 2007 Notes. The 2007 Notes are redeemable at the option of any holder, upon the occurrence of a change of control (as defined in the indenture governing the 2007 Notes), at 101% of their principal amount. The indenture governing the 2007 Notes also imposes certain covenants on the Company that are substantially identical to the covenants contained in the indenture governing the 2009 Notes, including covenants limiting: incurrence of indebtedness including senior indebtedness; restricted payments; the issuance and sales of restricted subsidiary capital stock; transactions with affiliates; liens, disposition of proceeds of asset sales; non-guarantor restricted subsidiaries; dividends and other payment restrictions affecting restricted subsidiaries; and mergers; consolidations and the sale of assets. The 5 1/2% Convertible Subordinated Notes, due 2006 (the "2006 Notes") are convertible into Common Stock at $42.185 per share subject to adjustment upon the occurrence of certain events. The 2006 Notes will be redeemable at the option of the Company, in whole or in part, at any time on or after June 15, 1999, at a redemption price of 103.85% and decreasing percentages thereafter. No sinking fund is provided. The 2006 Notes are redeemable at the option of the holder, upon the occurrence of a repurchase event (a change in control and other circumstances, as defined), at 100% of the principal amount. On February 12, 1998, the Company announced its intent to redeem the 5 1/2% Convertible Subordinated Notes, due 2004 (the "2004 Notes") on March 16, 1998, at 103.3% of their principal amount plus accrued interest. Holders of $86,084,000 principal amount of the 2004 Notes elected to convert their notes into 3,879,726 common shares at $22.188 per share plus $640 in cash for fractional shares. The value of the shares issued was credited to common stock and additional capital less unamortized debt issue expense applicable to the 2004 Notes. The remaining $95,000 principal amount of the 2004 Notes were redeemed for $98,135 representing 103.3% of the principal amount of such 2004 Notes. Current maturities and sinking fund requirements during the next five years in connection with the above long-term debt are none in 1999, $32,992,000 in 2000, $120,971,000 in 2001, $65,984,000 in 2002 and none in 2003. All of the current maturities reflected above are related to the retirement of the Company's bank debt. The Company has established a history of refinancing its senior debt before scheduled maturity payments commence and expects to do so again before the amortization of senior debt commences in 2000. On January 15, 1999, the Company issued $150,000,000 of 10 3/8% Senior Subordinated Notes, due 2009 (the "2009 Notes"). The proceeds from the issuance of the 2009 Notes were used to repay amounts outstanding under the Company's Credit Agreement. The 2009 Notes bear interest at a rate of 10 3/8%, payable semi-annually in arrears on February 15 and August 15 of each year, commencing August 15, 1999. The 2009 Notes are generally unsecured senior subordinated obligations of the Company and are subordinated in right of payment to the Company's senior indebtedness, which currently includes the Company's obligations under the Credit Agreement, its unsecured credit lines and bankers acceptances, are equal in right of payment to the 2007 Notes, but are senior in right of payment to its subordinated indebtedness, which includes the 2006 Notes. The Company, at its option, may redeem the 2009 Notes in whole or in part, at any time on or after February 15, 2004, at a redemption price of 105.188% of their principal value and decreasing percentages thereafter. No sinking fund payments are required on the 2009 54 POGO PRODUCING COMPANY & SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (3) LONG-TERM DEBT (CONTINUED) Notes. The 2009 Notes are redeemable at the option of any holder, upon the occurrence of a change in control (as defined in the indenture governing the 2009 Notes), at 101% of their principal amount. The indenture governing the 2009 Notes also imposes certain covenants on the Company that are substantially identical to the covenants contained in the indenture governing the 2007 Notes. As of February 1, 1999, $15,000,000 was available for dividends under this limitation, which is currently the Company's most restrictive such covenant. (4) GEOGRAPHIC SEGMENT REPORTING The Company's long-lived assets and revenues by segment and geographic area are as follows:
TOTAL OIL AND COMPANY GAS PIPELINES OTHER ---------- ---------- ----------- ----------- (EXPRESSED IN THOUSANDS) Long-Lived Assets: As of December 31, 1998: United States.................................................... $ 502,787 $ 493,633 $ 4,992 $ 4,162 Kingdom of Thailand.............................................. 209,552 207,756 -- 1,796 Canada........................................................... 13,186 13,083 -- 103 ---------- ---------- ----------- ----------- Total............................................................ $ 725,525 $ 714,472 $ 4,992 $ 6,061 ---------- ---------- ----------- ----------- ---------- ---------- ----------- ----------- As of December 31, 1997: United States.................................................... $ 365,142 $ 360,440 $ 243 $ 4,459 Kingdom of Thailand.............................................. 162,162 160,249 -- 1,913 ---------- ---------- ----------- ----------- Total............................................................ $ 527,304 $ 520,689 $ 243 $ 6,372 ---------- ---------- ----------- ----------- ---------- ---------- ----------- ----------- Revenues: For the year ended December 31, 1998 United States.................................................... $ 165,873 $ 163,438 $ 2,431 $ 4 Kingdom of Thailand.............................................. 35,649 35,445 -- 204 Canada........................................................... 1,281 1,271 -- 10 ---------- ---------- ----------- ----------- Total............................................................ $ 202,803 $ 200,154 $ 2,431 $ 218 ---------- ---------- ----------- ----------- ---------- ---------- ----------- ----------- For the year ended December 31, 1997 United States.................................................... $ 246,965 $ 245,458 $ -- $ 1,507 Kingdom of Thailand.............................................. 39,335 39,393 -- (58) ---------- ---------- ----------- ----------- Total............................................................ $ 286,300 $ 284,851 $ -- $ 1,449 ---------- ---------- ----------- ----------- ---------- ---------- ----------- ----------- For the year ended December 31, 1996 United States.................................................... $ 203,966 $ 203,364 $ -- $ 602 Kingdom of Thailand.............................................. 11 -- -- 11 ---------- ---------- ----------- ----------- Total............................................................ $ 203,977 $ 203,364 $ -- $ 613 ---------- ---------- ----------- ----------- ---------- ---------- ----------- -----------
55 POGO PRODUCING COMPANY & SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (5) SALES TO MAJOR CUSTOMERS The Company is an oil and gas exploration and production company that generally sells its oil and gas to numerous customers on a month-to-month basis. Sales to the following customers exceeded 10% of revenues during any one of the three years indicated (expressed in thousands):
1998 1997 1996 --------- --------- --------- Enron Corp. and affiliates................................... $ 29,539 $ 57,965 $ 58,101 Petroleum Authority of Thailand (PTT)........................ $ 23,137 $ 30,108 $ -- Coastal Gas Marketing Company................................ $ -- $ -- $ 18,376
(6) CREDIT RISK Substantially all of the Company's accounts receivable at December 31, 1998 and 1997, result from oil and gas sales and joint interest billings to other companies in the oil and gas industry. This concentration of customers and joint interest owners may impact the Company's overall credit risk, either positively or negatively, in that these entities may be similarly affected by industry-wide changes in economic or other conditions. Such receivables are generally not collateralized. Historically, credit losses incurred by the Company on receivables have not been material. No material credit losses were experienced during 1998 or 1997. A substantial portion of the Company's oil and gas operations are conducted in Southeast Asia, and a substantial portion of its natural gas and liquids hydrocarbon production are sold there. In the last two years, Southeast Asia in general, and the Kingdom of Thailand in particular, have experienced severe economic difficulties which have been characterized by sharply reduced economic activity, illiquidity, highly volatile foreign currency exchange rates and unstable stock markets. The government of the Kingdom of Thailand and other governments in the region are currently acting to address these issues. However, the economic difficulties currently being experienced in Thailand, together with the volatility of the Thai Baht against the U.S. dollar, will continue to have a material impact on the Company's operations in the Kingdom of Thailand together with the prices that the Company receives for its oil and natural gas production there. All of the Company's current natural gas production from its Thailand operations are committed under a long-term Gas Sales Agreement to PTT at a price denominated in Thai Baht. The Company's crude oil and condensate production from its Thailand operations is currently sold on a tanker load by tanker load basis. Prices that the Company receives for such crude oil production are based on world benchmark prices, which are denominated in U.S. dollars and are generally expected on future crude oil sales to be paid in U.S. dollars. The Company believes that the current economic difficulties in Southeast Asia have resulted in a decreased demand for petroleum products in the region, which has contributed to the recent general decline in crude oil and condensate prices throughout the world. (7) EMPLOYEE BENEFITS The Company has a tax-advantaged savings plan in which all U.S. salaried employees may participate. Under such plan, a participating employee may allocate up to 10% of his salary, up to a maximum allowed by law ($10,000 for 1999), and the Company will then match the employee's contribution on a dollar for dollar basis up to 6% of the employee's salary. Funds contributed by the employee and the matching funds contributed by the Company are held in trust by a bank trustee in six separate funds. Amounts contributed by the employee and earnings and accretions thereon may be used to purchase shares of Common Stock, invest in a money market fund or invest in four stock, bond, or blended stock and bond mutual funds according to instructions from the employee. Matching funds contributed to the savings plan by the 56 POGO PRODUCING COMPANY & SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (7) EMPLOYEE BENEFITS (CONTINUED) Company are invested only in Common Stock. The Company contributed $701,000 to the savings plan in 1998, $588,000 in 1997, and $471,000 in 1996. A trusteed retirement plan has been adopted by the Company for its U.S. salaried employees. The benefits are based on years of service and the employee's average compensation for five consecutive years within the final ten years of service which produce the highest average compensation. The Company makes annual contributions to the plan in the amount of retirement plan cost accrued or the maximum amount which can be deducted for federal income tax purposes. Although the Company has no obligation to do so, the Company currently provides full medical benefits to its retired U.S. employees and dependents. For current employees, the Company assumes all or a portion of post retirement medical and term life insurance costs based on the employee's age and length of service with the Company. The post retirement medical plan has no assets and is currently funded by the Company on a pay-as-you-go basis. The Company adopted Statement of Financial Accounting Standards No. 132, "Employer's Disclosures about 57 POGO PRODUCING COMPANY & SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (7) EMPLOYEE BENEFITS (CONTINUED) Pensions and Other Post Retirement Benefits," in 1998. This statement changes the disclosure requirements, but not the method of measurement or recognition of these obligations. The following table sets forth the plans' status (in thousands of dollars) as of December 31, 1998 and 1997.
POST RETIREMENT RETIREMENT PLAN BENEFITS ---------------------- -------------------- 1998 1997 1998 1997 ---------- ---------- --------- --------- CHANGE IN BENEFIT OBLIGATION Benefit obligation at beginning of year........ $ 11,220 $ 9,350 $ 6,906 $ 5,895 Service cost................................. 938 746 418 459 Interest cost................................ 843 707 374 427 Participant contributions.................... -- -- 4 1 Benefits paid................................ (2,099) (539) (191) (207) Actuarial (gain) or loss..................... 2,947 956 (1,227) 331 ---------- ---------- --------- --------- Benefit obligation at end of year.............. 13,849 11,220 6,284 6,906 ---------- ---------- --------- --------- CHANGE IN PLAN ASSETS Fair value of plan assets at beginning of year......................................... 31,312 24,181 -- -- Actual return on plan assets................. 8,439 7,893 -- -- Employer contributions....................... -- -- 187 206 Participant contributions.................... -- -- 4 1 Benefits paid................................ (2,099) (539) (191) (207) Administrative expenses...................... (248) (223) -- -- ---------- ---------- --------- --------- Fair value of plan assets at end of year....... 37,404 31,312 -- -- ---------- ---------- --------- --------- RECONCILIATION OF FUNDED STATUS Funded status.................................. 23,555 20,092 (6,284) (6,906) Unrecognized actuarial gain.................... (14,670) (13,134) (1,742) (641) Unrecognized transition (asset) or obligation................................... (233) (336) 2,132 2,435 Unrecognized past service cost................. (257) (300) -- -- ---------- ---------- --------- --------- Prepaid (accrued) benefit cost at year-end..... $ 8,395 $ 6,322 $ (5,894) $ (5,112) ---------- ---------- --------- --------- ---------- ---------- --------- --------- Discount rate.................................. 6.75% 7.00% 6.75% 7.00% Expected return on plan assets................. 9.50% 8.50% -- -- Rate of compensation increase.................. 4.75% 4.89% -- -- COMPONENTS OF NET PERIODIC BENEFIT COST Service cost................................... $ 938 $ 746 $ 418 $ 459 Interest cost.................................. 843 707 374 427 Expected return on plan assets................. (2,926) (2,286) -- -- Amortization of prior service cost............. (43) (43) -- -- Amortization of transition obligation.......... (104) (104) 305 305 Recognized actuarial gain...................... (781) (628) (127) (26) ---------- ---------- --------- --------- $ (2,073) $ (1,608) $ 970 $ 1,165 ---------- ---------- --------- --------- ---------- ---------- --------- ---------
58 POGO PRODUCING COMPANY & SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (7) EMPLOYEE BENEFITS (CONTINUED) For measurement purposes, a 7% annual rate of increase in the per capita cost of covered health care benefits was assumed for 1999. The rate is assumed to decrease gradually to 5% for 2003 and remain at that level thereafter. The accumulated post retirement benefit obligation at December 31 is attributable to the following groups (in thousands of dollars):
POST RETIREMENT BENEFITS -------------------- 1998 1997 --------- --------- Retirees and beneficiaries................................................. $ 1,456 $ 1,951 Dependents of retirees..................................................... 1,147 978 Fully eligible active employees............................................ 578 802 Active employees, not fully eligible....................................... 3,103 3,175 --------- --------- $ 6,284 $ 6,906 --------- --------- --------- ---------
Assumed health care cost trends have a significant effect on the amount reported for the health care plan. A one-percentage-point change in assumed health care cost trend rates would have the following effects (in thousands of dollars):
ONE PERCENTAGE POINT ------------------------ INCREASE DECREASE ----------- ----------- Effect on total of service and interest cost components for 1998......... $ 157 $ (124) Effect on year-end 1998 postretirement benefit obligation................ 1,028 (836)
(8) STOCK OPTION PLANS The Company's stock option plans authorize the granting of options to key employees and non-employee directors at prices equivalent to the market value at the date of grant. Options generally become exercisable in three annual installments commencing one year after the date of grant and, if not exercised, expire 10 years from the date of grant. The Company accounts for employee stock-based compensation using the intrinsic value method and since the exercise price of the options granted is equal to the quoted market price of the Company's stock at the grant date, no compensation cost has been recognized for its stock options plans. Had compensation costs been determined based on fair value at the grant dates for awards made in 1998, 1997 and 1996, the Company's net income and earnings per share 59 POGO PRODUCING COMPANY & SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (8) STOCK OPTION PLANS (CONTINUED) would have been reduced to the pro forma amounts indicated below (in thousands of dollars, except per share amounts):
1998 1997 1996 ---------- --------- --------- Net income (loss): As reported............................................... $ (43,098) $ 37,116 $ 32,760 Pro forma................................................. $ (44,602) $ 34,220 $ 31,194 Earnings (loss) per share: As reported Basic......................................... $ (1.14) $ 1.11 $ 0.99 As reported Diluted....................................... $ (1.20) $ 1.06 $ 0.95 Pro forma Basic........................................... $ (1.14) $ 1.04 $ 0.94 Pro forma Diluted......................................... $ (1.20) $ 0.99 $ 0.91
The fair value of grants was estimated on the date of grant using the Black Scholes option pricing model with the following weighted-average assumptions used in 1998, 1997 and 1996, respectively: risk free interest rates of 5.31%, 6.10% and 6.25%, expected volatility of 35.58%, 34.63% and 39.15%, dividend yields of 0.64%, 0.29% and 0.34%, and an expected life of the options of 4 years in each of the years 1998, 1997 and 1996. 60 POGO PRODUCING COMPANY & SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (8) STOCK OPTION PLANS (CONTINUED) A summary of the status of the Company's plans as of December 31, 1998, 1997 and 1996, and changes during the years ended on those dates is presented below:
WEIGHTED AVERAGE NUMBER OF EXERCISE OPTIONS PRICE ---------- ----------- Outstanding, December 31, 1995............................................................. 1,575,401 $ 14.56 Granted in 1996.......................................................................... 406,500 $ 34.59 Exercised in 1996........................................................................ (274,714) $ 12.30 ---------- Outstanding, December 31, 1996............................................................. 1,707,187 $ 19.70 ---------- ---------- Exercisable, December 31, 1996............................................................. 1,077,658 $ 14.31 ---------- ---------- Available for grant, December 31, 1996..................................................... 1,313,393 ---------- ---------- Weighted average fair value of options granted during 1996................................. $ 13.56 Outstanding, December 31, 1996............................................................. 1,707,187 $ 19.70 Granted in 1997.......................................................................... 480,400 $ 40.49 Exercised in 1997........................................................................ (229,024) $ 16.83 ---------- Outstanding, December 31, 1997............................................................. 1,958,563 $ 25.13 ---------- ---------- Exercisable, December 31, 1997............................................................. 1,196,803 $ 18.15 ---------- ---------- Available for grant, December 31, 1997..................................................... 832,993 ---------- ---------- Weighted average fair value of options granted during 1997................................. $ 14.63 Outstanding, December 31, 1997............................................................. 1,958,563 $ 19.70 Granted in 1998.......................................................................... 985,659 $ 19.62 Exercised in 1998........................................................................ (145,317) $ 6.87 Cancelled in 1998........................................................................ (334,748) $ 37.13 ---------- Outstanding, December 31, 1998............................................................. 2,464,157 $ 19.37 ---------- ---------- Exercisable, December 31, 1998............................................................. 1,223,484 $ 19.00 ---------- ---------- Available for grant, December 31, 1998..................................................... 682,082 ---------- ---------- Weighted average fair value of options granted during 1998................................. $ 5.35
61 POGO PRODUCING COMPANY & SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (8) STOCK OPTION PLANS (CONTINUED) The following table summarizes information about stock options outstanding at December 31, 1998:
OPTIONS OUTSTANDING --------------------------------------- WEIGHTED OPTIONS EXERCISABLE AVERAGE ----------------------- REMAINING WEIGHTED WEIGHTED CONTRACTUAL AVERAGE AVERAGE RANGE OF NUMBER LIFE EXERCISE NUMBER EXERCISE OPTION PRICES OUTSTANDING (DAYS) PRICE EXERCISABLE PRICE - ------------------ ----------- ------------- ----------- ---------- ----------- $ 5.56 to $8.06 317,361 742 $ 6.84 317,361 $ 6.84 $ 12.31 4,000 3,531 $ 12.31 -- -- $ 15.13 to $19.56 1,057,625 3,025 $ 18.25 244,262 $ 16.74 $ 20.28 to $24.81 868,638 2,649 $ 21.39 479,738 $ 22.16 $ 25.38 to $29.06 49,962 3,386 $ 25.72 45,321 $ 25.39 $ 30.23 to $33.94 30,962 2,709 $ 33.75 20,321 $ 33.81 $ 35.13 to $36.00 53,109 2,656 $ 35.97 51,314 $ 35.98 $ 40.62 to $44.00 82,500 3,084 $ 41.00 65,167 $ 41.05 ----------- ---------- Total 2,464,157 2,597 $ 19.37 1,223,484 $ 19.00 ----------- ---------- ----------- ----------
(9) FAIR VALUE OF FINANCIAL INSTRUMENTS The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate that value. CASH AND CASH INVESTMENTS Fair value is carrying value as no cash equivalents or cash investments are included in the balances as of December 31, 1998 and 1997. DEBT
INSTRUMENT BASIS OF FAIR VALUE ESTIMATE - -------------------------------------------------------- -------------------------------------------------------- Bank revolving credit agreement......................... Fair value is carrying value as of December 31, 1998 and 1997 based on the market value interest rates. Uncommitted credit lines with banks and banker's acceptance loans...................................... Fair value is carrying value as of December 31, 1998 based on the market value interest rates. 2007 Notes.............................................. Fair value is 94% and 102.5%, of carrying value as of December 31, 1998 and 1997, respectively, based on quoted market values. 2006 Notes.............................................. Fair value is 68.38% and 93.5%, of carrying value as of December 31, 1998 and 1997, respectively, based on quoted market values. 2004 Notes.............................................. Fair value is 140.38% of carrying value as of December 31, 1997 based on quoted market value.
62 POGO PRODUCING COMPANY & SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (9) FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED) The carrying value and estimated fair value of the Company's financial instruments at December 31, 1998 and 1997, (in thousands of dollars) are as follows:
1998 1997 ------------------------ ------------------------ CARRYING CARRYING VALUE FAIR VALUE VALUE FAIR VALUE ----------- ----------- ----------- ----------- Cash and cash investments.................................... $ 7,959 $ 7,959 $ 19,646 $ 19,646 Debt: Bank revolving credit agreement............................ (205,000) (205,000) (47,000) (47,000) Uncommitted credit lines with banks........................ (4,000) (4,000) -- -- Banker's acceptance loans.................................. (10,947) (10,947) -- -- 2007 Notes................................................. (100,000) (94,000) (100,000) (102,500) 2006 Notes................................................. (115,000) (78,637) (115,000) (107,525) 2004 Notes................................................. -- -- (86,179) (120,978)
The Company occasionally enters into forward and futures contracts to minimize the impact of oil and gas price fluctuations. However, the Company does not consider its forward and futures contracts to be financial instruments since these contracts require or permit settlement by the delivery of the underlying commodity. Gains and losses on these activities are recognized in revenues when the hedged production occurs. No such contracts were outstanding as of December 31, 1998 or 1997. (10) COMPREHENSIVE INCOME During 1998, the Company adopted the Financial Accounting Standards Board's Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS 130"). Currently there are no significant amounts to be included in the computation of comprehensive income of the Company, as defined, that are required to be disclosed under the provisions of SFAS 130. The Company did report a foreign currency translation loss of $1,207,000 in 1998 which is reflected as a reduction of shareholders' equity and represents less than 2% of the Company's reported pretax loss for 1998. As such, total comprehensive income (loss) and net income (loss) are materially the same for each of the three years in the period ended December 31, 1998. (11) IMPACT OF SFAS 133-- In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133"). SFAS 133 establishes accounting and reporting standards requiring that every derivative instrument (including certain derivative instruments embedded in other contracts) be recorded in the balance sheet as either an asset or liability measured at its fair market value and that changes in the derivative's fair market value be recognized currently in earnings unless specific hedge accounting criteria are met. SFAS 133 is effective for the Company in 2000 but early adoption is allowed. The Company has not yet quantified the impacts of adopting SFAS 133 or determined the timing or method of adoption. However, SFAS 133 could increase volatility in earnings and other comprehensive income should the Company enter into transactions covered by this pronouncement. 63 UNAUDITED SUPPLEMENTARY FINANCIAL DATA OIL AND GAS PRODUCING ACTIVITIES The results of operations from oil and gas producing activities excludes non-oil and gas revenues, general and administrative expenses, interest charges, interest income and interest capitalized. Income tax (expense) or benefit was determined by applying the statutory rates to pre-tax operating results with adjustments for permanent differences.
TOTAL UNITED KINGDOM OF COMPANY STATES THAILAND CANADA ----------- ---------- ----------- --------- (EXPRESSED IN THOUSANDS) 1998 ----------------------------------------------- Revenues.......................................................... $ 200,154 $ 163,438 $ 35,445 $ 1,271 Lease operating expense........................................... (68,883) (47,294) (20,913) (676) Exploration expense............................................... (9,802) (8,835) (289) (678) Dry hole and impairment expense................................... (41,736) (41,736) -- -- Depreciation, depletion and amortization expense.................. (109,288) (85,969) (22,753) (566) ----------- ---------- ----------- --------- Pre-tax operating results......................................... (29,555) (20,396) (8,510) (649) Income tax benefit................................................ 11,916 7,401 4,255 260 ----------- ---------- ----------- --------- Operating results................................................. $ (17,639) $ (12,995) $ (4,255) $ (389) ----------- ---------- ----------- --------- ----------- ---------- ----------- --------- 1997 ----------------------------------------------- Revenues.......................................................... $ 284,851 $ 245,458 $ 39,393 $ -- Lease operating expense........................................... (63,501) (43,934) (19,567) -- Exploration expense............................................... (10,530) (6,242) (4,288) -- Dry hole and impairment expense................................... (9,631) (9,631) -- -- Depreciation, depletion and amortization expense.................. (101,273) (84,443) (16,830) -- ----------- ---------- ----------- --------- Pre-tax operating results......................................... 99,916 101,208 (1,292) -- Income tax (expense) benefit...................................... (30,353) (32,390) 2,037 -- ----------- ---------- ----------- --------- Operating results................................................. $ 69,563 $ 68,818 $ 745 $ -- ----------- ---------- ----------- --------- ----------- ---------- ----------- --------- 1996 ----------------------------------------------- Revenues.......................................................... $ 204,142 $ 204,131 $ 11 $ -- Lease operating expense........................................... (37,628) (37,628) -- -- Exploration expense............................................... (16,777) (14,247) (2,530) -- Dry hole and impairment expense................................... (8,579) (8,834) 255 -- Depreciation, depletion and amortization expense.................. (61,033) (60,932) (101) -- ----------- ---------- ----------- --------- Pre-tax operating results......................................... 80,125 82,490 (2,365) -- Income tax (expense) benefit...................................... (27,905) (28,767) 862 -- ----------- ---------- ----------- --------- Operating results................................................. $ 52,220 $ 53,723 $ (1,503) $ -- ----------- ---------- ----------- --------- ----------- ---------- ----------- ---------
64 UNAUDITED SUPPLEMENTARY FINANCIAL DATA--(CONTINUED) The following table sets forth the Company's costs incurred (expressed in thousands) for oil and gas producing activities during the years indicated.
TOTAL UNITED KINGDOM OF COMPANY STATES THAILAND CANADA ---------- ---------- ----------- --------- Costs incurred (capitalized unless otherwise indicated): 1998: Property acquisition..................................... $ 149,903 $ 144,031 $ -- $ 5,872 Exploration Capitalized............................................ 36,465 24,685 11,631 149 Expensed............................................... 9,802 8,831 293 678 Development.............................................. 156,718 64,052 89,365 3,301 Interest................................................. 9,381 3,209 6,172 -- ---------- ---------- ----------- --------- $ 362,269 $ 244,808 $ 107,461 $ 10,000 ---------- ---------- ----------- --------- ---------- ---------- ----------- --------- Provision for depreciation, depletion and amortization..... $ 109,288 $ 85,969 $ 22,753 $ 566 ---------- ---------- ----------- --------- ---------- ---------- ----------- --------- 1997: Property acquisition..................................... $ 43,109 $ 14,492 $ 28,617 $ -- Exploration Capitalized............................................ 45,203 24,016 21,187 -- Expensed............................................... 10,530 6,242 4,288 -- Development.............................................. 156,764 95,768 60,996 -- Interest................................................. 6,079 3,331 2,748 -- ---------- ---------- ----------- --------- $ 261,685 $ 143,849 $ 117,836 $ -- ---------- ---------- ----------- --------- ---------- ---------- ----------- --------- Provision for depreciation, depletion and amortization..... $ 101,273 $ 84,443 $ 16,830 $ -- ---------- ---------- ----------- --------- ---------- ---------- ----------- --------- 1996: Property acquisition..................................... $ 5,927 $ 5,927 $ -- $ -- Exploration Capitalized............................................ 28,968 20,651 8,317 -- Expensed............................................... 16,777 14,258 2,519 -- Development.............................................. 153,028 99,464 53,564 -- Interest................................................. 4,244 4,244 -- -- ---------- ---------- ----------- --------- $ 208,944 $ 144,544 $ 64,400 $ -- ---------- ---------- ----------- --------- ---------- ---------- ----------- --------- Provision for depreciation, depletion and amortization..... $ 61,033 $ 60,932 $ 101 $ -- ---------- ---------- ----------- --------- ---------- ---------- ----------- ---------
The following information regarding estimates of the Company's proved oil and gas reserves, which are located offshore in United States waters of the Gulf of Mexico, onshore in the United States and Canada and offshore in the Kingdom of Thailand is based on reports prepared by Ryder Scott Company Petroleum Engineers. The definitions and assumptions that serve as the basis for the discussions under the caption "Item 1, Business--Exploration and Production Data--Reserves" should be referred to in connection with the following information. 65 UNAUDITED SUPPLEMENTARY FINANCIAL DATA--(CONTINUED) ESTIMATES OF PROVED RESERVES
OIL, CONDENSATE AND NATURAL GAS LIQUIDS (BBLS.) TOTAL UNITED KINGDOM OF COMPANY STATES THAILAND CANADA ----------- ----------- ----------- --------- Proved Reserves as of December 31, 1995....................... 45,182,002 26,185,010 18,996,992 -- Revisions of previous estimates............................. (499,595) 3,374,647 (3,874,242) -- Extensions, discoveries and other additions................. 9,810,363 3,601,333 6,209,030 -- Estimated 1996 production................................... (4,890,588) (4,890,588) -- -- ----------- ----------- ----------- --------- Proved Reserves as of December 31, 1996....................... 49,602,182 28,270,402 21,331,780 -- Revisions of previous estimates............................. 1,033,664 2,194,936 (1,161,272) -- Extensions, discoveries and other additions................. 9,316,407 4,649,856 4,666,551 -- Purchase of properties...................................... 5,175,501 409,428 4,766,073 -- Sale of properties.......................................... (6,155) (6,155) -- -- Estimated 1997 production................................... (6,957,246) (6,136,957) (820,289) -- ----------- ----------- ----------- --------- Proved Reserves as of December 31, 1997....................... 58,164,353 29,381,510 28,782,843 -- Revisions of previous estimates............................. (263,410) 1,316,467 (1,417,472) (162,405) Extensions, discoveries and other additions................. 10,111,879 2,767,537 7,341,791 2,551 Purchase of properties...................................... 6,226,804 5,496,985 -- 729,819 Sale of properties.......................................... (28,024) (28,024) -- -- Estimated 1998 production................................... (6,702,038) (5,724,933) (896,200) (80,905) ----------- ----------- ----------- --------- Proved Reserves as of December 31, 1998....................... 67,509,564 33,209,542 33,810,962 489,060 ----------- ----------- ----------- --------- ----------- ----------- ----------- --------- Proved Developed Reserves as of: December 31, 1995........................................... 22,487,608 22,487,608 -- -- December 31, 1996........................................... 31,090,407 25,898,414 5,191,993 -- December 31, 1997........................................... 33,149,612 26,167,519 6,982,093 -- December 31, 1998........................................... 33,368,347 28,581,175 4,298,112 489,060
NATURAL GAS (MMCF) TOTAL UNITED KINGDOM OF COMPANY STATES THAILAND CANADA --------- --------- ----------- --------- Proved Reserves as of December 31, 1995................ 328,061 196,454 131,607 -- Revisions of previous estimates...................... (30,034) 3,022 (33,056) -- Extensions, discoveries and other additions.......... 102,039 55,592 46,447 -- Estimated 1996 production............................ (39,122) (39,122) -- -- --------- --------- ----------- --------- Proved Reserves as of December 31, 1996................ 360,944 215,946 144,998 -- Revisions of previous estimates...................... (16,860) (5,582) (11,278) -- Extensions, discoveries and other additions.......... 92,063 49,651 42,412 -- Purchase of properties............................... 30,319 8,919 21,400 -- Sale of properties................................... (1,864) (1,864) -- -- Estimated 1997 production............................ (63,114) (50,350) (12,764) -- --------- --------- ----------- --------- Proved Reserves as of December 31, 1997................ 401,488 216,720 184,768 -- Revisions of previous estimates...................... (13,376) 7,391 (17,943) (2,824) Extensions, discoveries and other additions.......... 70,649 55,859 14,418 372 Purchase of properties............................... 38,689 32,259 -- 6,430 Sale of properties................................... (2,738) (2,738) -- -- Estimated 1998 production............................ (54,543) (41,136) (12,854) (553) --------- --------- ----------- --------- Proved Reserves as of December 31, 1998................ 440,169 268,355 168,389 3,425 --------- --------- ----------- --------- --------- --------- ----------- --------- Proved Developed Reserves as of: December 31, 1995.................................... 164,679 164,679 -- -- December 31, 1996.................................... 238,032 192,034 45,998 -- December 31, 1997.................................... 239,732 179,972 59,760 -- December 31, 1998.................................... 225,054 181,205 40,424 3,425
66 STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS RELATED TO PROVED OIL AND GAS RESERVES--UNAUDITED
TOTAL UNITED KINGDOM OF COMPANY STATES THAILAND CANADA ------------ ------------ ----------- --------- (EXPRESSED IN THOUSANDS) 1998 -------------------------------------------------- Future gross revenues......................................... $ 1,624,242 $ 880,743 $ 732,942 $ 10,557 Future production costs: Lease operating expense..................................... (540,332) (281,421) (255,252) (3,659) Future development and abandonment costs...................... (331,607) (167,724) (163,680) (203) ------------ ------------ ----------- --------- Future net cash flows before income taxes..................... 752,303 431,598 314,010 6,695 Discount at 10% per annum..................................... (257,077) (142,293) (113,413) (1,371) ------------ ------------ ----------- --------- Discounted future net cash flow before income taxes........... 495,226 289,305 200,597 5,324 Future income taxes, net of discount at 10% per annum......... (72,505) (22,494) (52,132) 2,121 ------------ ------------ ----------- --------- Standardized measure of discounted future net cash flows relating to proved oil and gas reserves..................... $ 422,721 $ 266,811 $ 148,465 $ 7,445 ------------ ------------ ----------- --------- ------------ ------------ ----------- --------- 1997 -------------------------------------------------- Future gross revenues......................................... $ 1,801,254 $ 1,002,609 $ 798,645 $ -- Future production costs: Lease operating expense..................................... (604,665) (269,505) (335,160) -- Future development and abandonment costs...................... (401,970) (155,179) (246,791) -- ------------ ------------ ----------- --------- Future net cash flows before income taxes..................... 794,619 577,925 216,694 -- Discount at 10% per annum..................................... (331,838) (171,764) (160,074) -- ------------ ------------ ----------- --------- Discounted future net cash flow before income taxes........... 462,781 406,161 56,620 -- Future income taxes, net of discount at 10% per annum......... (113,316) (93,386) (19,930) -- ------------ ------------ ----------- --------- Standardized measure of discounted future net cash flows relating to proved oil and gas reserves..................... $ 349,465 $ 312,775 $ 36,690 $ -- ------------ ------------ ----------- --------- ------------ ------------ ----------- --------- 1996 -------------------------------------------------- Future gross revenues......................................... $ 2,318,113 $ 1,491,057 $ 827,056 $ -- Future production costs: Lease operating expense..................................... (504,899) (259,501) (245,398) -- Future development and abandonment costs...................... (310,839) (126,086) (184,753) -- ------------ ------------ ----------- --------- Future net cash flows before income taxes..................... 1,502,375 1,105,470 396,905 -- Discount at 10% per annum..................................... (547,830) (332,343) (215,487) -- ------------ ------------ ----------- --------- Discounted future net cash flow before income taxes........... 954,545 773,127 181,418 -- Future income taxes, net of discount at 10% per annum......... (268,505) (212,906) (55,599) -- ------------ ------------ ----------- --------- Standardized measure of discounted future net cash flows relating to proved oil and gas reserves..................... $ 686,040 $ 560,221 $ 125,819 $ -- ------------ ------------ ----------- --------- ------------ ------------ ----------- ---------
67 STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS RELATED TO PROVED OIL AND GAS RESERVES--UNAUDITED--CONTINUED The standardized measure of discounted future net cash flows from the production of proved reserves is developed as follows: 1. Estimates are made of quantities of proved reserves and the future periods in which they are expected to be produced based on year end economic conditions. 2. The estimated future gross revenues from proved reserves are priced on the basis of year end prices, except in those instances where fixed and determinable natural gas price escalations are covered by contracts. 3. The future gross revenue streams are reduced by estimated future costs to develop and to produce the proved reserves, as well as certain abandonment costs based on year end cost estimates, and the estimated effect of future income taxes. These cost estimates are subject to some uncertainty, particularly those estimates relating to the Company's properties located in the Kingdom of Thailand. The standardized measure of discounted future net cash flows does not purport to present the fair market value of the Company's oil and gas reserves. An estimate of fair value would also take into account, among other things, the recovery of reserves in excess of proved reserves, anticipated future changes in prices and costs, a discount factor more representative of the time value of money and the risks inherent in reserve estimates. The following are the principal sources of change in the standardized measure of discounted future net cash flows. All amounts are related to changes in reserves located in the United States,the Kingdom of Thailand, and Canada, as noted.
YEAR ENDED DECEMBER 31, 1998 ------------------------------------------------ TOTAL UNITED KINGDOM OF COMPANY STATES THAILAND CANADA ----------- ----------- ----------- --------- (EXPRESSED IN THOUSANDS) Beginning balance................................................ $ 349,465 $ 312,775 $ 36,690 $ -- Revisions to prior years' proved reserves: Net changes in prices and production costs..................... (165,355) (151,407) (13,948) -- Net changes due to revisions in quantity estimates............. 5,592 13,681 (8,089) -- Net changes in estimates of future development costs........... (10,777) (43,419) 32,642 -- Accretion of discount.......................................... 46,278 40,616 5,662 -- Changes in production rate and other........................... 1,649 (6,485) 7,539 595 ----------- ----------- ----------- --------- Total revisions.............................................. (122,613) (147,014) 23,806 595 New field discoveries and extensions, net of future production and development costs.......................................... 101,142 55,418 45,338 386 Purchases of properties.......................................... 46,907 41,969 -- 4,938 Sales of properties.............................................. (17,158) (17,158) -- -- Sales of oil and gas produced, net of production costs........... (131,271) (116,144) (14,532) (595) Previously estimated development costs incurred.................. 155,438 66,073 89,365 -- Net change in income taxes....................................... 40,811 70,892 (32,202) 2,121 ----------- ----------- ----------- --------- Net change in standardized measure of discounted future net cash flows................................................. 73,256 (45,964) 111,775 7,445 ----------- ----------- ----------- --------- Ending balance................................................... $ 422,721 $ 266,811 $ 148,465 $ 7,445 ----------- ----------- ----------- --------- ----------- ----------- ----------- ---------
68 STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS RELATED TO PROVED OIL AND GAS RESERVES--UNAUDITED--CONTINUED
YEAR ENDED DECEMBER 31, 1997 ------------------------------------- TOTAL UNITED KINGDOM OF COMPANY STATES THAILAND ----------- ----------- ----------- (EXPRESSED IN THOUSANDS) Beginning balance.......................................................... $ 686,040 $ 560,221 $ 125,819 Revisions to prior years' proved reserves: Net changes in prices and production costs............................... (473,086) (344,493) (128,593) Net changes due to revisions in quantity estimates....................... (18,624) 9,619 (28,243) Net changes in estimates of future development costs..................... (83,170) (75,649) (7,521) Accretion of discount.................................................... 95,455 77,313 18,142 Changes in production rate and other..................................... (31,132) (4,518) (26,614) ----------- ----------- ----------- Total revisions........................................................ (510,557) (337,728) (172,829) New field discoveries and extensions, net of future production and development costs........................................................ 79,258 76,687 2,571 Purchase of properties..................................................... 10,189 5,899 4,290 Sales of properties........................................................ (6,069) (6,069) -- Sales of oil and gas produced, net of production costs..................... (221,350) (201,524) (19,826) Previously estimated development costs incurred............................ 156,764 95,768 60,996 Net change in income taxes................................................. 155,190 119,521 35,669 ----------- ----------- ----------- Net change in standardized measure of discounted future net cash flows................................................................ (336,575) (247,446) (89,129) ----------- ----------- ----------- Ending balance............................................................. $ 349,465 $ 312,775 $ 36,690 ----------- ----------- ----------- ----------- ----------- -----------
YEAR ENDED DECEMBER 31, 1996 ------------------------------------- TOTAL UNITED KINGDOM OF COMPANY STATES THAILAND ----------- ----------- ----------- (EXPRESSED IN THOUSANDS) Beginning balance.......................................................... $ 377,145 $ 295,981 $ 81,164 Revisions to prior years' proved reserves: Net changes in prices and production costs............................... 304,233 289,182 15,051 Net changes due to revisions in quantity estimates....................... 6,717 53,708 (46,991) Net changes in estimates of future development costs..................... (132,685) (79,791) (52,894) Accretion of discount.................................................... 53,248 40,085 13,163 Changes in production rate and other..................................... (72,474) (38,593) (33,881) ----------- ----------- ----------- Total revisions........................................................ 159,039 264,591 (105,552) New field discoveries and extensions, net of future production and development costs........................................................ 275,738 173,962 101,776 Sales of properties........................................................ (165,736) (165,736) -- Previously estimated development costs incurred............................ 153,028 99,464 53,564 Net change in income taxes................................................. (113,174) (108,041) (5,133) ----------- ----------- ----------- Net change in standardized measure of discounted future net cash flows................................................................ 308,895 264,240 44,655 ----------- ----------- ----------- Ending balance............................................................. $ 686,040 $ 560,221 $ 125,819 ----------- ----------- ----------- ----------- ----------- -----------
69 QUARTERLY RESULTS--UNAUDITED Summaries of the Company's results of operations by quarter for the years 1998 and 1997 are as follows:
QUARTER ENDED ------------------------------------------- MAR. 31 JUNE 30 SEPT. 30 DEC. 31 --------- --------- --------- ---------- (EXPRESSED IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 1998 Revenues............................................................. $ 60,730 $ 52,663 $ 46,179 $ 43,231 Gross profit (loss) (a).............................................. $ 8,621 $ 4,758 $ (3,908) $ (40,335) Net income (loss).................................................... $ 184 $ (2,668) $ (8,322) $ (32,292)(b) Earnings (loss) per share (c): Basic.............................................................. $ 0.01 $ (0.07) $ (0.22) $ (0.80) Diluted............................................................ $ 0.01 $ (0.07) $ (0.22) $ (0.80) 1997 Revenues............................................................. $ 61,314 $ 76,740 $ 77,177 $ 71,069 Gross profit (a)..................................................... $ 27,776 $ 23,953 $ 27,648 $ 20,104 Net income........................................................... $ 12,818 $ 9,174 $ 7,386 $ 7,738 Earnings per share (c): Basic.............................................................. $ 0.38 $ 0.27 $ 0.22 $ 0.23 Diluted............................................................ $ 0.36 $ 0.26 $ 0.21 $ 0.22
- ------------------------ (a) Represents revenues less lease operating, exploration, dry hole and impairment, and depreciation depletion and amortization expenses. (b) The net loss for the fourth quarter of 1998 includes an impairment charge of approximately $24,500,000 resulting from poor reservoir performance and persistent low oil and gas prices. (c) The sum of the individual quarterly earnings (loss) per share may not agree with year-to-date earnings (loss) per share as each quarterly computation is based on the weighted average number of common shares outstanding during that period. ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURES. Not applicable. 70 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. The information regarding nominees and continuing directors in the Company's definitive Proxy Statement for its annual meeting to be held on April 27, 1999, to be filed within 120 days of December 31, 1998 pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended (the Company's "1999 Proxy Statement"), is incorporated herein by reference. See also Item S-K 401(b) appearing in Part I of this Form 10-K. ITEM 11. EXECUTIVE COMPENSATION. The information regarding executive compensation in the Company's 1999 Proxy Statement, other than the information regarding the Compensation Committee Report on Executive Compensation, is incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. The information regarding ownership of the Company securities by management and certain other beneficial owners in the Company's 1999 Proxy Statement is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. The information regarding certain relationships and related transactions with management in the Company's 1999 Proxy Statement in incorporated herein by reference. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K. (a) Financial Statements and Supplementary Data, Financial Statement Schedules and Exhibits
PAGE ----- 1. Financial Statements and Supplementary Data: Report of Independent Public Accountants........................................... 41 Consolidated statements of income.................................................. 42 Consolidated balance sheets........................................................ 43 Consolidated statements of cash flows.............................................. 44 Consolidated statements of shareholders' equity.................................... 45 Notes to consolidated financial statements......................................... 46 Unaudited supplementary financial data............................................. 64 2. Financial Statement Schedules:
All Financial Statement Schedules have been omitted because they are not required, are not applicable or the information required has been included elsewhere herein. 71 3. Exhibits: *3.1 -- Restated Certificate of Incorporation of Pogo Producing Company. (Exhibit 3(a), Annual Report on Form 10-K for the year ended December 31, 1997, File No. 1-7792). *3.2 -- Certificate of Designation, Preferences and Rights of Preferred Stock of Pogo Producing Company, dated March 25, 1987. (Exhibit 3(a)(1), Annual Report on Form 10-K for the year ended December 31, 1987, File No. 0-5468). *3.3 -- Bylaws of Pogo Producing Company, as amended and restated through January 27, 1998 (Exhibit 3(b), Annual Report on Form 10-K for the year ended December 31, 1998,File No. 1-7792). *4.1 -- Amended and Restated Credit Agreement dated as of August 1, 1997 among Pogo Producing Company, certain commercial lending institutions, Bank of Montreal as the Agent and Banque Paribas as the Co-Agent. (Exhibit 4(a), Quarterly Report on Form 10-Q for the quarter ended, June 30, 1997, File No. 1-7792). * 4.2 -- First Amendment dated as of December 21, 1998, to Amended and Restated Credit Agreement dated as of August 1, 1997 among Pogo Producing Company, certain commercial lending institutions, Bank of Montreal as the Agent and Banque Paribas as the Co-Agent. (Exhibit 4.1, Amendment No. 1 to Quarterly Report on Form 10-Q for the quarter ended September 30, 1998, File No. 1-7792). *4.3 -- Indenture dated as of June 15, 1996 to Fleet National Bank, as Trustee. (Exhibit 4(f), Quarterly Report on Form 10-Q for the quarter ended June 30, 1996, File No. 001-7792). *4.4 -- Indenture dated as of May 15, 1997 between Pogo Producing Company and Fleet National Bank (now State Street Bank & Trust Company as successor in interest under the Indenture) as Trustee (Exhibit 4.3, Registration Statement on Form S-4, filed July 2, 1997, File No. 333-30613). *4.5 -- Indenture dated as of January 15,1999 between Pogo Producing Company and State Street Bank & Trust Company as Trustee (Exhibit 4.2, Registration Statement on Form S-4, filed February 10, 1999, File No. 333-72129). *4.6 -- Purchase Agreement dated January 12,1999 between Pogo Producing Company and Merrill Lynch & Co., Merrill Lynch, Pierce, Fenner & Smith Incorporated, and Goldman, Sachs & Co. (Exhibit 4.1, Registration Statement on Form S-4, filed February 10, 1999, File No. 333-72129). *4.7 -- Registration Rights Agreement dated January 15,1999 among Pogo Producing Company and Merrill Lynch & Co., Merrill Lynch, Pierce, Fenner & Smith Incorporated, and Goldman, Sachs & Co. (Exhibit 4.3, Registration Statement on Form S-4, filed February 10, 1999, File No. 333-72129). *4.8 -- Rights Agreement dated as of April 26, 1994 between Pogo Producing Company and Harris Trust Company of New York, as Rights Agent. (Exhibit 4, Current Report on Form 8-K filed April 26, 1994, File No. 1-7792). *4.9 -- Certificate of Designations of Series A Junior Participating Preferred Stock of Pogo Producing Company dated April 26, 1994. (Exhibit 4(d), Registration Statement on Form S-8 filed August 9, 1994, File No. 33-54969). Pogo Producing Company agrees to furnish to the Commission upon request a copy of any agreement defining the rights of holders of long-term debt of Pogo Producing Company and all its subsidiaries for which consolidated or unconsolidated financial statements are required to be filed under which the total amount of securities authorized does not exceed 10% of the total assets of Pogo Producing Company and its subsidiaries on a consolidated basis.
72 EXECUTIVE COMPENSATION PLANS AND ARRANGEMENTS (COMPRISING EXHIBITS 10.1 THROUGH 10.25, INCLUSIVE) *10.1 -- 1989 Incentive and Nonqualified Stock Option Plan of Pogo Producing Company, as amended and restated effective January 25, 1994. (Exhibit 99, Definitive Proxy Statement on Schedule 14A, filed March 22, 1994, File No. 1-7792). *10.2 -- Form of Stock Option Agreement under 1989 Incentive and Nonqualified Stock Option Plan, as amended and restated effective January 22, 1991. (Exhibit 10(d)(1), Annual Report on Form 10-K for the year ended December 31, 1991, File No. 0-5468). *10.3 -- Form of Director Stock Option Agreement under 1989 Incentive and Nonqualified Stock Option Plan as amended and restated effective January 22, 1991. (Exhibit 10(d)(2), Annual Report on Form 10-K for the year ended December 31, 1991, File No. 0-5468). *10.4 -- 1995 Long-Term Incentive Plan. (Exhibit 4(c), Registration Statement on Form S-8 filed May 22, 1996, File No. 333-04233). 10.5 -- 1998 Long-Term Incentive Plan. *10.6 -- Executive Employment Agreement by and between Pogo Producing Company and Stuart P. Burbach, dated February 1, 1996. (Exhibit 10(f)(1), Annual Report on Form 10-K for the year ended December 31, 1995, File No. 001-7792). 10.7 -- Extension Agreement to Continue Executive Employment Agreement by and between Pogo Producing Company and Stuart P. Burbach, dated effective February 1, 1999. *10.8 -- Executive Employment Agreement by and between Pogo Producing Company and Jerry A. Cooper, dated February 1, 1996. (Exhibit 10(f)(2), Annual Report on Form 10-K for the year ended December 31, 1995, File No. 001-7792). 10.9 -- Extension Agreement to Continue Executive Employment Agreement by and between Pogo Producing Company and Jerry A. Cooper, dated effective February 1, 1999. *10.10 -- Executive Employment Agreement by and between Pogo Producing Company and Kenneth R. Good, dated February 1, 1996. (Exhibit 10(f)(3), Annual Report on Form 10-K for the year ended December 31, 1995, File No. 001-7792). 10.11 -- Extension Agreement to Continue Executive Employment Agreement by and between Pogo Producing Company and Kenneth R. Good, dated effective February 1, 1999. *10.12 -- Executive Employment Agreement by and between Pogo Producing Company and R. Phillip Laney, dated February 1, 1996. (Exhibit 10(f)(4), Annual Report on Form 10-K for the year ended December 31, 1995, File No. 001-7792). 10.13 -- Extension Agreement to Continue Executive Employment Agreement by and between Pogo Producing Company and R. Phillip Laney, dated effective February 1, 1999. *10.14 -- Executive Employment Agreement by and between Pogo Producing Company and John O. McCoy, Jr., dated February 1, 1996. (Exhibit 10(f)(5), Annual Report on Form 10-K for the year ended December 31, 1995, File No. 001-7792). 10.15 -- Extension Agreement to Continue Executive Employment Agreement by and between Pogo Producing Company and John O. McCoy, Jr., dated effective February 1, 1999. *10.16 -- Executive Employment Agreement by and between Pogo Producing Company and Paul G. Van Wagenen, dated February 1, 1996. (Exhibit 10(f)(6), Annual Report on Form 10-K for the year ended December 31, 1995, File No. 001-7792). 10.17 -- Extension Agreement to Continue Executive Employment Agreement by and between Pogo Producing Company and Paul G. Van Wagenen, dated effective February 1, 1999. *10.18 -- Executive Employment Agreement by and between Pogo Producing Company and Bruce E. Archinal, dated as of February 1, 1998 (Exhibit 10(c)(7)(i), Annual Report on Form 10-K for the year ended December 31, 1997, File No. 001-7792).
73 10.19 -- Extension Agreement to Continue Executive Employment Agreement by and between Pogo Producing Company and Bruce E. Archinal, dated effective February 1, 1999. 10.20 -- Executive Employment Agreement by and between Pogo Producing Company and David R. Beathard, dated as of February 1, 1999. 10.21 -- Executive Employment Agreement by and between Pogo Producing Company and Stephen R. Brunner, dated as of February 1, 1999. 10.22 -- Executive Employment Agreement by and between Pogo Producing Company and J. D. McGregor, dated as of February 1, 1999. 10.23 -- Executive Employment Agreement by and between Pogo Producing Company and Gerald A. Morton, dated as of February 1, 1999. *10.24 -- Excess Benefits Letter Agreement by and between Pogo Producing Company and Kenneth R. Good, dated March 2, 1995. (Exhibit 10(g)(1), Annual Report on Form 10-K for the year ended December 31, 1995, File No. 001-7792). *10.25 -- Excess Benefits Letter Agreement by and between Pogo Producing Company and Paul G. Van Wagenen, dated March 2, 1995. (Exhibit 10(g)(2), Annual Report on Form 10-K for the year ended December 31, 1995, File No. 001-7792). 10.26 -- Amended and Restated Bareboat Charter Agreement by and between Tantawan Services, L.L.C. and Tantawan Production B.V., dated as of February 9,1996. 10.27 -- Bareboat Charter Agreement by and between Thaipo Limited, Thai Romo Limited, Palang Sophon Limited, B8/32 Partners Limited and Watertight Shipping B.V. dated as of August 24, 1998. *10.28 -- Gas Sales Agreement dated November 7, 1995, among The Petroleum Authority of Thailand, Thaipo, Limited, Thai Romo Ltd. and The Sophonpanich Co., Ltd. (Exhibit 10(k), Quarterly Report on Form 10-Q for the quarter ended June 30, 1996, File No. 001-7792). *10.29 -- The First Amendment to the Gas Sales Agreement dated November 12, 1997, among The Petroleum Authority of Thailand, B8/32 Partners Limited, Thaipo, Limited, Thai Romo Limited and Palang Sophon Limited (Exhibit 10(g)(ii), Annual Report on Form 10-K for the year ended December 31, 1998, File No. 001-7792). 21 -- List of Subsidiaries of Pogo Producing Company. 23.1 -- Consent of Independent Public Accountants. 23.2 -- Consent of Independent Petroleum Engineers. 24 -- Powers of Attorney from each Director of Pogo Producing Company whose signature is affixed to this Form 10-K for the year ended December 31, 1998. 27 -- Financial Data Schedule.
* Asterisk indicates exhibits incorporated by reference as shown. (b) Reports on Form 8-K None 74 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. POGO PRODUCING COMPANY (REGISTRANT) By: /s/ PAUL G. VAN WAGENEN ----------------------------------------- Paul G. Van Wagenen CHAIRMAN OF THE BOARD, PRESIDENT AND CHIEF EXECUTIVE OFFICER
Date: February 26, 1999 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities indicated on February 26, 1999.
SIGNATURES TITLE - ------------------------------ -------------------------- /s/ PAUL G. VAN WAGENEN - ------------------------------ Paul G. Van Wagenen Principal Executive CHAIRMAN OF THE BOARD, Officer and Director PRESIDENT AND CHIEF EXECUTIVE OFFICER /s/ JOHN W. ELSENHANS - ------------------------------ John W. Elsenhans Principal Financial VICE PRESIDENT AND CHIEF Officer FINANCIAL OFFICER /s/ THOMAS E. HART - ------------------------------ Principal Accounting Thomas E. Hart Officer VICE PRESIDENT AND CONTROLLER JERRY M. ARMSTRONG* - ------------------------------ Director Jerry M. Armstrong TOBIN ARMSTRONG* - ------------------------------ Director Tobin Armstrong
75
SIGNATURES TITLE - ------------------------------ -------------------------- JACK S. BLANTON* - ------------------------------ Director Jack S. Blanton W. M. BRUMLEY, JR.* - ------------------------------ Director W. M. Brumley, Jr. JOHN B. CARTER, JR.* - ------------------------------ Director John B. Carter, Jr. WILLIAM L. FISHER* - ------------------------------ Director William L. Fisher GERRIT W. GONG* - ------------------------------ Director Gerrit W. Gong J. STUART HUNT* - ------------------------------ Director J. Stuart Hunt FREDERICK A. KLINGENSTEIN* - ------------------------------ Director Frederick A. Klingenstein JACK A. VICKERS* - ------------------------------ Director Jack A. Vickers
*By: /s/ THOMAS E. HART ------------------------- Thomas E. Hart ATTORNEY-IN-FACT
76 EX-10.5 2 EXHIBIT 10.5 1998 INCENTIVE PLAN OF POGO PRODUCING COMPANY 1. OBJECTIVES. The Pogo Producing Company 1998 Incentive Plan (the "Plan") is designed to retain key employees, to encourage the sense of proprietorship of such employees and to stimulate the active interest of such persons in the development and financial success of Pogo Producing Company, a Delaware corporation (the "Company"), and its Subsidiaries (as hereinafter defined). These objectives are to be accomplished by making awards under the Plan and thereby providing Participants (as hereinafter defined) with a proprietary interest in the growth and performance of the Company and its Subsidiaries. 2. DEFINITIONS. As used herein, the terms set forth below shall have the following respective meanings: "Award" means the grant of any form of nonqualified stock option or stock appreciation right, stock award or cash award, whether granted singly, in combination or in tandem, to a Participant who is an employee pursuant to any applicable terms, conditions and limitations as the Committee may establish in order to fulfill the objectives of the Plan. "Award Agreement" means a written agreement between the Company and a Participant that sets forth the terms, conditions and limitations applicable to an Award. "Board" means the Board of Directors of the Company. "Code" means the Internal Revenue Code of 1986, as amended from time to time. "Committee" means the Compensation Committee of the Board or such other committee of the Board as is designated by the Board to administer the Plan. "Common Stock" means the Common Stock, par value $1.00 per share, of the Company. "Fair Market Value" means, as of a particular date, (i) if shares of Common Stock are listed on a national securities exchange, the mean between the highest and lowest sales price per share of Common Stock on the consolidated transaction reporting system for the principal such national securities exchange on that date, or, if there shall have been no such sale so reported on that date, on the last preceding date on which such a sale was so reported, (ii) if shares of Common Stock are not so listed but are quoted on the NASDAQ National Market System, the mean between the highest and lowest sales price per share of Common Stock on the NASDAQ National Market System on that -1- date, or, if there shall have been no such sale so reported on that date, on the last preceding date on which such a sale was so reported or (iii) if the Common Stock is not so listed or quoted, the mean between the closing bid and asked price on that date, or, if there are no quotations available for such date, on the last preceding date on which such quotations shall be available, as reported by NASDAQ, or, if not reported by NASDAQ, by the National Quotation Bureau, Inc. "Participant" means an employee of the Company or any of its Subsidiaries to whom an Award has been made under this Plan. "Subsidiary" means any corporation of which the Company directly or indirectly owns shares representing more than 50% of the voting power of all classes or series of capital stock of such corporation which have the right to vote generally on matters submitted to a vote of the shareholders of such corporation. 3. ELIGIBILITY. Key employees of the Company and its Subsidiaries eligible for an Award under this Plan are those who hold positions of responsibility and whose performance, in the judgment of the Committee, can have a significant effect on the success of the Company and its Subsidiaries. 4. COMMON STOCK AVAILABLE FOR AWARDS. There shall be available for Awards granted wholly or partly in Common Stock (including rights or options which may be exercised for or settled in Common Stock) during the term of this Plan an aggregate of 500,000 shares of Common Stock. The Board and the appropriate officers of the Company shall from time to time take whatever actions are necessary to file required documents with governmental authorities and stock exchanges and transaction reporting systems to make shares of Common Stock available for issuance pursuant to Awards. Common Stock related to Awards that are forfeited or terminated, expire unexercised, are settled in cash in lieu of Stock or in a manner such that all or some of the shares covered by an Award are not issued to a Participant, or are exchanged for Awards that do not involve Common Stock, shall immediately become available for Awards hereunder. The Committee may from time to time adopt and observe such procedures concerning the counting of shares against the Plan maximum as it may deem appropriate. 5. ADMINISTRATION. This Plan shall be administered by the Committee, which shall have full and exclusive power to interpret this Plan and to adopt such rules, regulations and guidelines for carrying out this Plan as it may deem necessary or proper, all of which powers shall be exercised in the best interests of the Company and in keeping with the objectives of this Plan. The Committee shall consist of at least two members of the Board. The Committee may, in its discretion, provide for the extension of the exercisability of an Award, accelerate the vesting or exercisability of an Award, eliminate or make less restrictive any restrictions contained in an Award, waive any restriction or other provision of this Plan or an Award or otherwise amend or modify an Award in any manner that is either (i) not adverse to the Participant holding such Award or (ii) consented to by such Participant. The Committee may correct any defect or supply any omission or reconcile any inconsistency in this Plan or in any Award in the manner and to the extent the Committee deems necessary -2- or desirable to carry it into effect. Any decision of the Committee in the interpretation and administration of this Plan shall lie within its sole and absolute discretion and shall be final, conclusive and binding on all parties concerned. No member of the Committee or officer of the Company to whom it has delegated authority in accordance with the provisions of Paragraph 6 of this Plan shall be liable for anything done or omitted to be done by him or her, by any member of the Committee or by any officer of the Company in connection with the performance of any duties under this Plan. 6. DELEGATION OF AUTHORITY. The Committee may delegate to the Chief Executive Officer and to other senior officers of the Company its duties under this Plan pursuant to such conditions or limitations as the Committee may establish. 7. AWARDS. The Committee shall determine the type or types of Awards to be made to each Participant under this Plan. Each Award made hereunder shall be embodied in an Award Agreement, which shall contain such terms, conditions and limitations as shall be determined by the Committee in its sole discretion and shall be signed by the Participant and by the Chief Executive Officer or the Chief Administrative Officer of the Company for and on behalf of the Company. Awards may consist of those listed in this Paragraph 7 and may be granted singly, in combination or in tandem. Awards may also be made in combination or in tandem with, in replacement of, or as alternatives to, grants or rights under this Plan or any other employee plan of the Company or any of its Subsidiaries, including the plan of any acquired entity. An Award may provide for the granting or issuance of additional, replacement or alternative Awards upon the occurrence of specified events, including the exercise of the original Award granted to a Participant. (a) STOCK OPTION. An Award may consist of a right to purchase a specified number of shares of Common Stock at a specified price that is not less than the greater of (i) 50% of the Fair Market Value of the Common Stock on the date of grant and (ii) the par value of the Common Stock on the date of grant. (b) STOCK APPRECIATION RIGHT. An Award may consist of a right to receive a payment, in cash or Common Stock, equal to the excess of the Fair Market Value or other specified valuation of a specified number of shares of Common Stock on the date the stock appreciation right ("SAR") is exercised over a specified strike price, as set forth in the applicable Award Agreement. (c) STOCK AWARD. An Award may consist of Common Stock or may be denominated in units of Common Stock. All or part of any stock award may be subject to conditions established by the Committee, and set forth in the Award Agreement, which may include, but are not limited to, continuous service with the Company and its Subsidiaries, achievement of specific business objectives, increases in specified indices, attaining specified growth rates and other comparable measurements of performance. Such Awards may be based on Fair Market Value or other specified valuations. The certificates evidencing shares of Common Stock issued in connection with a stock award shall contain appropriate legends and restrictions describing the terms and conditions of the restrictions applicable thereto. As -3- used herein, "Restricted Stock" means Common Stock that is restricted or subject to forfeiture provisions. (d) CASH AWARD. An Award may be denominated in cash with the amount of the eventual payment subject to future service and such other restrictions and conditions as may be established by the Committee, and set forth in the Award Agreement, including, but not limited to, continuous service with the Company and its Subsidiaries, achievement of specific business objectives, increases in specified indices, attaining specified growth rates and other comparable measurements of performance. 8. PAYMENT OF AWARDS. (a) GENERAL. Payment of Awards may be made in the form of cash or Common Stock or combinations thereof and may include such restrictions as the Committee shall determine, including, in the case of Common Stock, restrictions on transfer and forfeiture provisions. (b) DEFERRAL. With the approval of the Committee, payments in respect of Awards may be deferred, either in the form of installments or a future lump sum payment. The Committee may permit selected Participants to elect to defer payments of some or all types of Awards in accordance with procedures established by the Committee. Any deferred payment, whether elected by the Participant or specified by the Award Agreement or by the Committee, may be forfeited if and to the extent that the Award Agreement so provides. (c) DIVIDENDS AND INTEREST. Dividends or dividend equivalent rights may be extended to and made part of any Award denominated in Common Stock or units of Common Stock, subject to such terms, conditions and restrictions as the Committee may establish. The Committee may also establish rules and procedures for the crediting of interest on deferred cash payments and dividend equivalents for deferred payments denominated in Common Stock or units of Common Stock. (d) SUBSTITUTION OF AWARDS. At the discretion of the Committee, a Participant may be offered an election to substitute an Award for another Award or Awards of the same or different type. 9. STOCK OPTION EXERCISE. The price at which shares of Common Stock may be purchased under a stock option shall be paid in full at the time of exercise in cash or, if elected by the optionee, the optionee may purchase such shares by means of tendering Common Stock or surrendering another Award, including Restricted Stock, valued at Fair Market Value on the date of exercise, or any combination thereof. The Committee shall determine acceptable methods for tendering Common Stock or other Awards to exercise a stock option as it deems appropriate. If permitted by the Committee, payment may be made by successive exercises by the Participant. The Committee may provide for loans from the Company to an employee to permit the exercise or purchase of -4- Awards and may provide for procedures to permit the exercise or purchase of Awards by use of the proceeds to be received from the sale of Common Stock issuable pursuant to an Award. Unless otherwise provided in the applicable Award Agreement, in the event shares of Restricted Stock are tendered as consideration for the exercise of a stock option, a number of the shares issued upon the exercise of the stock option, equal to the number of shares of Restricted Stock used as consideration therefor, shall be subject to the same restrictions as the Restricted Stock so submitted as well as any additional restrictions that may be imposed by the Committee. 10. TAX WITHHOLDING. The Company shall have the right to deduct applicable taxes from any Award payment and withhold, at the time of delivery or vesting of cash or shares of Common Stock under this Plan, an appropriate amount of cash or number of shares of Common Stock or a combination thereof for payment of taxes required by law or to take such other action as may be necessary in the opinion of the Company to satisfy all obligations for withholding of such taxes. The Committee may also permit withholding to be satisfied by the transfer to the Company of shares of Common Stock theretofore owned by the holder of the Award with respect to which withholding is required. If shares of Common Stock are used to satisfy tax withholding, such shares shall be valued based on the Fair Market Value when the tax withholding is required to be made. 11. AMENDMENT, MODIFICATION, SUSPENSION OR TERMINATION. The Board may amend, modify, suspend or terminate this Plan for the purpose of meeting or addressing any changes in legal requirements or for any other purpose permitted by law, except that no amendment or alteration that would impair the rights of any Participant under any Award previously granted to such Participant shall be made without such Participant's consent. 12. TERMINATION OF EMPLOYMENT. Upon the termination of employment by a Participant, any unexercised, deferred or unpaid Awards shall be treated as provided in the specific Award Agreement evidencing the Award. In the event of such a termination, the Committee may, in its discretion, provide for the extension of the exercisability of an Award, accelerate the vesting or exercisability of an Award, eliminate or make less restrictive any restrictions contained in an Award, waive any restriction or other provision of this Plan or an Award or otherwise amend or modify the Award in any manner that is either (i) not adverse to such Participant or (ii) consented to by such Participant. 13. ASSIGNABILITY. Unless otherwise determined by the Committee and provided in the Award Agreement, no Award or any other benefit under this Plan shall be assignable or otherwise transferable except by will or the laws of descent and distribution or pursuant to a qualified domestic relations order as defined by the Code or Title I of the Employee Retirement Income Security Act, or the rules thereunder. The Committee may prescribe and include in applicable Award Agreements other restrictions on transfer. Any attempted assignment of an Award or any other benefit under this Plan in violation of this Paragraph 13 shall be null and void. -5- 14. ADJUSTMENTS. (a) The existence of outstanding Awards shall not affect in any manner the right or power of the Company or its shareholders to make or authorize any or all adjustments, recapitalizations, reorganizations or other changes in the capital stock of the Company or its business or any merger or consolidation of the Company, or any issue of bonds, debentures, preferred or prior preference stock (whether or not such issue is prior to, on a parity with or junior to the Common Stock) or Common Stock or the dissolution or liquidation of the Company, or any sale or transfer of all or any part of its assets or business, or any other corporate act or proceeding of any kind, whether or not of a character similar to that of the acts or proceedings enumerated above. (b) In the event of any subdivision or consolidation of outstanding shares of Common Stock or declaration of a dividend payable in shares of Common Stock or capital reorganization or reclassification or other transaction involving an increase or reduction in the number of outstanding shares of Common Stock, then (i) the number of shares of Common Stock reserved under this Plan and covered by outstanding Awards denominated in Common Stock or units of Common Stock, (ii) the exercise or other price in respect of such Awards and (iii) the appropriate Fair Market Value and other price determinations for such Awards hereof shall each be proportionately adjusted by the Board to reflect such transaction. In the event of any consolidation or merger of the Company with another corporation or entity, or the adoption by the Company of a plan of exchange affecting the Common Stock or any distribution to holders of Common Stock of securities or property (other than normal cash dividends or dividends payable in Common Stock), the Board shall make appropriate adjustments to (i) the number of shares of Common Stock reserved under this Plan and covered by outstanding Awards denominated in Common Stock or units of Common Stock, (ii) the exercise or other price in respect of such Awards and (iii) the appropriate Fair Market Value and other price determinations for such Awards to give effect to such transaction; provided that such adjustments shall only be such as necessary to maintain the proportionate interest of the holders of the Awards and preserve, without exceeding, the value of such Awards. In the event of a corporate merger, consolidation, acquisition of property or stock, separation, reorganization or liquidation, the Board shall be authorized to issue or assume Awards by means of substitution of new Awards, as appropriate, for previously issued Awards or an assumption of previously issued Awards as part of such adjustment. 15. RESTRICTIONS. No Common Stock or other form of payment shall be issued with respect to any Award unless the Company shall be satisfied based on the advice of its counsel that such issuance will be in compliance with applicable federal and state securities laws. Certificates evidencing shares of Common Stock delivered under this Plan may be subject to such stop transfer orders and other restrictions as the Committee may deem advisable under the rules, regulations and other requirements of the Securities and Exchange Commission, any securities exchange or transaction reporting system upon which the Common Stock is then listed and any applicable federal -6- and state securities laws. The Committee may cause a legend or legends to be placed upon any such certificates to make appropriate reference to such restrictions. 16. UNFUNDED PLAN. Insofar as it provides for Awards of cash, Common Stock or rights thereto, this Plan shall be unfunded. Although bookkeeping accounts may be established with respect to Participants who are entitled to cash, Common Stock or rights thereto under this Plan, any such accounts shall be used merely as a bookkeeping convenience. The Company shall not be required to segregate any assets that may at any time be represented by cash, Common Stock or rights thereto, nor shall this Plan be construed as providing for such segregation, nor shall the Company nor the Board nor the Committee be deemed to be a trustee of any cash, Common Stock or rights thereto to be granted under this Plan. Any liability or obligation of the Company to any Participant with respect to a grant of cash, Common Stock or rights thereto under this Plan shall be based solely upon any contractual obligations that may be created by this Plan and any Award Agreement, and no such liability or obligation of the Company shall be deemed to be secured by any pledge or other encumbrance on any property of the Company. Neither the Company nor the Board nor the Committee shall be required to give any security or bond for the performance of any obligation that may be created by this Plan. 17. GOVERNING LAW. This Plan and all determinations made and actions taken pursuant hereto, to the extent not otherwise governed by mandatory provisions of the Code or the securities laws of the United States, shall be governed by and construed in accordance with the laws of the State of Delaware. 18. EFFECTIVE DATE OF PLAN. This Plan shall be effective as of October 27, 1998, the date (the "Effective Date") it was approved by the Board. 19. PERMITTED TRANSFERS. The Committee may, in its discretion, authorize all or a portion of the Awards to be granted to a Participant to be on terms which permit transfer by such Participant to the following "Permitted Assignees:" (a) any person who is a sibling of a Participant, a Parent of a Participant, or the spouse of Participant or a descendant of Participant, including any person adopted by Participant or by any of Participant's descendants, and including the descendants of any such adopted person, provided that the adoption is completed before the adopted person is eighteen years of age; (b) the trustees of any trust holding properties with respect to which Permitted Assignees and Participant actuarially comprise more than seventy-five percent (75%) of the beneficial ownership at the time of the assignment, determined as provided below; and -7- (c) any corporation or other business entity which is wholly owned by Permitted Assignees and Participant at the time of the assignment (directly or indirectly). In making the determination whether Permitted Assignees actuarially comprise more than seventy-five percent (75%) of the beneficial ownership of properties held in a trust at the time of an assignment to the trustees of the trust, the following beneficial interests in the trust shall be ignored: (a) any beneficial interest of a person who is lawfully married to a Permitted Assignee at the time of the assignment or who had been married to a Permitted Assignee at the time of the Permitted Assignee's death and has not remarried at the time of the assignment; and (b) any beneficial interest represented by the existence of any power of appointment over the trust properties, even though the actual exercise of the power of appointment may constitute an assignment. The beneficial interests which are not ignored as provided above (the "Relevant Interests") shall be divided into two categories, those which are held for Permitted Assignees and those which are not, and each category shall be valued as provided under section 2512(a) of the Internal Revenue Code of 1986, as amended, as if the beneficial interests were then assigned, even if those interests are not assignable. Permitted Assignees shall be deemed to comprise more than seventy-five percent (75%) of the beneficial ownership of properties held in a trust at the time of an assignment to the trustees of the trust if the value of the Relevant Interests which are held for Permitted Assignees is more than three times the value of the Relevant Interests which are not held for Permitted Assignees. Notwithstanding the foregoing, (x) there may be no consideration for any such transfer, (y), if applicable, the Award Agreement pursuant to which such Award is granted must be approved by the Committee, and must expressly provide for transferability in a manner consistent with this Paragraph 19, and (z) subsequent transfers of transferred Awards, shall be prohibited except those in accordance with Paragraph 13. Following transfer, any such Awards shall continue to be subject to the same terms and conditions as were applicable immediately prior to transfer, provided that (i) in the event of termination of employment, Paragraph 12 hereof shall continue to be applied with respect to the original Participant, following which the Awards shall be exercisable by the transferee only to the extent, and for the periods specified in the Paragraph 12 and the applicable Award Agreement, (ii) the original Participant shall remain subject to the withholding tax provisions of Paragraph 10, and (iii) the Company shall have no duty or obligation to provide notice to a transferee of any action or event affecting the rights of the transferee under the Plan including, without limitation, any amendment, modification, suspension or termination of the Plan pursuant to Paragraph 11, the early termination of an Award pursuant to Paragraph 12, or adjustments to the amount of the Awards pursuant to Paragraph 14. -8- EX-10.7 3 EXHIBIT 10.7 EXTENSION AGREEMENT TO CONTINUE EMPLOYMENT AGREEMENT BETWEEN STUART P. BURBACH ("EXECUTIVE") AND POGO PRODUCING COMPANY, A DELAWARE CORPORATION ("COMPANY"), DATED EFFECTIVE FEBRUARY 1, 1999 WHEREAS, Executive and Company are parties to an "Employment Agreement" bearing an original "Effective Date" of February 1, 1996; and WHEREAS, February 1, 1999, (even date herewith) is hereby deemed to be the "Renewal Date" in that Employment Agreement; and WHEREAS, Executive and Company each wish to extend said Employment Agreement for an additional one-year period so as to terminate (unless further extended) two years thereafter, (to-wit January 31, 2001); and WHEREAS, Company desires to retain the services of Executive for the benefit of Company and its shareholders, and desires to induce Executive to remain in its employ for that extended time period; and WHEREAS, Executive has agreed to continue to serve as an employee of Company for the period specified herein from and after the date of this Extension Agreement; and WHEREAS, Company and Executive desire to enter into this Extension Agreement in order to formally secure for Company the benefit of the experience and abilities of Executive, and to set forth the agreements and understandings of Company and Executive; and WHEREAS, Company has advised Executive that execution and performance of this Extension Agreement by Company has been duly authorized and approved by all requisite corporate action on the part of the Company. NOW, THEREFORE, in consideration of the foregoing and the mutual promises and agreements herein contained, and in consideration of the sum of $10 paid by Company to Executive, receipt whereof is hereby acknowledged by Executive, Executive and Company do hereby agree as follows: 1. The Employment Agreement between Executive and Company bearing an "Effective Date" of February 1, 1996 and a "Renewal Date" which is deemed herein to be February 1, 1999, is hereby extended for an additional one-year period commencing February 1, 1999 and ending January 31, 2001, unless such employment period is hereafter further extended for an additional period by both Executive and Company. 2. All provisions of the Employment Agreement between Executive and Company dated as of February 1, 1996, and as it is herein amended, are continued in full force and effect without change as if the Employment Agreement had been initially effective as of February 1, 1999. POGO PRODUCING COMPANY By: /s/ JOHN O. MCCOY, JR. ---------------------- Senior Vice President and Chief Administrative Officer ATTEST: /s/ JOE ANN KINGDON - ------------------- Assistant Corporate Secretary EMPLOYEE: /s/ STUART P. BURBACH --------------------- EX-10.9 4 EXHIBIT 10.9 EXTENSION AGREEMENT TO CONTINUE EMPLOYMENT AGREEMENT BETWEEN JERRY A. COOPER ("EXECUTIVE") AND POGO PRODUCING COMPANY, A DELAWARE CORPORATION ("COMPANY"), DATED EFFECTIVE FEBRUARY 1, 1999 WHEREAS, Executive and Company are parties to an "Employment Agreement" bearing an original "Effective Date" of February 1, 1996; and WHEREAS, February 1, 1999, (even date herewith) is hereby deemed to be the "Renewal Date" in that Employment Agreement; and WHEREAS, Executive and Company each wish to extend said Employment Agreement for an additional one-year period so as to terminate (unless further extended) two years thereafter, (to-wit January 31, 2001); and WHEREAS, Company desires to retain the services of Executive for the benefit of Company and its shareholders, and desires to induce Executive to remain in its employ for that extended time period; and WHEREAS, Executive has agreed to continue to serve as an employee of Company for the period specified herein from and after the date of this Extension Agreement; and WHEREAS, Company and Executive desire to enter into this Extension Agreement in order to formally secure for Company the benefit of the experience and abilities of Executive, and to set forth the agreements and understandings of Company and Executive; and WHEREAS, Company has advised Executive that execution and performance of this Extension Agreement by Company has been duly authorized and approved by all requisite corporate action on the part of the Company. NOW, THEREFORE, in consideration of the foregoing and the mutual promises and agreements herein contained, and in consideration of the sum of $10 paid by Company to Executive, receipt whereof is hereby acknowledged by Executive, Executive and Company do hereby agree as follows: 1. The Employment Agreement between Executive and Company bearing an "Effective Date" of February 1, 1996 and a "Renewal Date" which is deemed herein to be February 1, 1999, is hereby extended for an additional one-year period commencing February 1, 1999 and ending January 31, 2001, unless such employment period is hereafter further extended for an additional period by both Executive and Company. 2. All provisions of the Employment Agreement between Executive and Company dated as of February 1, 1996, and as it is herein amended, are continued in full force and effect without change as if the Employment Agreement had been initially effective as of February 1, 1999. POGO PRODUCING COMPANY By: /s/ JOHN O. MCCOY, JR. ---------------------- Senior Vice President and Chief Administrative Officer ATTEST: /s/ JOE ANN KINGDON - ------------------- Assistant Corporate Secretary EMPLOYEE: /s/ JERRY A. COOPER ------------------- EX-10.11 5 EXHIBIT 10.11 EXTENSION AGREEMENT TO CONTINUE EMPLOYMENT AGREEMENT BETWEEN KENNETH R. GOOD ("EXECUTIVE") AND POGO PRODUCING COMPANY, A DELAWARE CORPORATION ("COMPANY"), DATED EFFECTIVE FEBRUARY 1, 1999 WHEREAS, Executive and Company are parties to an "Employment Agreement" bearing an original "Effective Date" of February 1, 1996; and WHEREAS, February 1, 1999, (even date herewith) is hereby deemed to be the "Renewal Date" in that Employment Agreement; and WHEREAS, Executive and Company each wish to extend said Employment Agreement for an additional one-year period so as to terminate (unless further extended) two years thereafter, (to-wit January 31, 2001); and WHEREAS, Company desires to retain the services of Executive for the benefit of Company and its shareholders, and desires to induce Executive to remain in its employ for that extended time period; and WHEREAS, Executive has agreed to continue to serve as an employee of Company for the period specified herein from and after the date of this Extension Agreement; and WHEREAS, Company and Executive desire to enter into this Extension Agreement in order to formally secure for Company the benefit of the experience and abilities of Executive, and to set forth the agreements and understandings of Company and Executive; and WHEREAS, Company has advised Executive that execution and performance of this Extension Agreement by Company has been duly authorized and approved by all requisite corporate action on the part of the Company. NOW, THEREFORE, in consideration of the foregoing and the mutual promises and agreements herein contained, and in consideration of the sum of $10 paid by Company to Executive, receipt whereof is hereby acknowledged by Executive, Executive and Company do hereby agree as follows: 1. The Employment Agreement between Executive and Company bearing an "Effective Date" of February 1, 1996 and a "Renewal Date" which is deemed herein to be February 1, 1999, is hereby extended for an additional one-year period commencing February 1, 1999 and ending January 31, 2001, unless such employment period is hereafter further extended for an additional period by both Executive and Company. 2. All provisions of the Employment Agreement between Executive and Company dated as of February 1, 1996, and as it is herein amended, are continued in full force and effect without change as if the Employment Agreement had been initially effective as of February 1, 1999. POGO PRODUCING COMPANY By: /s/ JOHN O. MCCOY, JR. ----------------------------------- Senior Vice President and Chief Administrative Officer ATTEST: /s/ JOE ANN KINGDON - ----------------------------- Assistant Corporate Secretary EMPLOYEE: /s/ KENNETH R. GOOD ------------------- EX-10.13 6 EXHIBIT 10.13 EXTENSION AGREEMENT TO CONTINUE EMPLOYMENT AGREEMENT BETWEEN RADFORD P. LANEY ("EXECUTIVE") AND POGO PRODUCING COMPANY, A DELAWARE CORPORATION ("COMPANY"), DATED EFFECTIVE FEBRUARY 1, 1999 WHEREAS, Executive and Company are parties to an "Employment Agreement" bearing an original "Effective Date" of February 1, 1996; and WHEREAS, February 1, 1999, (even date herewith) is hereby deemed to be the "Renewal Date" in that Employment Agreement; and WHEREAS, Executive and Company each wish to extend said Employment Agreement for an additional one-year period so as to terminate (unless further extended) two years thereafter, (to-wit January 31, 2001); and WHEREAS, Company desires to retain the services of Executive for the benefit of Company and its shareholders, and desires to induce Executive to remain in its employ for that extended time period; and WHEREAS, Executive has agreed to continue to serve as an employee of Company for the period specified herein from and after the date of this Extension Agreement; and WHEREAS, Company and Executive desire to enter into this Extension Agreement in order to formally secure for Company the benefit of the experience and abilities of Executive, and to set forth the agreements and understandings of Company and Executive; and WHEREAS, Company has advised Executive that execution and performance of this Extension Agreement by Company has been duly authorized and approved by all requisite corporate action on the part of the Company. NOW, THEREFORE, in consideration of the foregoing and the mutual promises and agreements herein contained, and in consideration of the sum of $10 paid by Company to Executive, receipt whereof is hereby acknowledged by Executive, Executive and Company do hereby agree as follows: 1. The Employment Agreement between Executive and Company bearing an "Effective Date" of February 1, 1996 and a "Renewal Date" which is deemed herein to be February 1, 1999, is hereby extended for an additional one-year period commencing February 1, 1999 and ending January 31, 2001, unless such employment period is hereafter further extended for an additional period by both Executive and Company. 2. All provisions of the Employment Agreement between Executive and Company dated as of February 1, 1996, and as it is herein amended, are continued in full force and effect without change as if the Employment Agreement had been initially effective as of February 1, 1999. POGO PRODUCING COMPANY By: /s/ JOHN O. MCCOY, JR. ----------------------------------- Senior Vice President and Chief Administrative Officer ATTEST: /s/ JOE ANN KINGDON - ----------------------------- Assistant Corporate Secretary EMPLOYEE: /s/ RADFORD P. LANEY -------------------- EX-10.15 7 EXHIBIT 10.15 EXTENSION AGREEMENT TO CONTINUE EMPLOYMENT AGREEMENT BETWEEN JOHN O. MCCOY, JR. ("EXECUTIVE") AND POGO PRODUCING COMPANY, A DELAWARE CORPORATION ("COMPANY"), DATED EFFECTIVE FEBRUARY 1, 1999 WHEREAS, Executive and Company are parties to an "Employment Agreement" bearing an original "Effective Date" of February 1, 1996; and WHEREAS, February 1, 1999, (even date herewith) is hereby deemed to be the "Renewal Date" in that Employment Agreement; and WHEREAS, Executive and Company each wish to extend said Employment Agreement for an additional one-year period so as to terminate (unless further extended) two years thereafter, (to-wit January 31, 2001); and WHEREAS, Company desires to retain the services of Executive for the benefit of Company and its shareholders, and desires to induce Executive to remain in its employ for that extended time period; and WHEREAS, Executive has agreed to continue to serve as an employee of Company for the period specified herein from and after the date of this Extension Agreement; and WHEREAS, Company and Executive desire to enter into this Extension Agreement in order to formally secure for Company the benefit of the experience and abilities of Executive, and to set forth the agreements and understandings of Company and Executive; and WHEREAS, Company has advised Executive that execution and performance of this Extension Agreement by Company has been duly authorized and approved by all requisite corporate action on the part of the Company. NOW, THEREFORE, in consideration of the foregoing and the mutual promises and agreements herein contained, and in consideration of the sum of $10 paid by Company to Executive, receipt whereof is hereby acknowledged by Executive, Executive and Company do hereby agree as follows: 1. The Employment Agreement between Executive and Company bearing an "Effective Date" of February 1, 1996 and a "Renewal Date" which is deemed herein to be February 1, 1999, is hereby extended for an additional one-year period commencing February 1, 1999 and ending January 31, 2001, unless such employment period is hereafter further extended for an additional period by both Executive and Company. 2. All provisions of the Employment Agreement between Executive and Company dated as of February 1, 1996, and as it is herein amended, are continued in full force and effect without change as if the Employment Agreement had been initially effective as of February 1, 1999. POGO PRODUCING COMPANY By: /s/ PAUL G. VAN WAGENEN ------------------------------- Chairman, President and Chief Executive Officer ATTEST: /s/ JOE ANN KINGDON - ------------------- Assistant Corporate Secretary EMPLOYEE: /s/ JOHN O. MCCOY, JR. ---------------------- EX-10.17 8 EXHIBIT 10.17 EXTENSION AGREEMENT TO CONTINUE EMPLOYMENT AGREEMENT BETWEEN PAUL G. VAN WAGENEN ("EXECUTIVE") AND POGO PRODUCING COMPANY, A DELAWARE CORPORATION ("COMPANY"), DATED EFFECTIVE FEBRUARY 1, 1999 WHEREAS, Executive and Company are parties to an "Employment Agreement" bearing an original "Effective Date" of February 1, 1996; and WHEREAS, February 1, 1999, (even date herewith) is hereby deemed to be the "Renewal Date" in that Employment Agreement; and WHEREAS, Executive and Company each wish to extend said Employment Agreement for an additional one-year period so as to terminate (unless further extended) two years thereafter, (to-wit January 31, 2001); and WHEREAS, Company desires to retain the services of Executive for the benefit of Company and its shareholders, and desires to induce Executive to remain in its employ for that extended time period; and WHEREAS, Executive has agreed to continue to serve as an employee of Company for the period specified herein from and after the date of this Extension Agreement; and WHEREAS, Company and Executive desire to enter into this Extension Agreement in order to formally secure for Company the benefit of the experience and abilities of Executive, and to set forth the agreements and understandings of Company and Executive; and WHEREAS, Company has advised Executive that execution and performance of this Extension Agreement by Company has been duly authorized and approved by all requisite corporate action on the part of the Company. NOW, THEREFORE, in consideration of the foregoing and the mutual promises and agreements herein contained, and in consideration of the sum of $10 paid by Company to Executive, receipt whereof is hereby acknowledged by Executive, Executive and Company do hereby agree as follows: 1. The Employment Agreement between Executive and Company bearing an "Effective Date" of February 1, 1996 and a "Renewal Date" which is deemed herein to be February 1, 1999, is hereby extended for an additional one-year period commencing February 1, 1999 and ending January 31, 2001, unless such employment period is hereafter further extended for an additional period by both Executive and Company. 2. All provisions of the Employment Agreement between Executive and Company dated as of February 1, 1996, and as it is herein amended, are continued in full force and effect without change as if the Employment Agreement had been initially effective as of February 1, 1999. POGO PRODUCING COMPANY By: /S/ JOHN O. MCCOY, JR. ------------------------------ Senior Vice President and Chief Administrative Officer ATTEST: /S/ JOE ANN KINGDON - ------------------- Assistant Corporate Secretary EMPLOYEE: /S/ PAUL G. VAN WAGENEN ----------------------- EX-10.19 9 EXHIBIT 10.19 EXTENSION AGREEMENT TO CONTINUE EMPLOYMENT AGREEMENT BETWEEN BRUCE E. ARCHINAL ("EXECUTIVE") AND POGO PRODUCING COMPANY, A DELAWARE CORPORATION ("COMPANY"), DATED EFFECTIVE FEBRUARY 1, 1999 WHEREAS, Executive and Company are parties to an "Employment Agreement" bearing an original "Effective Date" of February 1, 1996; and WHEREAS, February 1, 1999, (even date herewith) is hereby deemed to be the "Renewal Date" in that Employment Agreement; and WHEREAS, Executive and Company each wish to extend said Employment Agreement for an additional one-year period so as to terminate (unless further extended) two years thereafter, (to-wit January 31, 2001); and WHEREAS, Company desires to retain the services of Executive for the benefit of Company and its shareholders, and desires to induce Executive to remain in its employ for that extended time period; and WHEREAS, Executive has agreed to continue to serve as an employee of Company for the period specified herein from and after the date of this Extension Agreement; and WHEREAS, Company and Executive desire to enter into this Extension Agreement in order to formally secure for Company the benefit of the experience and abilities of Executive, and to set forth the agreements and understandings of Company and Executive; and WHEREAS, Company has advised Executive that execution and performance of this Extension Agreement by Company has been duly authorized and approved by all requisite corporate action on the part of the Company. NOW, THEREFORE, in consideration of the foregoing and the mutual promises and agreements herein contained, and in consideration of the sum of $10 paid by Company to Executive, receipt whereof is hereby acknowledged by Executive, Executive and Company do hereby agree as follows: 1. The Employment Agreement between Executive and Company bearing an "Effective Date" of February 1, 1996 and a "Renewal Date" which is deemed herein to be February 1, 1999, is hereby extended for an additional one-year period commencing February 1, 1999 and ending January 31, 2001, unless such employment period is hereafter further extended for an additional period by both Executive and Company. 2. All provisions of the Employment Agreement between Executive and Company dated as of February 1, 1996, and as it is herein amended, are continued in full force and effect without change as if the Employment Agreement had been initially effective as of February 1, 1999. Pogo Producing Company By: /s/ JOHN O. MCCOY, JR. ------------------------------ Senior Vice President and Chief Administrative Officer ATTEST: /s/ JOE ANN KINGDON - ------------------- Assistant Corporate Secretary EMPLOYEE: /s/ BRUCE E. ARCHINAL --------------------- EX-10.20 10 EXHIBIT 10.20 EXECUTIVE EMPLOYMENT AGREEMENT AGREEMENT by and between POGO PRODUCING COMPANY, a Delaware corporation (the "Company") and DAVID R. BEATHARD (the "Executive"), dated as of the 1st day of February, 1999. The Board of Directors of the Company (the "Board"), has determined that it is in the best interests of the Company and its shareholders to assure that the Company will have the continued dedication of the Executive, and to provide the Executive with compensation and benefits arrangements which are competitive with those of other corporations and which ensure that the compensation and benefits expectations of the Executive will be satisfied. The Board also believes it is imperative to diminish the inevitable distraction of the Executive by virtue of the personal uncertainties and risks created by a pending or threatened Change of Control and to encourage the Executive's full attention and dedication to the Company currently and in the event of any threatened or pending Change of Control, and to insure the continuation of favorable compensation and benefits upon a Change of Control. Therefore, in order to accomplish these objectives, the Board has caused the Company to enter into this Agreement. NOW, THEREFORE, IT IS HEREBY AGREED AS FOLLOWS; 1. CERTAIN DEFINITIONS. (a) The "Effective Date" shall mean the date of this Agreement. (b) The "Employment Period" shall mean the period commencing on the Effective Date and ending on the second anniversary of such date; provided, however, that on each annual anniversary of the Effective Date (the "Renewal Date"), the Employment Period shall be reviewed, to determine whether, in the discretion of the Company, it should be extended for one additional year so as to terminate two years from such Renewal Date. Any such one year extension shall be effective only if, prior to the Renewal Date, the Company shall give notice to the Executive that the Employment Period shall be so extended. 2. CHANGE OF CONTROL. For the purpose of this Agreement, a "Change of Control" shall mean: (a) The acquisition by any individual, entity or group (within the meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934, as amended (the "Exchange Act")) (a "Person") of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of 20% or more of either (i) the then outstanding shares of common stock of the Company (the "Outstanding Company Common Stock") or (ii) the combined voting power of the then outstanding voting securities of the Company entitled to vote generally in the election of directors (the "Outstanding Company Voting Securities"). Notwithstanding anything in this Agreement to the contrary, the following shall not constitute a Change of Control: (i) any acquisition directly from the Company (excluding an acquisition by virtue of the exercise of a conversion privilege), (ii) any acquisition by the Company, (iii) any acquisition by any employee benefit plan (or related trust) sponsored or maintained by the Company or any corporation controlled by the Company, or (iv) any acquisition by State Farm Mutual Automobile Insurance Company and certain affiliates ("State Farm") or Klingenstein, Fields & Co., L.P. ("Klingenstein") ("Specified Stockholders") of beneficial ownership of Outstanding Company Voting Securities resulting in an accumulation of said securities up to and including the following amounts: A. In the case of State Farm, 30% of Outstanding Voting Securities, and B. In the case of Klingenstein, 30% of Outstanding Voting Securities, or (v) any acquisition by any corporation pursuant to a reorganization, merger or consolidation, if, following such reorganization, merger or consolidation, the conditions described in clauses (i), (ii) and (iii) of subsection (c) of this Section 2 are satisfied; or (b) Individuals who, as of the date hereof, constitute the Board (the "Incumbent Board") cease for any reason to constitute at least a majority of the Board; provided, however, that any individual becoming a director subsequent to the date hereof whose election, or nomination for election by the Company's shareholders, was approved by a vote of at least a majority of the directors then comprising the Incumbent Board shall be considered as though such individual were a member of the Incumbent Board, but excluding, for this purpose, any such individual whose initial assumption of office occurs as a result of either an actual or threatened election contest (as such terms are used in Rule 14a-11 of Regulation 14A promulgated under the Exchange Act) or other actual or threatened solicitation of proxies or consents by or on behalf of a Person other than the Board; or (c) Approval by the shareholders of the Company of a reorganization, merger or consolidation, in each case, unless, following such reorganization, merger or consolidation, (i) more than 60% of, respectively, the then outstanding shares of common stock of the corporation resulting from such reorganization, merger or consolidation and the combined voting power of the then outstanding voting securities of such corporation entitled to vote generally in the election of directors is then beneficially owned, directly or indirectly, by all or substantially all of the individuals and entities who where the beneficial owners, respectively, of the Outstanding Company Common Stock and Outstanding Company Voting Securities immediately prior to such reorganization, merger or consolidation in substantially the same proportions as their ownership, -2- immediately prior to such reorganization, merger or consolidation, of the Outstanding Company Common Stock and Outstanding Company Voting Securities, as the case may be, (ii) no Person [excluding the Company, any Specified Stockholder, any employee benefit plan (or related trust) of the Company or such corporation resulting from such reorganization, merger or consolidation and any Person beneficially owning, immediately prior to such reorganization, merger or consolidation, directly or indirectly, 20% or more of the Outstanding Company Common Stock or Outstanding Voting Securities, as the case may be] beneficially owns, directly or indirectly, 20% or more, respectively, of the then outstanding shares of common stock of the corporation resulting from such reorganization, merger or consolidation or the combined voting power of the then outstanding voting securities of such corporation, entitled to vote generally in the election of directors and (iii) at least a majority of the members of the board of directors of the corporation resulting from such reorganization, merger or consolidation were members of the Incumbent Board at the time of the execution of the initial agreement providing for such reorganization, merger or consolidation; or (d) Approval by the shareholders of the Company of (i) a complete liquidation or dissolution of the Company or (ii) the sale or other disposition of all or substantially all of the assets of the Company, other than to a corporation with respect to which following such sale or other disposition (A) more than 60% of, respectively, the then outstanding shares of common stock of such corporation and the combined voting power of the then outstanding voting securities of such corporation entitled to vote generally in the election of directors is then beneficially owned, directly or indirectly, by all or substantially all of the individuals and entities who were the beneficial owners, respectively, of the Outstanding Company Common Stock and Outstanding Company Voting Securities immediately prior to such sale or other disposition in substantially the same proportion as their ownership, immediately prior to such sale or other disposition, of the Outstanding Company Common Stock and Outstanding Company Voting Securities, as the case may be, (B) no Person [excluding the Company, any Specified Stockholder, any employee benefit plan (or related trust) of the Company or such corporation and any Person beneficially owning, immediately prior to such sale or other disposition, directly or indirectly, 20% or more of the Outstanding Company Common Stock or Outstanding Company Voting Securities, as the case may be] beneficially owns, directly or indirectly, 20% or more of, respectively, the then outstanding shares of common stock of such corporation and the combined voting power of the then outstanding voting securities of such corporation entitled to vote generally in the election of directors and (C) at least a majority of the members of the board of directors of such corporation where members of the Incumbent Board at the time of the execution of the initial agreement or action of the Board providing for such sale or other disposition of assets of the Company. 3. EMPLOYMENT AGREEMENT. The Company hereby agrees to continue the Executive in its employ in accordance with the terms and provisions of this Agreement, for the Employment Period. 4. TERMS OF EMPLOYMENT. (a) POSITION AND DUTIES. (i) During the Employment Period, (A) the Executive's position (including status, offices, titles and reporting requirements), authority, duties and responsibilities shall be at least commensurate in all material respects with the most significant of those held, exercised and assigned at any time during the 90-day period immediately preceding the later of the Effective Date, the most recent Renewal Date or a Change of Control, if any, (the "Applicable Date") and (B) the Executive's services shall be performed at the -3- location where the Executive was employed immediately preceding the Applicable Date or any office which is the headquarters of the Company and is less than 35 miles from such location. (ii) During the Employment Period, and excluding any periods of vacation and sick leave to which the Executive is entitled, the Executive agrees to devote reasonable attention and time during normal business hours to the business and affairs of the Company. During the Employment Period it shall not be a violation of this Agreement for the Executive to (A) serve on corporate, civic or charitable boards or committees, (B) deliver lectures, fulfill speaking engagements or teach at educational institutions and (C) manage personal investments, so long as such activities do not significantly interfere with the performance of the Executive's responsibilities as an employee of the Company in accordance with this Agreement; provided Executive may not serve on the board of a publicly traded for profit corporation or similar body of a publicly traded for profit business organized in other than corporate form without the consent of the Compensation Committee of the Board of Directors of the Company. It is expressly understood and agreed that to the extent that any such activities have been conducted by the Executive prior to the Applicable Date, the continued conduct of such activities (or the conduct of activities similar in nature and scope thereto) subsequent to the Applicable Date shall not thereafter be deemed to interfere with the performance of the Executive's responsibilities to the Company. (b) COMPENSATION. (i) BASE SALARY. During the Employment Period, the Executive shall receive an annual base salary ("Annual Base Salary"), which shall be paid on a monthly basis, at least equal to twelve times the highest monthly base salary paid or payable to the Executive by the Company and its affiliated companies in respect of the twelve-month period immediately preceding the month in which the Applicable Date occurs. During the Employment Period, the Annual Base Salary shall be reviewed at least annually and may be increased at any time and from time to time as shall be substantially consistent with increases in base salary generally awarded in the ordinary course of business to other executives of the Company and its affiliated companies. Any increase in Annual Base Salary shall not serve to limit or reduce any other obligation to the Executive under this Agreement. As used in this Agreement, the term "affiliated companies" shall include any company controlled by, controlling or under common control with the Company. (ii) ANNUAL BONUS. In addition to Annual Base Salary, the Executive may be awarded at the discretion of the Company for any fiscal year ending during the Employment Period, a bonus. (iii) INCENTIVE, SAVINGS AND RETIREMENT PLANS. During the Employment Period, the Executive shall be entitled to participate in all incentive, savings and retirement plans, practices, policies and programs applicable generally to other executives of the Company and its affiliated companies. Such plans, practices, policies and programs shall provide the Executive with incentive opportunities (measured with respect to both regular and special incentive opportunities, to the extent, if any, that such distinction is applicable), savings opportunities and retirement benefit opportunities, in each case, equal to the most favorable of those provided by the Company and its affiliated companies for the Executive under such plans, practices, policies and programs as in effect at any time during the 90-day period immediately preceding the Applicable Date. -4- (iv) WELFARE BENEFIT PLANS. During the Employment Period, the Executive and/or the Executive's family, as the case may be, shall be eligible for participation in and shall receive all benefits under welfare benefit plans, practices, policies and programs provided by the Company and its affiliated companies (including, without limitation, medical, prescription, dental, disability, salary continuance, employee life, group life, accidental death and travel accident insurance plans and programs) to the extent applicable generally to other executives of the Company and its affiliated companies. Such plans, practices, policies and programs shall provide the Executive with benefits which are equal, in the aggregate, to the most favorable of such plans, practices, policies and programs in effect for the Executive at any time during the 90-day period immediately preceding the Applicable Date. (v) EXPENSES. During the Employment Period, the Executive shall be entitled to receive prompt reimbursement for all reasonable expenses incurred by the Executive in accordance with the most favorable policies, practices and procedures of the Company and its affiliated companies in effect for the Executive at any time during the 90-day period immediately preceding the Applicable Date. (vi) FRINGE BENEFITS. During the Employment Period, the Executive shall be entitled to fringe benefits in accordance with the most favorable plans, practices, programs and policies of the Company and its affiliated companies in effect for the Executive at any time during the 90-day period immediately preceding the Applicable Date. (vii) OFFICE AND SUPPORT STAFF. During the Employment Period, the Executive shall be entitled to an office or offices of a size and with furnishings and other appointments, and to personal secretarial and other assistance, at least equal to the most favorable of the foregoing provided to the Executive by the Company and its affiliated companies at any time during the 90-day period immediately preceding the Applicable Date. (viii) VACATION. During the Employment Period, the Executive shall be entitled to paid vacation in accordance with the most favorable plans, policies, programs and practices of the Company and its affiliated companies as in effect for the Executive at any time during the 90-day period immediately preceding the Applicable Date. 5. TERMINATION OF EMPLOYMENT. (a) DEATH OR DISABILITY. The Executive's employment shall terminate automatically upon the Executive's death during the Employment Period. If the Company determines in good faith that the Disability of the Executive has occurred during the Employment Period (pursuant to the definition of Disability set forth below), it may give to the Executive written notice in accordance with Section 12(c) of this Agreement of its intention to terminate the Executive's employment. In such event, the Executive's employment with the Company shall terminate effective on the 30th day after receipt of such notice by the Executive (the "Disability Effective Date"), provided that, within the 30 days after such receipt, the Executive shall not have returned to full-time performance of the Executive's duties. For purposes of this Agreement, "Disability" shall mean the absence of the Executive from the Executive's duties with the Company on a full-time basis for 180 consecutive business days as a result of incapacity due to mental or physical illness which is determined to be total and permanent by a physician selected by -5- the Company or its insurers and acceptable to the Executive or the Executive's legal representative (such agreement as to acceptability not to be withheld unreasonably). (b) CAUSE. The Company may terminate the Executive's employment during the Employment Period for Cause. For purposes of this Agreement, "Cause" shall mean (i) a material violation by the Executive of the Executive's obligations under Section 4(a) of this Agreement (other than as a result of incapacity due to physical or mental illness) which is willful and deliberate on the Executive's part, which is committed in bad faith or without reasonable belief that such violation is in the best interests of the Company and which is not remedied in a reasonable period of time after receipt of written notice from the Company specifying such violation or (ii) the conviction of the Executive of a felony involving moral turpitude. (c) GOOD REASON; WINDOW PERIOD; OTHER TERMINATIONS. The Executive's employment may be terminated (i) during the Employment Period by the Executive for Good Reason, (ii) during the Window Period by the Executive without any reason or (iii) by Executive other than (A) for Good Reason or (B) during a Window Period. For purposes of this Agreement, the "Window Period" shall mean the 180-day period immediately following the date a Change of Control occurs. Anything in this Agreement to the contrary notwithstanding, if a Change of Control occurs and if the Executive's employment with the Company is terminated prior to the date on which the Change of Control occurs, and if it is reasonably demonstrated by the Executive that such termination of employment or cessation of status as an officer (i) was at the request of a third party who has taken steps reasonably calculated to effect the Change of Control or (ii) otherwise arose in connection with or anticipation of the Change of Control, then for all purposes of this Agreement the "date a Change of Control occurs" shall mean the date immediately prior to the date of such termination of employment or cessation of status as an officer. For purposes of this Agreement, "Good Reason" shall mean (i) the assignment to the Executive of any duties inconsistent with the Executive's position (including status, offices, titles and reporting requirements), authority, duties or responsibilities as contemplated by Section 4(a) of this Agreement, or any other action by the Company which results in a diminution in such position, authority, duties or responsibilities excluding for this purpose an insubstantial or inadvertent action which is remedied by the Company promptly after receipt of notice thereof given by the Executive; (ii) any failure by the Company to comply with any of the provisions of Section 4(b) of this Agreement, other than an insubstantial or inadvertent failure which is remedied by the Company promptly after receipt of notice thereof given by the Executive; (iii) the Company's requiring the Executive to be based at any office or location other than that described in Section 4(a)(i)(B) hereof; (iv) any purported termination by the Company of the Executive's employment otherwise than as expressly permitted by this Agreement; or -6- (v) any failure by the Company to comply with and satisfy Section 11(c) of this Agreement. (d) NOTICE OF TERMINATION. Any termination by the Company for Cause, or by the Executive without any reason during the Window Period or for Good Reason, shall be communicated by Notice of Termination to the other party hereto given in accordance with Section 12(c) of this Agreement. For purposes of this Agreement, a "Notice of Termination" means a written notice which (i) indicates the specific termination provision in this Agreement relied upon, (ii) to the extent applicable, sets forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of the Executive's employment under the provision so indicated and (iii) if the Date of Termination (as defined below) is other than the date of receipt of such notice, specifies the termination date (which date shall be not more than fifteen days after the giving of such notice). The failure by the Executive or the Company to set forth in the Notice of Termination any fact or circumstance which contributes to a showing of Good Reason or Cause shall not waive any right of the Executive or the Company hereunder or preclude the Executive or the Company from asserting such fact or circumstance in enforcing the Executive's or the Company's right hereunder. (e) DATE OF TERMINATION. "Date of Termination" means (i) if the Executive's employment is terminated by the Company for Cause, or by the Executive during the Window Period or for Good Reason, the date of receipt of the Notice of Termination or any later date specified therein, as the case may be, (ii) if the Executive's employment is terminated by the Company other than for Cause or Disability, the Date of Termination shall be the date on which the Company notifies the Executive of such termination, (iii) if the Executive's employment is terminated by reason of death or Disability, the Date of Termination shall be the date of death of the Executive or the Disability Effective Date, as the case may be, and (iv) if the Executive's employment is terminated by the Executive other than for Good Reason or during a Window Period, the date of the receipt of the Notice of Termination or any later date specified therein. 6. OBLIGATIONS OF THE COMPANY UPON TERMINATION. (a) GOOD REASON OR DURING THE WINDOW PERIOD; OTHER THAN FOR CAUSE, DEATH OR DISABILITY. If, during the Employment Period, the Company shall terminate the Executive's employment other than for Cause or Disability or the Executive shall terminate employment either for Good Reason or without any reason during the Window Period: (i) the Company shall pay to the Executive in a lump sum in cash within 30 days after the Date of Termination the aggregate of the following amounts: A. the sum of (1) the Executive's Annual Base Salary through the Date of Termination to the extent not theretofore paid and (2) any compensation previously deferred by the Executive (together with any accrued interest or earnings thereon) and any accrued vacation pay, in each case to the extent not theretofore paid (the sum of the amounts described in clauses (1) and (2) shall be hereinafter referred to as the "Accrued Obligations"); and -7- B. the amount (such amount shall be hereinafter referred to as the "Severance Amount") equal to the product of (1) three and (2) the sum of (x) the Executive's Annual Base Salary and (y) any bonus described in Section 4(b)(ii) paid or payable in respect of the most recently completed fiscal year of the Company; and, provided further, that such amount shall be reduced by the present value (determined as provided in Section 280G(d)(4) of the Internal Revenue Code of 1986, as amended (the "Code")) of any other amount of severance relating to salary or bonus continuation to be received by the Executive upon termination of employment of the Executive under any severance plan, severance policy or severance arrangement of the Company; and C. a separate lump sum supplemental retirement benefit equal to the difference between (1) the actuarial equivalent (utilizing for this purpose the actuarial assumptions utilized with respect to the Employees Retirement Plan for Pogo Producing Company (or any successor plan thereto) (the "Retirement Plan") during the 90-day period immediately preceding the Applicable Date) of the benefit payable under the Retirement Plan and any supplemental and/or excess retirement plan of the Company and its affiliated companies providing benefits for the Executive (the "SERP") which the Executive would receive if the Executive's employment continued at the compensation level provided for in Sections 4(b)(i) and 4(b)(ii) of this Agreement for the remainder of the Employment Period, assuming for this purpose that all accrued benefits are fully vested and that benefit accrual formulas are no less advantageous to the Executive than those in effect during the 90-day period immediately preceding the Applicable Date, and (2) the actuarial equivalent (utilizing for this purpose the actuarial assumptions utilized with respect to the Retirement Plan during the 90-day period immediately preceding the Applicable Date) of the Executive's actual benefit (paid or payable), if any, under the Retirement Plan and the SERP (the amount of such benefit shall be hereinafter referred to as the "Supplemental Retirement Amount"); and (ii) for the remainder of the Employment Period, or such longer period as any plan, program, practice or policy may provide, the Company shall continue benefits to the Executive and/or the Executive's family at least equal to those which would have been provided to them in accordance with the plans, programs, practices and policies described in Section 4(b)(iv) of this Agreement if the Executive's employment had not been terminated in accordance with the most favorable plans, practices, programs or policies of the Company and its affiliated companies as in effect and applicable generally to other executives and their families during the 90-day period immediately preceding the Applicable Date, provided, however, that if the Executive becomes reemployed with another employer and is eligible to receive medical or other welfare benefits under another employer provided plan, the medical and other welfare benefits described herein shall be secondary to those provided under such other plan during such applicable period of eligibility (such continuation of such benefits for the applicable period herein set forth shall be hereinafter referred to as "Welfare Benefit Continuation"). For purposes of determining eligibility of the Executive for retiree benefits pursuant to such plans, practices, programs and policies, the Executive shall be considered to have remained employed until the end of the Employment Period and to have retired on the last day of such period; and (iii) to the extent not theretofore paid or provided, the Company shall timely pay or provide to the Executive and/or the Executive's family any other amounts or benefits required to -8- be paid or provided or which the Executive and/or the Executive's family is eligible to receive pursuant to this Agreement and under any plan, program, policy or practice or contract or agreement of the Company and its affiliated companies as in effect and applicable generally to other executives and their families during the 90-day period immediately preceding the Applicable Date (such other amounts and benefits shall be hereinafter referred to as the "Other Benefits"). (b) DEATH. If the Executive's employment is terminated by reason of the Executive's death during the Employment Period, this Agreement shall terminate without further obligations to the Executive's legal representatives under this Agreement, other than for (i) payment of Accrued Obligations (which shall be paid to the Executive's estate or beneficiary, as applicable, in a lump sum in cash within 30 days of the Date of Termination) and the timely payment or provision of the Welfare Benefit Continuation and Other Benefits and (ii) payment to the Executive's estate or beneficiary, as applicable, in a lump sum in cash within 30 days of the Date of Termination of an amount equal to the sum of the Severance Amount and the Supplemental Retirement Amount. (c) DISABILITY. If the Executive's employment is terminated by reason of the Executive's Disability during the Employment Period, this Agreement shall terminate without further obligations to the Executive, other than for (i) payment of Accrued Obligations (which shall be paid to the Executive in a lump sum in cash within 30 days of the Date of Termination) and the timely payment or provision of the Welfare Benefit Continuation and Other Benefits (excluding, in each case, Disability Benefits (as defined below)) and (ii) payment to the Executive in a lump sum in cash within 30 days of the Date of Termination of an amount equal to the greater of (A) the sum of the Severance Amount and the Supplemental Retirement Amount and (B) the present value (determined as provided in Section 280G(d)(4) of the Code) of any cash amount to be received by the Executive as a disability benefit pursuant to the terms of any long term disability plan, policy or arrangement of the Company and its affiliated companies, but not including any proceeds of disability insurance covering the Executive to the extent paid for on a contributory basis by the Executive (which shall be paid in any event as an Other Benefit) (the benefits included in this clause (B) shall be hereinafter referred to as the "Disability Benefits"). (d) CAUSE; BY EXECUTIVE OTHER THAN FOR GOOD REASON AND OTHER THAN DURING A WINDOW PERIOD. If the Executive's employment shall be terminated for Cause during the Employment Period, this Agreement shall terminate without further obligations to the Executive other than the obligation to pay to the Executive Annual Base Salary through the Date of Termination plus the amount of any compensation previously deferred by the Executive, in each case to the extent theretofore unpaid. If the Executive terminates employment during the Employment Period, excluding a termination either for Good Reason or without any reason during the Window Period, this Agreement shall terminate without further obligations to the Executive, other than for Accrued Obligations and the timely payment or provision of Other Benefits. In such case, all Accrued Obligations shall be paid to the Executive in a lump sum in cash within 30 days of the Date of Termination. 7. NON-EXCLUSIVITY OF RIGHTS. Except as provided in Section 6(a)(ii), 6(b) and 6(c) of this Agreement, nothing in this Agreement shall prevent or limit the Executive's continuing or future participation in any plan, program, policy or practice provided by the Company or any of its -9- affiliated companies and for which the Executive may qualify, nor shall anything herein limit or otherwise affect such rights as the Executive may have under any contract or agreement with the Company or any of its affiliated companies. Amounts which are vested benefits or which the Executive is otherwise entitled to receive under any plan, policy, practice or program of or any contract or agreement with the Company or any of its affiliated companies at or subsequent to the Date of Termination shall be payable in accordance with such plan, policy, practice or program or contract or agreement except as explicitly modified by this Agreement. 8. FULL SETTLEMENT; RESOLUTION OF DISPUTES. (a) The Company's obligation to make payments provided for in this Agreement and otherwise to perform its obligations hereunder shall not be affected by any set-off, counterclaim, recoupment, defense or other claim, right or action which the Company may have against the Executive or others. In no event shall the Executive be obligated to seek other employment or take any other action by way of mitigation of the amounts payable to the Executive under any of the provisions of this Agreement and, except as provided in Section 6(a)(ii) of this Agreement, such amounts shall not be reduced whether or not the Executive obtains other employment. If there is any contest by the Company concerning the Payments or benefits to be provided to the Executive hereunder whether through litigation, arbitration or mediation, or with respect to the validity or enforceability of, or liability under, any provision of this Agreement or any guarantee of performance thereof, and the Executive is the prevailing party, the Company agrees to pay promptly upon conclusion of the contest all legal fees and expenses which the Executive may reasonably have incurred. (b) If there shall be any dispute between the Company and the Executive (i) in the event of any termination of the Executive's employment by the Company, whether such termination was for Cause, or (ii) in the event of any termination of employment by the Executive, whether Good Reason existed, then, unless and until there is a final, nonappealable judgment by a court of competent jurisdiction declaring that such termination was for Cause or that Good Reason did not exist, the Company shall pay all amounts, and provide all benefits, to the Executive and/or the Executive's family or other beneficiaries, as the case may be, that the Company would be required to pay or provide pursuant to Section 6(a) hereof as though such termination were by the Company without Cause or by the Executive with Good Reason; provided, however, that the Company shall not be required to pay any disputed amounts pursuant to this paragraph except upon receipt of an undertaking (which need not be secured) by or on behalf of the Executive to repay all such amounts to which the Executive is ultimately adjudged by such court not to be entitled. 9. CERTAIN ADDITIONAL PAYMENTS BY THE COMPANY. (a) Anything in this Agreement to the contrary notwithstanding, in the event it shall be determined that any payment or distribution by the Company to or for the benefit of the Executive (whether paid or payable or distributed or distributable pursuant to the terms of this Agreement or otherwise, but determined without regard to any additional payments required under this Section 9) (a "Payment") would be subject to the excise tax imposed by Section 4999 of the Code or any interest or penalties are incurred by the Executive with respect to such excise tax (such excise tax, together with any such interest and penalties, are hereinafter collectively referred to as the "Excise Tax"), then the Executive shall be entitled to receive an additional payment (a "Gross-Up Payment") in an amount such that after payment by the Executive of all taxes (including any interest or penalties imposed with respect to such taxes), including, without limitation, any income taxes (and any interest and penalties imposed -10- with respect thereto) and Excise Tax imposed upon the Gross-Up Payment, the Executive retains an amount of the Gross-Up Payment equal to the Excise Tax imposed upon the Payments. (b) Subject to the provisions of Section 9(c), all determinations required to be made under this Section 9, including whether and when Gross-Up Payment is required and the amount of such Gross-Up Payment and the assumptions to be utilized in arriving at such determination, shall be made by Arthur Andersen LLP (the "Accounting Firm") which shall provide detailed supporting calculations both to the Company and the Executive within 15 business days of the receipt of notice from the Executive that there has been a Payment, or such earlier time as is requested by the Company. In the event that the Accounting Firm is serving as accountant or auditor for the individual, entity or group effecting the Change of Control, the Executive shall appoint another nationally recognized accounting firm to make the determinations required hereunder (which accounting firm shall then be referred to as the Accounting Firm hereunder). All fees and expenses of the Accounting Firm shall be borne solely by the Company. Any Gross-Up Payment, as determined pursuant to this Section 9, shall be paid by the Company to the Executive within five days of the receipt of the Accounting Firm's determination. If the Accounting Firm determines that no Excise Tax is payable by the Executive, it shall furnish the Executive with a written opinion that failure to report the Excise Tax on the Executive's applicable federal income tax return would not result in the imposition of a negligence or similar penalty. Any determination by the Accounting Firm shall be binding upon the Company and the Executive. As a result of the uncertainty in the application of Section 4999 of the Code at the time of the initial determination by the Accounting Firm hereunder, it is possible that Gross-Up Payments which will not have been made by the Company should have been made ("Underpayment"), consistent with the calculations required to be made hereunder. In the event that the Company exhausts its remedies pursuant to Section 9(c) and the Executive thereafter is required to make a payment of any Excise Tax, the Accounting Firm shall determine the amount of the Underpayment that has occurred and any such Underpayment shall be promptly paid by the Company to or for the benefit of the Executive. (c) The Executive shall notify the Company in writing of any claims by the Internal Revenue Service that, if successful, would require the payment by the Company of the Gross-Up Payment. Such notification shall be given as soon as practicable but no later than ten business days after the Executive is informed in writing of such claim and shall apprise the Company of the nature of such claim and the date on which such claim is requested to be paid. The Executive shall not pay such claim prior to the expiration of the 30-day period following the date on which it gives such notice to the Company (or such shorter period ending on the date that any payment of taxes with respect to such claim is due). If the Company notifies the Executive in writing prior to the expiration of such period that it desires to contest such claim, the Executive shall: (i) give the Company any information reasonably requested by the Company relating to such claim, (ii) take such action in connection with contesting such claim as the Company shall reasonably request in writing from time to time, including, without limitation, accepting legal representation with respect to such claim by an attorney reasonably selected by the Company, -11- (iii) cooperate with the Company in good faith in order effectively to contest such claim, and (iv) permit the Company to participate in any proceedings relating to such claim; provided, however, that the Company shall bear and pay directly all costs and expenses (including additional interest and penalties) incurred in connection with such contest and shall indemnify and hold the Executive harmless, on an after-tax basis, for any Excise Tax or income tax (including interest and penalties with respect thereto) imposed as a result of such representation and payment of costs and expenses. Without limitation on the foregoing provisions of this Section 9(c), the Company shall control all proceedings taken in connection with such contest and, at its sole option, may pursue or forego any and all administrative appeals, proceedings, hearings and conferences with the taxing authority in respect of such claim and may, at its sole option, either direct the Executive to pay the tax claimed and sue for a refund or contest the claim in any permissible manner, and the Executive agrees to prosecute such contest to a determination before any administrative tribunal, in a court of initial jurisdiction and in one or more appellate courts, as the Company shall determine; provided, however, that if the Company directs the Executive to pay such claim and sue for a refund, the Company shall advance the amount of such payment to the Executive, on an interest-free basis and shall indemnify and hold the Executive harmless, on an after-tax basis, from any Excise Tax or income tax (including interest or penalties with respect thereto) imposed with respect to such advance or with respect to any imputed income with respect to such advance; and further provided that any extension of the statute of limitations relating to payment of taxes for the taxable year of the Executive with respect to which such contested amount is claimed to be due is limited solely to such contested amount. Furthermore, the Company's control of the contest shall be limited to issues with respect to which a Gross-Up Payment would be payable hereunder and the Executive shall be entitled to settle or contest, as the case may be, any other issue raised by the Internal Revenue Service or any other taxing authority. (d) If, after the receipt by the Executive of an amount advanced by the Company pursuant to Section (c), the Executive becomes entitled to receive any refund with respect to such claim, the Executive shall (subject to the Company's complying with the requirements of Section 9(c)) promptly pay to the Company the amount of such refund (together with any interest paid or credited thereon after taxes applicable thereto). If, after the receipt by the Executive of an amount advanced by the Company pursuant to Section 9(c), a determination is made that the Executive shall not be entitled to any refund with respect to such claim and the Company does not notify the Executive in writing of its intent to contest such denial of refund prior to the expiration of 30 days after such determination, then such advance shall be forgiven and shall not be required to be repaid and the amount of such advance shall be offset, to the extent thereof, the amount of Gross-Up Payment required to be paid. 10. CONFIDENTIAL INFORMATION. The Executive shall hold in a fiduciary capacity for the benefit of the Company all secret or confidential information, knowledge or data relating to the Company or any of its affiliated companies, and their respective businesses, which shall have been obtained by the Executive during the Executive's employment by the Company or any of its affiliated companies and which shall not be or become public knowledge (other than by acts by the Executive or representatives of the Executive in violation of this Agreement). After termination of -12- the Executive's employment with the Company, the Executive shall not, without the prior written consent of the Company or as may otherwise be required by law or legal process, communicate or divulge any such information, knowledge or data to anyone other than the Company and those designated by it. In no event shall an asserted violation of the provisions of this Section 10 constitute a basis for deferring or withholding any amounts otherwise payable to the Executive under this Agreement. 11. SUCCESSORS. (a) This Agreement is personal to the Executive and without the prior written consent of the Company shall not be assignable by the Executive otherwise than by will or the laws of descent and distribution. This Agreement shall inure to the benefit of and be enforceable by the Executive's legal representatives. (b) This Agreement shall inure to the benefit of and be binding upon the Company and its successors and assigns. (c) The Company will require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Company to assume expressly and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform it if no such succession had taken place. As used in this Agreement, "Company" shall mean the Company as hereinbefore defined and any successor to its business and/or assets as aforesaid which assumes and agrees to perform this Agreement by operation of law, or otherwise. 12. MISCELLANEOUS. (a) This Agreement shall be an unfunded obligation of the Company. (b) THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF TEXAS, WITHOUT REFERENCE TO PRINCIPLES OF CONFLICT OF LAWS. The captions of this Agreement are not part of the provisions hereof and shall have no force or effect. This Agreement may not be amended or modified otherwise than by a written agreement executed by the parties hereto or their respective successors and legal representatives. (c) All notices and other communications hereunder shall be in writing and shall be given by hand delivery to the other party or by registered or certified mail, return receipt requested, postage prepaid, addressed as follows: IF TO THE EXECUTIVE: David R. Beathard 4305 Mildred Bellaire, Texas 77401 -13- IF TO THE COMPANY: Pogo Producing Company P.O. Box 2504 Houston, Texas 77252-2504 Attention: Senior Vice President and Chief Administrative Officer or to such other address as either party shall have furnished to the other in writing in accordance herewith. Notice and communications shall be effective when actually received by the addressee. (d) The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement. (e) The Company may withhold from any amounts payable under this Agreement such Federal, state or local taxes as shall be required to be withheld pursuant to any applicable law or regulation. (f) The Executive's or the Company's failure to insist upon strict compliance with any provision hereof or any other provision of this Agreement or the failure to assert any right the Executive or the Company may have hereunder, including, without limitation, the right of the Executive to terminate employment for Good Reason pursuant to Section 5(c)(i)-(v) of this Agreement, shall not be deemed to be a waiver of such provision or right or any other provision or right of this Agreement. IN WITNESS WHEREOF, the Executive has hereunto set the Executive's hand and, pursuant to the authorization from its Board of Directors, the Company has caused these presents to be executed in its name on its behalf, all as of the day and year first above written. /s/ DAVID R. BEATHARD --------------------- POGO PRODUCING COMPANY By: /s/ PAUL G. VAN WAGENEN ----------------------- -14- EX-10.21 11 EXHIBIT 10.21 EXECUTIVE EMPLOYMENT AGREEMENT AGREEMENT by and between POGO PRODUCING COMPANY, a Delaware corporation (the "Company") and STEPHEN R. BRUNNER (the "Executive"), dated as of the 1st day of February, 1999. The Board of Directors of the Company (the "Board"), has determined that it is in the best interests of the Company and its shareholders to assure that the Company will have the continued dedication of the Executive, and to provide the Executive with compensation and benefits arrangements which are competitive with those of other corporations and which ensure that the compensation and benefits expectations of the Executive will be satisfied. The Board also believes it is imperative to diminish the inevitable distraction of the Executive by virtue of the personal uncertainties and risks created by a pending or threatened Change of Control and to encourage the Executive's full attention and dedication to the Company currently and in the event of any threatened or pending Change of Control, and to insure the continuation of favorable compensation and benefits upon a Change of Control. Therefore, in order to accomplish these objectives, the Board has caused the Company to enter into this Agreement. NOW, THEREFORE, IT IS HEREBY AGREED AS FOLLOWS; 1. CERTAIN DEFINITIONS. (a) The "Effective Date" shall mean the date of this Agreement. (b) The "Employment Period" shall mean the period commencing on the Effective Date and ending on the second anniversary of such date; provided, however, that on each annual anniversary of the Effective Date (the "Renewal Date"), the Employment Period shall be reviewed, to determine whether, in the discretion of the Company, it should be extended for one additional year so as to terminate two years from such Renewal Date. Any such one year extension shall be effective only if, prior to the Renewal Date, the Company shall give notice to the Executive that the Employment Period shall be so extended. 2. CHANGE OF CONTROL. For the purpose of this Agreement, a "Change of Control" shall mean: (a) The acquisition by any individual, entity or group (within the meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934, as amended (the "Exchange Act")) (a "Person") of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of 20% or more of either (i) the then outstanding shares of common stock of the Company (the "Outstanding Company Common Stock") or (ii) the combined voting power of the then outstanding voting securities of the Company entitled to vote generally in the election of directors (the "Outstanding Company Voting Securities"). Notwithstanding anything in this Agreement to the contrary, the following shall not constitute a Change of Control: (i) any acquisition directly from the Company (excluding an acquisition by virtue of the exercise of a conversion privilege), (ii) any acquisition by the Company, (iii) any acquisition by any employee benefit plan (or related trust) sponsored or maintained by the Company or any corporation controlled by the Company, or (iv) any acquisition by State Farm Mutual Automobile Insurance Company and certain affiliates ("State Farm") or Klingenstein, Fields & Co., L.P. ("Klingenstein") ("Specified Stockholders") of beneficial ownership of Outstanding Company Voting Securities resulting in an accumulation of said securities up to and including the following amounts: A. In the case of State Farm, 30% of Outstanding Voting Securities, and B. In the case of Klingenstein, 30% of Outstanding Voting Securities, or (v) any acquisition by any corporation pursuant to a reorganization, merger or consolidation, if, following such reorganization, merger or consolidation, the conditions described in clauses (i), (ii) and (iii) of subsection (c) of this Section 2 are satisfied; or (b) Individuals who, as of the date hereof, constitute the Board (the "Incumbent Board") cease for any reason to constitute at least a majority of the Board; provided, however, that any individual becoming a director subsequent to the date hereof whose election, or nomination for election by the Company's shareholders, was approved by a vote of at least a majority of the directors then comprising the Incumbent Board shall be considered as though such individual were a member of the Incumbent Board, but excluding, for this purpose, any such individual whose initial assumption of office occurs as a result of either an actual or threatened election contest (as such terms are used in Rule 14a-11 of Regulation 14A promulgated under the Exchange Act) or other actual or threatened solicitation of proxies or consents by or on behalf of a Person other than the Board; or (c) Approval by the shareholders of the Company of a reorganization, merger or consolidation, in each case, unless, following such reorganization, merger or consolidation, (i) more than 60% of, respectively, the then outstanding shares of common stock of the corporation resulting from such reorganization, merger or consolidation and the combined voting power of the then outstanding voting securities of such corporation entitled to vote generally in the election of directors is then beneficially owned, directly or indirectly, by all or substantially all of the individuals and entities who where the beneficial owners, respectively, of the Outstanding Company Common Stock and Outstanding Company Voting Securities immediately prior to such reorganization, merger or consolidation in substantially the same proportions as their ownership, -2- immediately prior to such reorganization, merger or consolidation, of the Outstanding Company Common Stock and Outstanding Company Voting Securities, as the case may be, (ii) no Person [excluding the Company, any Specified Stockholder, any employee benefit plan (or related trust) of the Company or such corporation resulting from such reorganization, merger or consolidation and any Person beneficially owning, immediately prior to such reorganization, merger or consolidation, directly or indirectly, 20% or more of the Outstanding Company Common Stock or Outstanding Voting Securities, as the case may be] beneficially owns, directly or indirectly, 20% or more, respectively, of the then outstanding shares of common stock of the corporation resulting from such reorganization, merger or consolidation or the combined voting power of the then outstanding voting securities of such corporation, entitled to vote generally in the election of directors and (iii) at least a majority of the members of the board of directors of the corporation resulting from such reorganization, merger or consolidation were members of the Incumbent Board at the time of the execution of the initial agreement providing for such reorganization, merger or consolidation; or (d) Approval by the shareholders of the Company of (i) a complete liquidation or dissolution of the Company or (ii) the sale or other disposition of all or substantially all of the assets of the Company, other than to a corporation with respect to which following such sale or other disposition (A) more than 60% of, respectively, the then outstanding shares of common stock of such corporation and the combined voting power of the then outstanding voting securities of such corporation entitled to vote generally in the election of directors is then beneficially owned, directly or indirectly, by all or substantially all of the individuals and entities who were the beneficial owners, respectively, of the Outstanding Company Common Stock and Outstanding Company Voting Securities immediately prior to such sale or other disposition in substantially the same proportion as their ownership, immediately prior to such sale or other disposition, of the Outstanding Company Common Stock and Outstanding Company Voting Securities, as the case may be, (B) no Person [excluding the Company, any Specified Stockholder, any employee benefit plan (or related trust) of the Company or such corporation and any Person beneficially owning, immediately prior to such sale or other disposition, directly or indirectly, 20% or more of the Outstanding Company Common Stock or Outstanding Company Voting Securities, as the case may be] beneficially owns, directly or indirectly, 20% or more of, respectively, the then outstanding shares of common stock of such corporation and the combined voting power of the then outstanding voting securities of such corporation entitled to vote generally in the election of directors and (C) at least a majority of the members of the board of directors of such corporation where members of the Incumbent Board at the time of the execution of the initial agreement or action of the Board providing for such sale or other disposition of assets of the Company. 3. EMPLOYMENT AGREEMENT. The Company hereby agrees to continue the Executive in its employ in accordance with the terms and provisions of this Agreement, for the Employment Period. 4. TERMS OF EMPLOYMENT. (a) POSITION AND DUTIES. (i) During the Employment Period, (A) the Executive's position (including status, offices, titles and reporting requirements), authority, duties and responsibilities shall be at least commensurate in all material respects with the most significant of those held, exercised and assigned at any time during the 90-day period immediately preceding the later of the Effective Date, the most recent Renewal Date or a Change of Control, if any, (the "Applicable Date") and (B) the Executive's services shall be performed at the -3- location where the Executive was employed immediately preceding the Applicable Date or any office which is the headquarters of the Company and is less than 35 miles from such location. (ii) During the Employment Period, and excluding any periods of vacation and sick leave to which the Executive is entitled, the Executive agrees to devote reasonable attention and time during normal business hours to the business and affairs of the Company. During the Employment Period it shall not be a violation of this Agreement for the Executive to (A) serve on corporate, civic or charitable boards or committees, (B) deliver lectures, fulfill speaking engagements or teach at educational institutions and (C) manage personal investments, so long as such activities do not significantly interfere with the performance of the Executive's responsibilities as an employee of the Company in accordance with this Agreement; provided Executive may not serve on the board of a publicly traded for profit corporation or similar body of a publicly traded for profit business organized in other than corporate form without the consent of the Compensation Committee of the Board of Directors of the Company. It is expressly understood and agreed that to the extent that any such activities have been conducted by the Executive prior to the Applicable Date, the continued conduct of such activities (or the conduct of activities similar in nature and scope thereto) subsequent to the Applicable Date shall not thereafter be deemed to interfere with the performance of the Executive's responsibilities to the Company. (b) COMPENSATION. (i) BASE SALARY. During the Employment Period, the Executive shall receive an annual base salary ("Annual Base Salary"), which shall be paid on a monthly basis, at least equal to twelve times the highest monthly base salary paid or payable to the Executive by the Company and its affiliated companies in respect of the twelve-month period immediately preceding the month in which the Applicable Date occurs. During the Employment Period, the Annual Base Salary shall be reviewed at least annually and may be increased at any time and from time to time as shall be substantially consistent with increases in base salary generally awarded in the ordinary course of business to other executives of the Company and its affiliated companies. Any increase in Annual Base Salary shall not serve to limit or reduce any other obligation to the Executive under this Agreement. As used in this Agreement, the term "affiliated companies" shall include any company controlled by, controlling or under common control with the Company. (ii) ANNUAL BONUS. In addition to Annual Base Salary, the Executive may be awarded at the discretion of the Company for any fiscal year ending during the Employment Period, a bonus. (iii) INCENTIVE, SAVINGS AND RETIREMENT PLANS. During the Employment Period, the Executive shall be entitled to participate in all incentive, savings and retirement plans, practices, policies and programs applicable generally to other executives of the Company and its affiliated companies. Such plans, practices, policies and programs shall provide the Executive with incentive opportunities (measured with respect to both regular and special incentive opportunities, to the extent, if any, that such distinction is applicable), savings opportunities and retirement benefit opportunities, in each case, equal to the most favorable of those provided by the Company and its affiliated companies for the Executive under such plans, practices, policies and programs as in effect at any time during the 90-day period immediately preceding the Applicable Date. -4- (iv) WELFARE BENEFIT PLANS. During the Employment Period, the Executive and/or the Executive's family, as the case may be, shall be eligible for participation in and shall receive all benefits under welfare benefit plans, practices, policies and programs provided by the Company and its affiliated companies (including, without limitation, medical, prescription, dental, disability, salary continuance, employee life, group life, accidental death and travel accident insurance plans and programs) to the extent applicable generally to other executives of the Company and its affiliated companies. Such plans, practices, policies and programs shall provide the Executive with benefits which are equal, in the aggregate, to the most favorable of such plans, practices, policies and programs in effect for the Executive at any time during the 90-day period immediately preceding the Applicable Date. (v) EXPENSES. During the Employment Period, the Executive shall be entitled to receive prompt reimbursement for all reasonable expenses incurred by the Executive in accordance with the most favorable policies, practices and procedures of the Company and its affiliated companies in effect for the Executive at any time during the 90-day period immediately preceding the Applicable Date. (vi) FRINGE BENEFITS. During the Employment Period, the Executive shall be entitled to fringe benefits in accordance with the most favorable plans, practices, programs and policies of the Company and its affiliated companies in effect for the Executive at any time during the 90-day period immediately preceding the Applicable Date. (vii) OFFICE AND SUPPORT STAFF. During the Employment Period, the Executive shall be entitled to an office or offices of a size and with furnishings and other appointments, and to personal secretarial and other assistance, at least equal to the most favorable of the foregoing provided to the Executive by the Company and its affiliated companies at any time during the 90-day period immediately preceding the Applicable Date. (viii) VACATION. During the Employment Period, the Executive shall be entitled to paid vacation in accordance with the most favorable plans, policies, programs and practices of the Company and its affiliated companies as in effect for the Executive at any time during the 90-day period immediately preceding the Applicable Date. 5. TERMINATION OF EMPLOYMENT. (a) DEATH OR DISABILITY. The Executive's employment shall terminate automatically upon the Executive's death during the Employment Period. If the Company determines in good faith that the Disability of the Executive has occurred during the Employment Period (pursuant to the definition of Disability set forth below), it may give to the Executive written notice in accordance with Section 12(c) of this Agreement of its intention to terminate the Executive's employment. In such event, the Executive's employment with the Company shall terminate effective on the 30th day after receipt of such notice by the Executive (the "Disability Effective Date"), provided that, within the 30 days after such receipt, the Executive shall not have returned to full-time performance of the Executive's duties. For purposes of this Agreement, "Disability" shall mean the absence of the Executive from the Executive's duties with the Company on a full-time basis for 180 consecutive business days as a result of incapacity due to mental or physical illness which is determined to be total and permanent by a physician selected by -5- the Company or its insurers and acceptable to the Executive or the Executive's legal representative (such agreement as to acceptability not to be withheld unreasonably). (b) CAUSE. The Company may terminate the Executive's employment during the Employment Period for Cause. For purposes of this Agreement, "Cause" shall mean (i) a material violation by the Executive of the Executive's obligations under Section 4(a) of this Agreement (other than as a result of incapacity due to physical or mental illness) which is willful and deliberate on the Executive's part, which is committed in bad faith or without reasonable belief that such violation is in the best interests of the Company and which is not remedied in a reasonable period of time after receipt of written notice from the Company specifying such violation or (ii) the conviction of the Executive of a felony involving moral turpitude. (c) GOOD REASON; WINDOW PERIOD; OTHER TERMINATIONS. The Executive's employment may be terminated (i) during the Employment Period by the Executive for Good Reason, (ii) during the Window Period by the Executive without any reason or (iii) by Executive other than (A) for Good Reason or (B) during a Window Period. For purposes of this Agreement, the "Window Period" shall mean the 180-day period immediately following the date a Change of Control occurs. Anything in this Agreement to the contrary notwithstanding, if a Change of Control occurs and if the Executive's employment with the Company is terminated prior to the date on which the Change of Control occurs, and if it is reasonably demonstrated by the Executive that such termination of employment or cessation of status as an officer (i) was at the request of a third party who has taken steps reasonably calculated to effect the Change of Control or (ii) otherwise arose in connection with or anticipation of the Change of Control, then for all purposes of this Agreement the "date a Change of Control occurs" shall mean the date immediately prior to the date of such termination of employment or cessation of status as an officer. For purposes of this Agreement, "Good Reason" shall mean (i) the assignment to the Executive of any duties inconsistent with the Executive's position (including status, offices, titles and reporting requirements), authority, duties or responsibilities as contemplated by Section 4(a) of this Agreement, or any other action by the Company which results in a diminution in such position, authority, duties or responsibilities excluding for this purpose an insubstantial or inadvertent action which is remedied by the Company promptly after receipt of notice thereof given by the Executive; (ii) any failure by the Company to comply with any of the provisions of Section 4(b) of this Agreement, other than an insubstantial or inadvertent failure which is remedied by the Company promptly after receipt of notice thereof given by the Executive; (iii) the Company's requiring the Executive to be based at any office or location other than that described in Section 4(a)(i)(B) hereof; (iv) any purported termination by the Company of the Executive's employment otherwise than as expressly permitted by this Agreement; or -6- (v) any failure by the Company to comply with and satisfy Section 11(c) of this Agreement. (d) NOTICE OF TERMINATION. Any termination by the Company for Cause, or by the Executive without any reason during the Window Period or for Good Reason, shall be communicated by Notice of Termination to the other party hereto given in accordance with Section 12(c) of this Agreement. For purposes of this Agreement, a "Notice of Termination" means a written notice which (i) indicates the specific termination provision in this Agreement relied upon, (ii) to the extent applicable, sets forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of the Executive's employment under the provision so indicated and (iii) if the Date of Termination (as defined below) is other than the date of receipt of such notice, specifies the termination date (which date shall be not more than fifteen days after the giving of such notice). The failure by the Executive or the Company to set forth in the Notice of Termination any fact or circumstance which contributes to a showing of Good Reason or Cause shall not waive any right of the Executive or the Company hereunder or preclude the Executive or the Company from asserting such fact or circumstance in enforcing the Executive's or the Company's right hereunder. (e) DATE OF TERMINATION. "Date of Termination" means (i) if the Executive's employment is terminated by the Company for Cause, or by the Executive during the Window Period or for Good Reason, the date of receipt of the Notice of Termination or any later date specified therein, as the case may be, (ii) if the Executive's employment is terminated by the Company other than for Cause or Disability, the Date of Termination shall be the date on which the Company notifies the Executive of such termination, (iii) if the Executive's employment is terminated by reason of death or Disability, the Date of Termination shall be the date of death of the Executive or the Disability Effective Date, as the case may be, and (iv) if the Executive's employment is terminated by the Executive other than for Good Reason or during a Window Period, the date of the receipt of the Notice of Termination or any later date specified therein. 6. OBLIGATIONS OF THE COMPANY UPON TERMINATION. (a) GOOD REASON OR DURING THE WINDOW PERIOD; OTHER THAN FOR CAUSE, DEATH OR DISABILITY. If, during the Employment Period, the Company shall terminate the Executive's employment other than for Cause or Disability or the Executive shall terminate employment either for Good Reason or without any reason during the Window Period: (i) the Company shall pay to the Executive in a lump sum in cash within 30 days after the Date of Termination the aggregate of the following amounts: A. the sum of (1) the Executive's Annual Base Salary through the Date of Termination to the extent not theretofore paid and (2) any compensation previously deferred by the Executive (together with any accrued interest or earnings thereon) and any accrued vacation pay, in each case to the extent not theretofore paid (the sum of the amounts described in clauses (1) and (2) shall be hereinafter referred to as the "Accrued Obligations"); and -7- B. the amount (such amount shall be hereinafter referred to as the "Severance Amount") equal to the product of (1) three and (2) the sum of (x) the Executive's Annual Base Salary and (y) any bonus described in Section 4(b)(ii) paid or payable in respect of the most recently completed fiscal year of the Company; and, provided further, that such amount shall be reduced by the present value (determined as provided in Section 280G(d)(4) of the Internal Revenue Code of 1986, as amended (the "Code")) of any other amount of severance relating to salary or bonus continuation to be received by the Executive upon termination of employment of the Executive under any severance plan, severance policy or severance arrangement of the Company; and C. a separate lump sum supplemental retirement benefit equal to the difference between (1) the actuarial equivalent (utilizing for this purpose the actuarial assumptions utilized with respect to the Employees Retirement Plan for Pogo Producing Company (or any successor plan thereto) (the "Retirement Plan") during the 90-day period immediately preceding the Applicable Date) of the benefit payable under the Retirement Plan and any supplemental and/or excess retirement plan of the Company and its affiliated companies providing benefits for the Executive (the "SERP") which the Executive would receive if the Executive's employment continued at the compensation level provided for in Sections 4(b)(i) and 4(b)(ii) of this Agreement for the remainder of the Employment Period, assuming for this purpose that all accrued benefits are fully vested and that benefit accrual formulas are no less advantageous to the Executive than those in effect during the 90-day period immediately preceding the Applicable Date, and (2) the actuarial equivalent (utilizing for this purpose the actuarial assumptions utilized with respect to the Retirement Plan during the 90-day period immediately preceding the Applicable Date) of the Executive's actual benefit (paid or payable), if any, under the Retirement Plan and the SERP (the amount of such benefit shall be hereinafter referred to as the "Supplemental Retirement Amount"); and (ii) for the remainder of the Employment Period, or such longer period as any plan, program, practice or policy may provide, the Company shall continue benefits to the Executive and/or the Executive's family at least equal to those which would have been provided to them in accordance with the plans, programs, practices and policies described in Section 4(b)(iv) of this Agreement if the Executive's employment had not been terminated in accordance with the most favorable plans, practices, programs or policies of the Company and its affiliated companies as in effect and applicable generally to other executives and their families during the 90-day period immediately preceding the Applicable Date, provided, however, that if the Executive becomes reemployed with another employer and is eligible to receive medical or other welfare benefits under another employer provided plan, the medical and other welfare benefits described herein shall be secondary to those provided under such other plan during such applicable period of eligibility (such continuation of such benefits for the applicable period herein set forth shall be hereinafter referred to as "Welfare Benefit Continuation"). For purposes of determining eligibility of the Executive for retiree benefits pursuant to such plans, practices, programs and policies, the Executive shall be considered to have remained employed until the end of the Employment Period and to have retired on the last day of such period; and (iii) to the extent not theretofore paid or provided, the Company shall timely pay or provide to the Executive and/or the Executive's family any other amounts or benefits required to -8- be paid or provided or which the Executive and/or the Executive's family is eligible to receive pursuant to this Agreement and under any plan, program, policy or practice or contract or agreement of the Company and its affiliated companies as in effect and applicable generally to other executives and their families during the 90-day period immediately preceding the Applicable Date (such other amounts and benefits shall be hereinafter referred to as the "Other Benefits"). (b) DEATH. If the Executive's employment is terminated by reason of the Executive's death during the Employment Period, this Agreement shall terminate without further obligations to the Executive's legal representatives under this Agreement, other than for (i) payment of Accrued Obligations (which shall be paid to the Executive's estate or beneficiary, as applicable, in a lump sum in cash within 30 days of the Date of Termination) and the timely payment or provision of the Welfare Benefit Continuation and Other Benefits and (ii) payment to the Executive's estate or beneficiary, as applicable, in a lump sum in cash within 30 days of the Date of Termination of an amount equal to the sum of the Severance Amount and the Supplemental Retirement Amount. (c) DISABILITY. If the Executive's employment is terminated by reason of the Executive's Disability during the Employment Period, this Agreement shall terminate without further obligations to the Executive, other than for (i) payment of Accrued Obligations (which shall be paid to the Executive in a lump sum in cash within 30 days of the Date of Termination) and the timely payment or provision of the Welfare Benefit Continuation and Other Benefits (excluding, in each case, Disability Benefits (as defined below)) and (ii) payment to the Executive in a lump sum in cash within 30 days of the Date of Termination of an amount equal to the greater of (A) the sum of the Severance Amount and the Supplemental Retirement Amount and (B) the present value (determined as provided in Section 280G(d)(4) of the Code) of any cash amount to be received by the Executive as a disability benefit pursuant to the terms of any long term disability plan, policy or arrangement of the Company and its affiliated companies, but not including any proceeds of disability insurance covering the Executive to the extent paid for on a contributory basis by the Executive (which shall be paid in any event as an Other Benefit) (the benefits included in this clause (B) shall be hereinafter referred to as the "Disability Benefits"). (d) CAUSE; BY EXECUTIVE OTHER THAN FOR GOOD REASON AND OTHER THAN DURING A WINDOW PERIOD. If the Executive's employment shall be terminated for Cause during the Employment Period, this Agreement shall terminate without further obligations to the Executive other than the obligation to pay to the Executive Annual Base Salary through the Date of Termination plus the amount of any compensation previously deferred by the Executive, in each case to the extent theretofore unpaid. If the Executive terminates employment during the Employment Period, excluding a termination either for Good Reason or without any reason during the Window Period, this Agreement shall terminate without further obligations to the Executive, other than for Accrued Obligations and the timely payment or provision of Other Benefits. In such case, all Accrued Obligations shall be paid to the Executive in a lump sum in cash within 30 days of the Date of Termination. 7. NON-EXCLUSIVITY OF RIGHTS. Except as provided in Section 6(a)(ii), 6(b) and 6(c) of this Agreement, nothing in this Agreement shall prevent or limit the Executive's continuing or future participation in any plan, program, policy or practice provided by the Company or any of its -9- affiliated companies and for which the Executive may qualify, nor shall anything herein limit or otherwise affect such rights as the Executive may have under any contract or agreement with the Company or any of its affiliated companies. Amounts which are vested benefits or which the Executive is otherwise entitled to receive under any plan, policy, practice or program of or any contract or agreement with the Company or any of its affiliated companies at or subsequent to the Date of Termination shall be payable in accordance with such plan, policy, practice or program or contract or agreement except as explicitly modified by this Agreement. 8. FULL SETTLEMENT; RESOLUTION OF DISPUTES. (a) The Company's obligation to make payments provided for in this Agreement and otherwise to perform its obligations hereunder shall not be affected by any set-off, counterclaim, recoupment, defense or other claim, right or action which the Company may have against the Executive or others. In no event shall the Executive be obligated to seek other employment or take any other action by way of mitigation of the amounts payable to the Executive under any of the provisions of this Agreement and, except as provided in Section 6(a)(ii) of this Agreement, such amounts shall not be reduced whether or not the Executive obtains other employment. If there is any contest by the Company concerning the Payments or benefits to be provided to the Executive hereunder whether through litigation, arbitration or mediation, or with respect to the validity or enforceability of, or liability under, any provision of this Agreement or any guarantee of performance thereof, and the Executive is the prevailing party, the Company agrees to pay promptly upon conclusion of the contest all legal fees and expenses which the Executive may reasonably have incurred. (b) If there shall be any dispute between the Company and the Executive (i) in the event of any termination of the Executive's employment by the Company, whether such termination was for Cause, or (ii) in the event of any termination of employment by the Executive, whether Good Reason existed, then, unless and until there is a final, nonappealable judgment by a court of competent jurisdiction declaring that such termination was for Cause or that Good Reason did not exist, the Company shall pay all amounts, and provide all benefits, to the Executive and/or the Executive's family or other beneficiaries, as the case may be, that the Company would be required to pay or provide pursuant to Section 6(a) hereof as though such termination were by the Company without Cause or by the Executive with Good Reason; provided, however, that the Company shall not be required to pay any disputed amounts pursuant to this paragraph except upon receipt of an undertaking (which need not be secured) by or on behalf of the Executive to repay all such amounts to which the Executive is ultimately adjudged by such court not to be entitled. 9. CERTAIN ADDITIONAL PAYMENTS BY THE COMPANY. (a) Anything in this Agreement to the contrary notwithstanding, in the event it shall be determined that any payment or distribution by the Company to or for the benefit of the Executive (whether paid or payable or distributed or distributable pursuant to the terms of this Agreement or otherwise, but determined without regard to any additional payments required under this Section 9) (a "Payment") would be subject to the excise tax imposed by Section 4999 of the Code or any interest or penalties are incurred by the Executive with respect to such excise tax (such excise tax, together with any such interest and penalties, are hereinafter collectively referred to as the "Excise Tax"), then the Executive shall be entitled to receive an additional payment (a "Gross-Up Payment") in an amount such that after payment by the Executive of all taxes (including any interest or penalties imposed with respect to such taxes), including, without limitation, any income taxes (and any interest and penalties imposed -10- with respect thereto) and Excise Tax imposed upon the Gross-Up Payment, the Executive retains an amount of the Gross-Up Payment equal to the Excise Tax imposed upon the Payments. (b) Subject to the provisions of Section 9(c), all determinations required to be made under this Section 9, including whether and when Gross-Up Payment is required and the amount of such Gross-Up Payment and the assumptions to be utilized in arriving at such determination, shall be made by Arthur Andersen LLP (the "Accounting Firm") which shall provide detailed supporting calculations both to the Company and the Executive within 15 business days of the receipt of notice from the Executive that there has been a Payment, or such earlier time as is requested by the Company. In the event that the Accounting Firm is serving as accountant or auditor for the individual, entity or group effecting the Change of Control, the Executive shall appoint another nationally recognized accounting firm to make the determinations required hereunder (which accounting firm shall then be referred to as the Accounting Firm hereunder). All fees and expenses of the Accounting Firm shall be borne solely by the Company. Any Gross-Up Payment, as determined pursuant to this Section 9, shall be paid by the Company to the Executive within five days of the receipt of the Accounting Firm's determination. If the Accounting Firm determines that no Excise Tax is payable by the Executive, it shall furnish the Executive with a written opinion that failure to report the Excise Tax on the Executive's applicable federal income tax return would not result in the imposition of a negligence or similar penalty. Any determination by the Accounting Firm shall be binding upon the Company and the Executive. As a result of the uncertainty in the application of Section 4999 of the Code at the time of the initial determination by the Accounting Firm hereunder, it is possible that Gross-Up Payments which will not have been made by the Company should have been made ("Underpayment"), consistent with the calculations required to be made hereunder. In the event that the Company exhausts its remedies pursuant to Section 9(c) and the Executive thereafter is required to make a payment of any Excise Tax, the Accounting Firm shall determine the amount of the Underpayment that has occurred and any such Underpayment shall be promptly paid by the Company to or for the benefit of the Executive. (c) The Executive shall notify the Company in writing of any claims by the Internal Revenue Service that, if successful, would require the payment by the Company of the Gross-Up Payment. Such notification shall be given as soon as practicable but no later than ten business days after the Executive is informed in writing of such claim and shall apprise the Company of the nature of such claim and the date on which such claim is requested to be paid. The Executive shall not pay such claim prior to the expiration of the 30-day period following the date on which it gives such notice to the Company (or such shorter period ending on the date that any payment of taxes with respect to such claim is due). If the Company notifies the Executive in writing prior to the expiration of such period that it desires to contest such claim, the Executive shall: (i) give the Company any information reasonably requested by the Company relating to such claim, (ii) take such action in connection with contesting such claim as the Company shall reasonably request in writing from time to time, including, without limitation, accepting legal representation with respect to such claim by an attorney reasonably selected by the Company, -11- (iii) cooperate with the Company in good faith in order effectively to contest such claim, and (iv) permit the Company to participate in any proceedings relating to such claim; provided, however, that the Company shall bear and pay directly all costs and expenses (including additional interest and penalties) incurred in connection with such contest and shall indemnify and hold the Executive harmless, on an after-tax basis, for any Excise Tax or income tax (including interest and penalties with respect thereto) imposed as a result of such representation and payment of costs and expenses. Without limitation on the foregoing provisions of this Section 9(c), the Company shall control all proceedings taken in connection with such contest and, at its sole option, may pursue or forego any and all administrative appeals, proceedings, hearings and conferences with the taxing authority in respect of such claim and may, at its sole option, either direct the Executive to pay the tax claimed and sue for a refund or contest the claim in any permissible manner, and the Executive agrees to prosecute such contest to a determination before any administrative tribunal, in a court of initial jurisdiction and in one or more appellate courts, as the Company shall determine; provided, however, that if the Company directs the Executive to pay such claim and sue for a refund, the Company shall advance the amount of such payment to the Executive, on an interest-free basis and shall indemnify and hold the Executive harmless, on an after-tax basis, from any Excise Tax or income tax (including interest or penalties with respect thereto) imposed with respect to such advance or with respect to any imputed income with respect to such advance; and further provided that any extension of the statute of limitations relating to payment of taxes for the taxable year of the Executive with respect to which such contested amount is claimed to be due is limited solely to such contested amount. Furthermore, the Company's control of the contest shall be limited to issues with respect to which a Gross-Up Payment would be payable hereunder and the Executive shall be entitled to settle or contest, as the case may be, any other issue raised by the Internal Revenue Service or any other taxing authority. (d) If, after the receipt by the Executive of an amount advanced by the Company pursuant to Section (c), the Executive becomes entitled to receive any refund with respect to such claim, the Executive shall (subject to the Company's complying with the requirements of Section 9(c)) promptly pay to the Company the amount of such refund (together with any interest paid or credited thereon after taxes applicable thereto). If, after the receipt by the Executive of an amount advanced by the Company pursuant to Section 9(c), a determination is made that the Executive shall not be entitled to any refund with respect to such claim and the Company does not notify the Executive in writing of its intent to contest such denial of refund prior to the expiration of 30 days after such determination, then such advance shall be forgiven and shall not be required to be repaid and the amount of such advance shall be offset, to the extent thereof, the amount of Gross-Up Payment required to be paid. 10. CONFIDENTIAL INFORMATION. The Executive shall hold in a fiduciary capacity for the benefit of the Company all secret or confidential information, knowledge or data relating to the Company or any of its affiliated companies, and their respective businesses, which shall have been obtained by the Executive during the Executive's employment by the Company or any of its affiliated companies and which shall not be or become public knowledge (other than by acts by the Executive or representatives of the Executive in violation of this Agreement). After termination of -12- the Executive's employment with the Company, the Executive shall not, without the prior written consent of the Company or as may otherwise be required by law or legal process, communicate or divulge any such information, knowledge or data to anyone other than the Company and those designated by it. In no event shall an asserted violation of the provisions of this Section 10 constitute a basis for deferring or withholding any amounts otherwise payable to the Executive under this Agreement. 11. SUCCESSORS. (a) This Agreement is personal to the Executive and without the prior written consent of the Company shall not be assignable by the Executive otherwise than by will or the laws of descent and distribution. This Agreement shall inure to the benefit of and be enforceable by the Executive's legal representatives. (b) This Agreement shall inure to the benefit of and be binding upon the Company and its successors and assigns. (c) The Company will require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Company to assume expressly and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform it if no such succession had taken place. As used in this Agreement, "Company" shall mean the Company as hereinbefore defined and any successor to its business and/or assets as aforesaid which assumes and agrees to perform this Agreement by operation of law, or otherwise. 12. MISCELLANEOUS. (a) This Agreement shall be an unfunded obligation of the Company. (b) THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF TEXAS, WITHOUT REFERENCE TO PRINCIPLES OF CONFLICT OF LAWS. The captions of this Agreement are not part of the provisions hereof and shall have no force or effect. This Agreement may not be amended or modified otherwise than by a written agreement executed by the parties hereto or their respective successors and legal representatives. (c) All notices and other communications hereunder shall be in writing and shall be given by hand delivery to the other party or by registered or certified mail, return receipt requested, postage prepaid, addressed as follows: IF TO THE EXECUTIVE: Stephen R. Brunner 6119 Palm Ridge Court Kingwood, Texas 77345 -13- IF TO THE COMPANY: Pogo Producing Company P.O. Box 2504 Houston, Texas 77252-2504 Attention: Senior Vice President and Chief Administrative Officer or to such other address as either party shall have furnished to the other in writing in accordance herewith. Notice and communications shall be effective when actually received by the addressee. (d) The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement. (e) The Company may withhold from any amounts payable under this Agreement such Federal, state or local taxes as shall be required to be withheld pursuant to any applicable law or regulation. (f) The Executive's or the Company's failure to insist upon strict compliance with any provision hereof or any other provision of this Agreement or the failure to assert any right the Executive or the Company may have hereunder, including, without limitation, the right of the Executive to terminate employment for Good Reason pursuant to Section 5(c)(i)-(v) of this Agreement, shall not be deemed to be a waiver of such provision or right or any other provision or right of this Agreement. IN WITNESS WHEREOF, the Executive has hereunto set the Executive's hand and, pursuant to the authorization from its Board of Directors, the Company has caused these presents to be executed in its name on its behalf, all as of the day and year first above written. /s/ STEPHEN R. BRUNNER ---------------------- _ POGO PRODUCING COMPANY By: /s/ PAUL G. VAN WAGENEN ----------------------- -14- EX-10.22 12 EXHIBIT 10.22 EXECUTIVE EMPLOYMENT AGREEMENT AGREEMENT by and between POGO PRODUCING COMPANY, a Delaware corporation (the "Company") and J. DON MCGREGOR (the "Executive"), dated as of the 1st day of February, 1999. The Board of Directors of the Company (the "Board"), has determined that it is in the best interests of the Company and its shareholders to assure that the Company will have the continued dedication of the Executive, and to provide the Executive with compensation and benefits arrangements which are competitive with those of other corporations and which ensure that the compensation and benefits expectations of the Executive will be satisfied. The Board also believes it is imperative to diminish the inevitable distraction of the Executive by virtue of the personal uncertainties and risks created by a pending or threatened Change of Control and to encourage the Executive's full attention and dedication to the Company currently and in the event of any threatened or pending Change of Control, and to insure the continuation of favorable compensation and benefits upon a Change of Control. Therefore, in order to accomplish these objectives, the Board has caused the Company to enter into this Agreement. NOW, THEREFORE, IT IS HEREBY AGREED AS FOLLOWS; 1. CERTAIN DEFINITIONS. (a) The "Effective Date" shall mean the date of this Agreement. (b) The "Employment Period" shall mean the period commencing on the Effective Date and ending on the second anniversary of such date; provided, however, that on each annual anniversary of the Effective Date (the "Renewal Date"), the Employment Period shall be reviewed, to determine whether, in the discretion of the Company, it should be extended for one additional year so as to terminate two years from such Renewal Date. Any such one year extension shall be effective only if, prior to the Renewal Date, the Company shall give notice to the Executive that the Employment Period shall be so extended. 2. CHANGE OF CONTROL. For the purpose of this Agreement, a "Change of Control" shall mean: (a) The acquisition by any individual, entity or group (within the meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934, as amended (the "Exchange Act")) (a "Person") of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of 20% or more of either (i) the then outstanding shares of common stock of the Company (the "Outstanding Company Common Stock") or (ii) the combined voting power of the then outstanding voting securities of the Company entitled to vote generally in the election of directors (the "Outstanding Company Voting Securities"). Notwithstanding anything in this Agreement to the contrary, the following shall not constitute a Change of Control: (i) any acquisition directly from the Company (excluding an acquisition by virtue of the exercise of a conversion privilege), (ii) any acquisition by the Company, (iii) any acquisition by any employee benefit plan (or related trust) sponsored or maintained by the Company or any corporation controlled by the Company, or (iv) any acquisition by State Farm Mutual Automobile Insurance Company and certain affiliates ("State Farm") or Klingenstein, Fields & Co., L.P. ("Klingenstein") ("Specified Stockholders") of beneficial ownership of Outstanding Company Voting Securities resulting in an accumulation of said securities up to and including the following amounts: A. In the case of State Farm, 30% of Outstanding Voting Securities, and B. In the case of Klingenstein, 30% of Outstanding Voting Securities, or (v) any acquisition by any corporation pursuant to a reorganization, merger or consolidation, if, following such reorganization, merger or consolidation, the conditions described in clauses (i), (ii) and (iii) of subsection (c) of this Section 2 are satisfied; or (b) Individuals who, as of the date hereof, constitute the Board (the "Incumbent Board") cease for any reason to constitute at least a majority of the Board; provided, however, that any individual becoming a director subsequent to the date hereof whose election, or nomination for election by the Company's shareholders, was approved by a vote of at least a majority of the directors then comprising the Incumbent Board shall be considered as though such individual were a member of the Incumbent Board, but excluding, for this purpose, any such individual whose initial assumption of office occurs as a result of either an actual or threatened election contest (as such terms are used in Rule 14a-11 of Regulation 14A promulgated under the Exchange Act) or other actual or threatened solicitation of proxies or consents by or on behalf of a Person other than the Board; or (c) Approval by the shareholders of the Company of a reorganization, merger or consolidation, in each case, unless, following such reorganization, merger or consolidation, (i) more than 60% of, respectively, the then outstanding shares of common stock of the corporation resulting from such reorganization, merger or consolidation and the combined voting power of the then outstanding voting securities of such corporation entitled to vote generally in the election of directors is then beneficially owned, directly or indirectly, by all or substantially all of the individuals and entities who where the beneficial owners, respectively, of the Outstanding Company Common Stock and Outstanding Company Voting Securities immediately prior to such reorganization, merger or consolidation in substantially the same proportions as their ownership, -2- immediately prior to such reorganization, merger or consolidation, of the Outstanding Company Common Stock and Outstanding Company Voting Securities, as the case may be, (ii) no Person [excluding the Company, any Specified Stockholder, any employee benefit plan (or related trust) of the Company or such corporation resulting from such reorganization, merger or consolidation and any Person beneficially owning, immediately prior to such reorganization, merger or consolidation, directly or indirectly, 20% or more of the Outstanding Company Common Stock or Outstanding Voting Securities, as the case may be] beneficially owns, directly or indirectly, 20% or more, respectively, of the then outstanding shares of common stock of the corporation resulting from such reorganization, merger or consolidation or the combined voting power of the then outstanding voting securities of such corporation, entitled to vote generally in the election of directors and (iii) at least a majority of the members of the board of directors of the corporation resulting from such reorganization, merger or consolidation were members of the Incumbent Board at the time of the execution of the initial agreement providing for such reorganization, merger or consolidation; or (d) Approval by the shareholders of the Company of (i) a complete liquidation or dissolution of the Company or (ii) the sale or other disposition of all or substantially all of the assets of the Company, other than to a corporation with respect to which following such sale or other disposition (A) more than 60% of, respectively, the then outstanding shares of common stock of such corporation and the combined voting power of the then outstanding voting securities of such corporation entitled to vote generally in the election of directors is then beneficially owned, directly or indirectly, by all or substantially all of the individuals and entities who were the beneficial owners, respectively, of the Outstanding Company Common Stock and Outstanding Company Voting Securities immediately prior to such sale or other disposition in substantially the same proportion as their ownership, immediately prior to such sale or other disposition, of the Outstanding Company Common Stock and Outstanding Company Voting Securities, as the case may be, (B) no Person [excluding the Company, any Specified Stockholder, any employee benefit plan (or related trust) of the Company or such corporation and any Person beneficially owning, immediately prior to such sale or other disposition, directly or indirectly, 20% or more of the Outstanding Company Common Stock or Outstanding Company Voting Securities, as the case may be] beneficially owns, directly or indirectly, 20% or more of, respectively, the then outstanding shares of common stock of such corporation and the combined voting power of the then outstanding voting securities of such corporation entitled to vote generally in the election of directors and (C) at least a majority of the members of the board of directors of such corporation where members of the Incumbent Board at the time of the execution of the initial agreement or action of the Board providing for such sale or other disposition of assets of the Company. 3. EMPLOYMENT AGREEMENT. The Company hereby agrees to continue the Executive in its employ in accordance with the terms and provisions of this Agreement, for the Employment Period. 4. TERMS OF EMPLOYMENT. (a) POSITION AND DUTIES. (i) During the Employment Period, (A) the Executive's position (including status, offices, titles and reporting requirements), authority, duties and responsibilities shall be at least commensurate in all material respects with the most significant of those held, exercised and assigned at any time during the 90-day period immediately preceding the later of the Effective Date, the most recent Renewal Date or a Change of Control, if any, (the "Applicable Date") and (B) the Executive's services shall be performed at the -3- location where the Executive was employed immediately preceding the Applicable Date or any office which is the headquarters of the Company and is less than 35 miles from such location. (ii) During the Employment Period, and excluding any periods of vacation and sick leave to which the Executive is entitled, the Executive agrees to devote reasonable attention and time during normal business hours to the business and affairs of the Company. During the Employment Period it shall not be a violation of this Agreement for the Executive to (A) serve on corporate, civic or charitable boards or committees, (B) deliver lectures, fulfill speaking engagements or teach at educational institutions and (C) manage personal investments, so long as such activities do not significantly interfere with the performance of the Executive's responsibilities as an employee of the Company in accordance with this Agreement; provided Executive may not serve on the board of a publicly traded for profit corporation or similar body of a publicly traded for profit business organized in other than corporate form without the consent of the Compensation Committee of the Board of Directors of the Company. It is expressly understood and agreed that to the extent that any such activities have been conducted by the Executive prior to the Applicable Date, the continued conduct of such activities (or the conduct of activities similar in nature and scope thereto) subsequent to the Applicable Date shall not thereafter be deemed to interfere with the performance of the Executive's responsibilities to the Company. (b) COMPENSATION. (i) BASE SALARY. During the Employment Period, the Executive shall receive an annual base salary ("Annual Base Salary"), which shall be paid on a monthly basis, at least equal to twelve times the highest monthly base salary paid or payable to the Executive by the Company and its affiliated companies in respect of the twelve-month period immediately preceding the month in which the Applicable Date occurs. During the Employment Period, the Annual Base Salary shall be reviewed at least annually and may be increased at any time and from time to time as shall be substantially consistent with increases in base salary generally awarded in the ordinary course of business to other executives of the Company and its affiliated companies. Any increase in Annual Base Salary shall not serve to limit or reduce any other obligation to the Executive under this Agreement. As used in this Agreement, the term "affiliated companies" shall include any company controlled by, controlling or under common control with the Company. (ii) ANNUAL BONUS. In addition to Annual Base Salary, the Executive may be awarded at the discretion of the Company for any fiscal year ending during the Employment Period, a bonus. (iii) INCENTIVE, SAVINGS AND RETIREMENT PLANS. During the Employment Period, the Executive shall be entitled to participate in all incentive, savings and retirement plans, practices, policies and programs applicable generally to other executives of the Company and its affiliated companies. Such plans, practices, policies and programs shall provide the Executive with incentive opportunities (measured with respect to both regular and special incentive opportunities, to the extent, if any, that such distinction is applicable), savings opportunities and retirement benefit opportunities, in each case, equal to the most favorable of those provided by the Company and its affiliated companies for the Executive under such plans, practices, policies and programs as in effect at any time during the 90-day period immediately preceding the Applicable Date. -4- (iv) WELFARE BENEFIT PLANS. During the Employment Period, the Executive and/or the Executive's family, as the case may be, shall be eligible for participation in and shall receive all benefits under welfare benefit plans, practices, policies and programs provided by the Company and its affiliated companies (including, without limitation, medical, prescription, dental, disability, salary continuance, employee life, group life, accidental death and travel accident insurance plans and programs) to the extent applicable generally to other executives of the Company and its affiliated companies. Such plans, practices, policies and programs shall provide the Executive with benefits which are equal, in the aggregate, to the most favorable of such plans, practices, policies and programs in effect for the Executive at any time during the 90-day period immediately preceding the Applicable Date. (v) EXPENSES. During the Employment Period, the Executive shall be entitled to receive prompt reimbursement for all reasonable expenses incurred by the Executive in accordance with the most favorable policies, practices and procedures of the Company and its affiliated companies in effect for the Executive at any time during the 90-day period immediately preceding the Applicable Date. (vi) FRINGE BENEFITS. During the Employment Period, the Executive shall be entitled to fringe benefits in accordance with the most favorable plans, practices, programs and policies of the Company and its affiliated companies in effect for the Executive at any time during the 90-day period immediately preceding the Applicable Date. (vii) OFFICE AND SUPPORT STAFF. During the Employment Period, the Executive shall be entitled to an office or offices of a size and with furnishings and other appointments, and to personal secretarial and other assistance, at least equal to the most favorable of the foregoing provided to the Executive by the Company and its affiliated companies at any time during the 90-day period immediately preceding the Applicable Date. (viii) VACATION. During the Employment Period, the Executive shall be entitled to paid vacation in accordance with the most favorable plans, policies, programs and practices of the Company and its affiliated companies as in effect for the Executive at any time during the 90-day period immediately preceding the Applicable Date. 5. TERMINATION OF EMPLOYMENT. (a) DEATH OR DISABILITY. The Executive's employment shall terminate automatically upon the Executive's death during the Employment Period. If the Company determines in good faith that the Disability of the Executive has occurred during the Employment Period (pursuant to the definition of Disability set forth below), it may give to the Executive written notice in accordance with Section 12(c) of this Agreement of its intention to terminate the Executive's employment. In such event, the Executive's employment with the Company shall terminate effective on the 30th day after receipt of such notice by the Executive (the "Disability Effective Date"), provided that, within the 30 days after such receipt, the Executive shall not have returned to full-time performance of the Executive's duties. For purposes of this Agreement, "Disability" shall mean the absence of the Executive from the Executive's duties with the Company on a full-time basis for 180 consecutive business days as a result of incapacity due to mental or physical illness which is determined to be total and permanent by a physician selected by -5- the Company or its insurers and acceptable to the Executive or the Executive's legal representative (such agreement as to acceptability not to be withheld unreasonably). (b) CAUSE. The Company may terminate the Executive's employment during the Employment Period for Cause. For purposes of this Agreement, "Cause" shall mean (i) a material violation by the Executive of the Executive's obligations under Section 4(a) of this Agreement (other than as a result of incapacity due to physical or mental illness) which is willful and deliberate on the Executive's part, which is committed in bad faith or without reasonable belief that such violation is in the best interests of the Company and which is not remedied in a reasonable period of time after receipt of written notice from the Company specifying such violation or (ii) the conviction of the Executive of a felony involving moral turpitude. (c) GOOD REASON; WINDOW PERIOD; OTHER TERMINATIONS. The Executive's employment may be terminated (i) during the Employment Period by the Executive for Good Reason, (ii) during the Window Period by the Executive without any reason or (iii) by Executive other than (A) for Good Reason or (B) during a Window Period. For purposes of this Agreement, the "Window Period" shall mean the 180-day period immediately following the date a Change of Control occurs. Anything in this Agreement to the contrary notwithstanding, if a Change of Control occurs and if the Executive's employment with the Company is terminated prior to the date on which the Change of Control occurs, and if it is reasonably demonstrated by the Executive that such termination of employment or cessation of status as an officer (i) was at the request of a third party who has taken steps reasonably calculated to effect the Change of Control or (ii) otherwise arose in connection with or anticipation of the Change of Control, then for all purposes of this Agreement the "date a Change of Control occurs" shall mean the date immediately prior to the date of such termination of employment or cessation of status as an officer. For purposes of this Agreement, "Good Reason" shall mean (i) the assignment to the Executive of any duties inconsistent with the Executive's position (including status, offices, titles and reporting requirements), authority, duties or responsibilities as contemplated by Section 4(a) of this Agreement, or any other action by the Company which results in a diminution in such position, authority, duties or responsibilities excluding for this purpose an insubstantial or inadvertent action which is remedied by the Company promptly after receipt of notice thereof given by the Executive; (ii) any failure by the Company to comply with any of the provisions of Section 4(b) of this Agreement, other than an insubstantial or inadvertent failure which is remedied by the Company promptly after receipt of notice thereof given by the Executive; (iii) the Company's requiring the Executive to be based at any office or location other than that described in Section 4(a)(i)(B) hereof; (iv) any purported termination by the Company of the Executive's employment otherwise than as expressly permitted by this Agreement; or -6- (v) any failure by the Company to comply with and satisfy Section 11(c) of this Agreement. (d) NOTICE OF TERMINATION. Any termination by the Company for Cause, or by the Executive without any reason during the Window Period or for Good Reason, shall be communicated by Notice of Termination to the other party hereto given in accordance with Section 12(c) of this Agreement. For purposes of this Agreement, a "Notice of Termination" means a written notice which (i) indicates the specific termination provision in this Agreement relied upon, (ii) to the extent applicable, sets forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of the Executive's employment under the provision so indicated and (iii) if the Date of Termination (as defined below) is other than the date of receipt of such notice, specifies the termination date (which date shall be not more than fifteen days after the giving of such notice). The failure by the Executive or the Company to set forth in the Notice of Termination any fact or circumstance which contributes to a showing of Good Reason or Cause shall not waive any right of the Executive or the Company hereunder or preclude the Executive or the Company from asserting such fact or circumstance in enforcing the Executive's or the Company's right hereunder. (e) DATE OF TERMINATION. "Date of Termination" means (i) if the Executive's employment is terminated by the Company for Cause, or by the Executive during the Window Period or for Good Reason, the date of receipt of the Notice of Termination or any later date specified therein, as the case may be, (ii) if the Executive's employment is terminated by the Company other than for Cause or Disability, the Date of Termination shall be the date on which the Company notifies the Executive of such termination, (iii) if the Executive's employment is terminated by reason of death or Disability, the Date of Termination shall be the date of death of the Executive or the Disability Effective Date, as the case may be, and (iv) if the Executive's employment is terminated by the Executive other than for Good Reason or during a Window Period, the date of the receipt of the Notice of Termination or any later date specified therein. 6. OBLIGATIONS OF THE COMPANY UPON TERMINATION. (a) GOOD REASON OR DURING THE WINDOW PERIOD; OTHER THAN FOR CAUSE, DEATH OR DISABILITY. If, during the Employment Period, the Company shall terminate the Executive's employment other than for Cause or Disability or the Executive shall terminate employment either for Good Reason or without any reason during the Window Period: (i) the Company shall pay to the Executive in a lump sum in cash within 30 days after the Date of Termination the aggregate of the following amounts: A. the sum of (1) the Executive's Annual Base Salary through the Date of Termination to the extent not theretofore paid and (2) any compensation previously deferred by the Executive (together with any accrued interest or earnings thereon) and any accrued vacation pay, in each case to the extent not theretofore paid (the sum of the amounts described in clauses (1) and (2) shall be hereinafter referred to as the "Accrued Obligations"); and -7- B. the amount (such amount shall be hereinafter referred to as the "Severance Amount") equal to the product of (1) three and (2) the sum of (x) the Executive's Annual Base Salary and (y) any bonus described in Section 4(b)(ii) paid or payable in respect of the most recently completed fiscal year of the Company; and, provided further, that such amount shall be reduced by the present value (determined as provided in Section 280G(d)(4) of the Internal Revenue Code of 1986, as amended (the "Code")) of any other amount of severance relating to salary or bonus continuation to be received by the Executive upon termination of employment of the Executive under any severance plan, severance policy or severance arrangement of the Company; and C. a separate lump sum supplemental retirement benefit equal to the difference between (1) the actuarial equivalent (utilizing for this purpose the actuarial assumptions utilized with respect to the Employees Retirement Plan for Pogo Producing Company (or any successor plan thereto) (the "Retirement Plan") during the 90-day period immediately preceding the Applicable Date) of the benefit payable under the Retirement Plan and any supplemental and/or excess retirement plan of the Company and its affiliated companies providing benefits for the Executive (the "SERP") which the Executive would receive if the Executive's employment continued at the compensation level provided for in Sections 4(b)(i) and 4(b)(ii) of this Agreement for the remainder of the Employment Period, assuming for this purpose that all accrued benefits are fully vested and that benefit accrual formulas are no less advantageous to the Executive than those in effect during the 90-day period immediately preceding the Applicable Date, and (2) the actuarial equivalent (utilizing for this purpose the actuarial assumptions utilized with respect to the Retirement Plan during the 90-day period immediately preceding the Applicable Date) of the Executive's actual benefit (paid or payable), if any, under the Retirement Plan and the SERP (the amount of such benefit shall be hereinafter referred to as the "Supplemental Retirement Amount"); and (ii) for the remainder of the Employment Period, or such longer period as any plan, program, practice or policy may provide, the Company shall continue benefits to the Executive and/or the Executive's family at least equal to those which would have been provided to them in accordance with the plans, programs, practices and policies described in Section 4(b)(iv) of this Agreement if the Executive's employment had not been terminated in accordance with the most favorable plans, practices, programs or policies of the Company and its affiliated companies as in effect and applicable generally to other executives and their families during the 90-day period immediately preceding the Applicable Date, provided, however, that if the Executive becomes reemployed with another employer and is eligible to receive medical or other welfare benefits under another employer provided plan, the medical and other welfare benefits described herein shall be secondary to those provided under such other plan during such applicable period of eligibility (such continuation of such benefits for the applicable period herein set forth shall be hereinafter referred to as "Welfare Benefit Continuation"). For purposes of determining eligibility of the Executive for retiree benefits pursuant to such plans, practices, programs and policies, the Executive shall be considered to have remained employed until the end of the Employment Period and to have retired on the last day of such period; and (iii) to the extent not theretofore paid or provided, the Company shall timely pay or provide to the Executive and/or the Executive's family any other amounts or benefits required to -8- be paid or provided or which the Executive and/or the Executive's family is eligible to receive pursuant to this Agreement and under any plan, program, policy or practice or contract or agreement of the Company and its affiliated companies as in effect and applicable generally to other executives and their families during the 90-day period immediately preceding the Applicable Date (such other amounts and benefits shall be hereinafter referred to as the "Other Benefits"). (b) DEATH. If the Executive's employment is terminated by reason of the Executive's death during the Employment Period, this Agreement shall terminate without further obligations to the Executive's legal representatives under this Agreement, other than for (i) payment of Accrued Obligations (which shall be paid to the Executive's estate or beneficiary, as applicable, in a lump sum in cash within 30 days of the Date of Termination) and the timely payment or provision of the Welfare Benefit Continuation and Other Benefits and (ii) payment to the Executive's estate or beneficiary, as applicable, in a lump sum in cash within 30 days of the Date of Termination of an amount equal to the sum of the Severance Amount and the Supplemental Retirement Amount. (c) DISABILITY. If the Executive's employment is terminated by reason of the Executive's Disability during the Employment Period, this Agreement shall terminate without further obligations to the Executive, other than for (i) payment of Accrued Obligations (which shall be paid to the Executive in a lump sum in cash within 30 days of the Date of Termination) and the timely payment or provision of the Welfare Benefit Continuation and Other Benefits (excluding, in each case, Disability Benefits (as defined below)) and (ii) payment to the Executive in a lump sum in cash within 30 days of the Date of Termination of an amount equal to the greater of (A) the sum of the Severance Amount and the Supplemental Retirement Amount and (B) the present value (determined as provided in Section 280G(d)(4) of the Code) of any cash amount to be received by the Executive as a disability benefit pursuant to the terms of any long term disability plan, policy or arrangement of the Company and its affiliated companies, but not including any proceeds of disability insurance covering the Executive to the extent paid for on a contributory basis by the Executive (which shall be paid in any event as an Other Benefit) (the benefits included in this clause (B) shall be hereinafter referred to as the "Disability Benefits"). (d) CAUSE; BY EXECUTIVE OTHER THAN FOR GOOD REASON AND OTHER THAN DURING A WINDOW PERIOD. If the Executive's employment shall be terminated for Cause during the Employment Period, this Agreement shall terminate without further obligations to the Executive other than the obligation to pay to the Executive Annual Base Salary through the Date of Termination plus the amount of any compensation previously deferred by the Executive, in each case to the extent theretofore unpaid. If the Executive terminates employment during the Employment Period, excluding a termination either for Good Reason or without any reason during the Window Period, this Agreement shall terminate without further obligations to the Executive, other than for Accrued Obligations and the timely payment or provision of Other Benefits. In such case, all Accrued Obligations shall be paid to the Executive in a lump sum in cash within 30 days of the Date of Termination. 7. NON-EXCLUSIVITY OF RIGHTS. Except as provided in Section 6(a)(ii), 6(b) and 6(c) of this Agreement, nothing in this Agreement shall prevent or limit the Executive's continuing or future participation in any plan, program, policy or practice provided by the Company or any of its -9- affiliated companies and for which the Executive may qualify, nor shall anything herein limit or otherwise affect such rights as the Executive may have under any contract or agreement with the Company or any of its affiliated companies. Amounts which are vested benefits or which the Executive is otherwise entitled to receive under any plan, policy, practice or program of or any contract or agreement with the Company or any of its affiliated companies at or subsequent to the Date of Termination shall be payable in accordance with such plan, policy, practice or program or contract or agreement except as explicitly modified by this Agreement. 8. FULL SETTLEMENT; RESOLUTION OF DISPUTES. (a) The Company's obligation to make payments provided for in this Agreement and otherwise to perform its obligations hereunder shall not be affected by any set-off, counterclaim, recoupment, defense or other claim, right or action which the Company may have against the Executive or others. In no event shall the Executive be obligated to seek other employment or take any other action by way of mitigation of the amounts payable to the Executive under any of the provisions of this Agreement and, except as provided in Section 6(a)(ii) of this Agreement, such amounts shall not be reduced whether or not the Executive obtains other employment. If there is any contest by the Company concerning the Payments or benefits to be provided to the Executive hereunder whether through litigation, arbitration or mediation, or with respect to the validity or enforceability of, or liability under, any provision of this Agreement or any guarantee of performance thereof, and the Executive is the prevailing party, the Company agrees to pay promptly upon conclusion of the contest all legal fees and expenses which the Executive may reasonably have incurred. (b) If there shall be any dispute between the Company and the Executive (i) in the event of any termination of the Executive's employment by the Company, whether such termination was for Cause, or (ii) in the event of any termination of employment by the Executive, whether Good Reason existed, then, unless and until there is a final, nonappealable judgment by a court of competent jurisdiction declaring that such termination was for Cause or that Good Reason did not exist, the Company shall pay all amounts, and provide all benefits, to the Executive and/or the Executive's family or other beneficiaries, as the case may be, that the Company would be required to pay or provide pursuant to Section 6(a) hereof as though such termination were by the Company without Cause or by the Executive with Good Reason; provided, however, that the Company shall not be required to pay any disputed amounts pursuant to this paragraph except upon receipt of an undertaking (which need not be secured) by or on behalf of the Executive to repay all such amounts to which the Executive is ultimately adjudged by such court not to be entitled. 9. CERTAIN ADDITIONAL PAYMENTS BY THE COMPANY. (a) Anything in this Agreement to the contrary notwithstanding, in the event it shall be determined that any payment or distribution by the Company to or for the benefit of the Executive (whether paid or payable or distributed or distributable pursuant to the terms of this Agreement or otherwise, but determined without regard to any additional payments required under this Section 9) (a "Payment") would be subject to the excise tax imposed by Section 4999 of the Code or any interest or penalties are incurred by the Executive with respect to such excise tax (such excise tax, together with any such interest and penalties, are hereinafter collectively referred to as the "Excise Tax"), then the Executive shall be entitled to receive an additional payment (a "Gross-Up Payment") in an amount such that after payment by the Executive of all taxes (including any interest or penalties imposed with respect to such taxes), including, without limitation, any income taxes (and any interest and penalties imposed -10- with respect thereto) and Excise Tax imposed upon the Gross-Up Payment, the Executive retains an amount of the Gross-Up Payment equal to the Excise Tax imposed upon the Payments. (b) Subject to the provisions of Section 9(c), all determinations required to be made under this Section 9, including whether and when Gross-Up Payment is required and the amount of such Gross-Up Payment and the assumptions to be utilized in arriving at such determination, shall be made by Arthur Andersen LLP (the "Accounting Firm") which shall provide detailed supporting calculations both to the Company and the Executive within 15 business days of the receipt of notice from the Executive that there has been a Payment, or such earlier time as is requested by the Company. In the event that the Accounting Firm is serving as accountant or auditor for the individual, entity or group effecting the Change of Control, the Executive shall appoint another nationally recognized accounting firm to make the determinations required hereunder (which accounting firm shall then be referred to as the Accounting Firm hereunder). All fees and expenses of the Accounting Firm shall be borne solely by the Company. Any Gross-Up Payment, as determined pursuant to this Section 9, shall be paid by the Company to the Executive within five days of the receipt of the Accounting Firm's determination. If the Accounting Firm determines that no Excise Tax is payable by the Executive, it shall furnish the Executive with a written opinion that failure to report the Excise Tax on the Executive's applicable federal income tax return would not result in the imposition of a negligence or similar penalty. Any determination by the Accounting Firm shall be binding upon the Company and the Executive. As a result of the uncertainty in the application of Section 4999 of the Code at the time of the initial determination by the Accounting Firm hereunder, it is possible that Gross-Up Payments which will not have been made by the Company should have been made ("Underpayment"), consistent with the calculations required to be made hereunder. In the event that the Company exhausts its remedies pursuant to Section 9(c) and the Executive thereafter is required to make a payment of any Excise Tax, the Accounting Firm shall determine the amount of the Underpayment that has occurred and any such Underpayment shall be promptly paid by the Company to or for the benefit of the Executive. (c) The Executive shall notify the Company in writing of any claims by the Internal Revenue Service that, if successful, would require the payment by the Company of the Gross-Up Payment. Such notification shall be given as soon as practicable but no later than ten business days after the Executive is informed in writing of such claim and shall apprise the Company of the nature of such claim and the date on which such claim is requested to be paid. The Executive shall not pay such claim prior to the expiration of the 30-day period following the date on which it gives such notice to the Company (or such shorter period ending on the date that any payment of taxes with respect to such claim is due). If the Company notifies the Executive in writing prior to the expiration of such period that it desires to contest such claim, the Executive shall: (i) give the Company any information reasonably requested by the Company relating to such claim, (ii) take such action in connection with contesting such claim as the Company shall reasonably request in writing from time to time, including, without limitation, accepting legal representation with respect to such claim by an attorney reasonably selected by the Company, -11- (iii) cooperate with the Company in good faith in order effectively to contest such claim, and (iv) permit the Company to participate in any proceedings relating to such claim; provided, however, that the Company shall bear and pay directly all costs and expenses (including additional interest and penalties) incurred in connection with such contest and shall indemnify and hold the Executive harmless, on an after-tax basis, for any Excise Tax or income tax (including interest and penalties with respect thereto) imposed as a result of such representation and payment of costs and expenses. Without limitation on the foregoing provisions of this Section 9(c), the Company shall control all proceedings taken in connection with such contest and, at its sole option, may pursue or forego any and all administrative appeals, proceedings, hearings and conferences with the taxing authority in respect of such claim and may, at its sole option, either direct the Executive to pay the tax claimed and sue for a refund or contest the claim in any permissible manner, and the Executive agrees to prosecute such contest to a determination before any administrative tribunal, in a court of initial jurisdiction and in one or more appellate courts, as the Company shall determine; provided, however, that if the Company directs the Executive to pay such claim and sue for a refund, the Company shall advance the amount of such payment to the Executive, on an interest-free basis and shall indemnify and hold the Executive harmless, on an after-tax basis, from any Excise Tax or income tax (including interest or penalties with respect thereto) imposed with respect to such advance or with respect to any imputed income with respect to such advance; and further provided that any extension of the statute of limitations relating to payment of taxes for the taxable year of the Executive with respect to which such contested amount is claimed to be due is limited solely to such contested amount. Furthermore, the Company's control of the contest shall be limited to issues with respect to which a Gross-Up Payment would be payable hereunder and the Executive shall be entitled to settle or contest, as the case may be, any other issue raised by the Internal Revenue Service or any other taxing authority. (d) If, after the receipt by the Executive of an amount advanced by the Company pursuant to Section (c), the Executive becomes entitled to receive any refund with respect to such claim, the Executive shall (subject to the Company's complying with the requirements of Section 9(c)) promptly pay to the Company the amount of such refund (together with any interest paid or credited thereon after taxes applicable thereto). If, after the receipt by the Executive of an amount advanced by the Company pursuant to Section 9(c), a determination is made that the Executive shall not be entitled to any refund with respect to such claim and the Company does not notify the Executive in writing of its intent to contest such denial of refund prior to the expiration of 30 days after such determination, then such advance shall be forgiven and shall not be required to be repaid and the amount of such advance shall be offset, to the extent thereof, the amount of Gross-Up Payment required to be paid. 10. CONFIDENTIAL INFORMATION. The Executive shall hold in a fiduciary capacity for the benefit of the Company all secret or confidential information, knowledge or data relating to the Company or any of its affiliated companies, and their respective businesses, which shall have been obtained by the Executive during the Executive's employment by the Company or any of its affiliated companies and which shall not be or become public knowledge (other than by acts by the Executive or representatives of the Executive in violation of this Agreement). After termination of -12- the Executive's employment with the Company, the Executive shall not, without the prior written consent of the Company or as may otherwise be required by law or legal process, communicate or divulge any such information, knowledge or data to anyone other than the Company and those designated by it. In no event shall an asserted violation of the provisions of this Section 10 constitute a basis for deferring or withholding any amounts otherwise payable to the Executive under this Agreement. 11. SUCCESSORS. (a) This Agreement is personal to the Executive and without the prior written consent of the Company shall not be assignable by the Executive otherwise than by will or the laws of descent and distribution. This Agreement shall inure to the benefit of and be enforceable by the Executive's legal representatives. (b) This Agreement shall inure to the benefit of and be binding upon the Company and its successors and assigns. (c) The Company will require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Company to assume expressly and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform it if no such succession had taken place. As used in this Agreement, "Company" shall mean the Company as hereinbefore defined and any successor to its business and/or assets as aforesaid which assumes and agrees to perform this Agreement by operation of law, or otherwise. 12. MISCELLANEOUS. (a) This Agreement shall be an unfunded obligation of the Company. (b) THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF TEXAS, WITHOUT REFERENCE TO PRINCIPLES OF CONFLICT OF LAWS. The captions of this Agreement are not part of the provisions hereof and shall have no force or effect. This Agreement may not be amended or modified otherwise than by a written agreement executed by the parties hereto or their respective successors and legal representatives. (c) All notices and other communications hereunder shall be in writing and shall be given by hand delivery to the other party or by registered or certified mail, return receipt requested, postage prepaid, addressed as follows: IF TO THE EXECUTIVE: J. Don McGregor P.O. Box 2504 Houston, Texas 77252-2504 -13- IF TO THE COMPANY: Pogo Producing Company P.O. Box 2504 Houston, Texas 77252-2504 Attention: Senior Vice President and Chief Administrative Officer or to such other address as either party shall have furnished to the other in writing in accordance herewith. Notice and communications shall be effective when actually received by the addressee. (d) The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement. (e) The Company may withhold from any amounts payable under this Agreement such Federal, state or local taxes as shall be required to be withheld pursuant to any applicable law or regulation. (f) The Executive's or the Company's failure to insist upon strict compliance with any provision hereof or any other provision of this Agreement or the failure to assert any right the Executive or the Company may have hereunder, including, without limitation, the right of the Executive to terminate employment for Good Reason pursuant to Section 5(c)(i)-(v) of this Agreement, shall not be deemed to be a waiver of such provision or right or any other provision or right of this Agreement. IN WITNESS WHEREOF, the Executive has hereunto set the Executive's hand and, pursuant to the authorization from its Board of Directors, the Company has caused these presents to be executed in its name on its behalf, all as of the day and year first above written. /s/ J. DON MCGREGOR -------------------------------- POGO PRODUCING COMPANY By: /s/ PAUL G. VAN WAGENEN ----------------------------- -14- EX-10.23 13 EXHIBIT 10.23 EXECUTIVE EMPLOYMENT AGREEMENT AGREEMENT by and between POGO PRODUCING COMPANY, a Delaware corporation (the "Company") and GERALD A. MORTON (the "Executive"), dated as of the 1st day of February, 1999. The Board of Directors of the Company (the "Board"), has determined that it is in the best interests of the Company and its shareholders to assure that the Company will have the continued dedication of the Executive, and to provide the Executive with compensation and benefits arrangements which are competitive with those of other corporations and which ensure that the compensation and benefits expectations of the Executive will be satisfied. The Board also believes it is imperative to diminish the inevitable distraction of the Executive by virtue of the personal uncertainties and risks created by a pending or threatened Change of Control and to encourage the Executive's full attention and dedication to the Company currently and in the event of any threatened or pending Change of Control, and to insure the continuation of favorable compensation and benefits upon a Change of Control. Therefore, in order to accomplish these objectives, the Board has caused the Company to enter into this Agreement. NOW, THEREFORE, IT IS HEREBY AGREED AS FOLLOWS; 1. CERTAIN DEFINITIONS. (a) The "Effective Date" shall mean the date of this Agreement. (b) The "Employment Period" shall mean the period commencing on the Effective Date and ending on the second anniversary of such date; provided, however, that on each annual anniversary of the Effective Date (the "Renewal Date"), the Employment Period shall be reviewed, to determine whether, in the discretion of the Company, it should be extended for one additional year so as to terminate two years from such Renewal Date. Any such one year extension shall be effective only if, prior to the Renewal Date, the Company shall give notice to the Executive that the Employment Period shall be so extended. 2. CHANGE OF CONTROL. For the purpose of this Agreement, a "Change of Control" shall mean: (a) The acquisition by any individual, entity or group (within the meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934, as amended (the "Exchange Act")) (a "Person") of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of 20% or more of either (i) the then outstanding shares of common stock of the Company (the "Outstanding Company Common Stock") or (ii) the combined voting power of the then outstanding voting securities of the Company entitled to vote generally in the election of directors (the "Outstanding Company Voting Securities"). Notwithstanding anything in this Agreement to the contrary, the following shall not constitute a Change of Control: (i) any acquisition directly from the Company (excluding an acquisition by virtue of the exercise of a conversion privilege), (ii) any acquisition by the Company, (iii) any acquisition by any employee benefit plan (or related trust) sponsored or maintained by the Company or any corporation controlled by the Company, or (iv) any acquisition by State Farm Mutual Automobile Insurance Company and certain affiliates ("State Farm") or Klingenstein, Fields & Co., L.P. ("Klingenstein") ("Specified Stockholders") of beneficial ownership of Outstanding Company Voting Securities resulting in an accumulation of said securities up to and including the following amounts: A. In the case of State Farm, 30% of Outstanding Voting Securities, and B. In the case of Klingenstein, 30% of Outstanding Voting Securities, or (v) any acquisition by any corporation pursuant to a reorganization, merger or consolidation, if, following such reorganization, merger or consolidation, the conditions described in clauses (i), (ii) and (iii) of subsection (c) of this Section 2 are satisfied; or (b) Individuals who, as of the date hereof, constitute the Board (the "Incumbent Board") cease for any reason to constitute at least a majority of the Board; provided, however, that any individual becoming a director subsequent to the date hereof whose election, or nomination for election by the Company's shareholders, was approved by a vote of at least a majority of the directors then comprising the Incumbent Board shall be considered as though such individual were a member of the Incumbent Board, but excluding, for this purpose, any such individual whose initial assumption of office occurs as a result of either an actual or threatened election contest (as such terms are used in Rule 14a-11 of Regulation 14A promulgated under the Exchange Act) or other actual or threatened solicitation of proxies or consents by or on behalf of a Person other than the Board; or (c) Approval by the shareholders of the Company of a reorganization, merger or consolidation, in each case, unless, following such reorganization, merger or consolidation, (i) more than 60% of, respectively, the then outstanding shares of common stock of the corporation resulting from such reorganization, merger or consolidation and the combined voting power of the then outstanding voting securities of such corporation entitled to vote generally in the election of directors is then beneficially owned, directly or indirectly, by all or substantially all of the individuals and entities who where the beneficial owners, respectively, of the Outstanding Company Common Stock and Outstanding Company Voting Securities immediately prior to such reorganization, merger or consolidation in substantially the same proportions as their ownership, -2- immediately prior to such reorganization, merger or consolidation, of the Outstanding Company Common Stock and Outstanding Company Voting Securities, as the case may be, (ii) no Person [excluding the Company, any Specified Stockholder, any employee benefit plan (or related trust) of the Company or such corporation resulting from such reorganization, merger or consolidation and any Person beneficially owning, immediately prior to such reorganization, merger or consolidation, directly or indirectly, 20% or more of the Outstanding Company Common Stock or Outstanding Voting Securities, as the case may be] beneficially owns, directly or indirectly, 20% or more, respectively, of the then outstanding shares of common stock of the corporation resulting from such reorganization, merger or consolidation or the combined voting power of the then outstanding voting securities of such corporation, entitled to vote generally in the election of directors and (iii) at least a majority of the members of the board of directors of the corporation resulting from such reorganization, merger or consolidation were members of the Incumbent Board at the time of the execution of the initial agreement providing for such reorganization, merger or consolidation; or (d) Approval by the shareholders of the Company of (i) a complete liquidation or dissolution of the Company or (ii) the sale or other disposition of all or substantially all of the assets of the Company, other than to a corporation with respect to which following such sale or other disposition (A) more than 60% of, respectively, the then outstanding shares of common stock of such corporation and the combined voting power of the then outstanding voting securities of such corporation entitled to vote generally in the election of directors is then beneficially owned, directly or indirectly, by all or substantially all of the individuals and entities who were the beneficial owners, respectively, of the Outstanding Company Common Stock and Outstanding Company Voting Securities immediately prior to such sale or other disposition in substantially the same proportion as their ownership, immediately prior to such sale or other disposition, of the Outstanding Company Common Stock and Outstanding Company Voting Securities, as the case may be, (B) no Person [excluding the Company, any Specified Stockholder, any employee benefit plan (or related trust) of the Company or such corporation and any Person beneficially owning, immediately prior to such sale or other disposition, directly or indirectly, 20% or more of the Outstanding Company Common Stock or Outstanding Company Voting Securities, as the case may be] beneficially owns, directly or indirectly, 20% or more of, respectively, the then outstanding shares of common stock of such corporation and the combined voting power of the then outstanding voting securities of such corporation entitled to vote generally in the election of directors and (C) at least a majority of the members of the board of directors of such corporation where members of the Incumbent Board at the time of the execution of the initial agreement or action of the Board providing for such sale or other disposition of assets of the Company. 3. EMPLOYMENT AGREEMENT. The Company hereby agrees to continue the Executive in its employ in accordance with the terms and provisions of this Agreement, for the Employment Period. 4. TERMS OF EMPLOYMENT. (a) POSITION AND DUTIES. (i) During the Employment Period, (A) the Executive's position (including status, offices, titles and reporting requirements), authority, duties and responsibilities shall be at least commensurate in all material respects with the most significant of those held, exercised and assigned at any time during the 90-day period immediately preceding the later of the Effective Date, the most recent Renewal Date or a Change of Control, if any, (the "Applicable Date") and (B) the Executive's services shall be performed at the -3- location where the Executive was employed immediately preceding the Applicable Date or any office which is the headquarters of the Company and is less than 35 miles from such location. (ii) During the Employment Period, and excluding any periods of vacation and sick leave to which the Executive is entitled, the Executive agrees to devote reasonable attention and time during normal business hours to the business and affairs of the Company. During the Employment Period it shall not be a violation of this Agreement for the Executive to (A) serve on corporate, civic or charitable boards or committees, (B) deliver lectures, fulfill speaking engagements or teach at educational institutions and (C) manage personal investments, so long as such activities do not significantly interfere with the performance of the Executive's responsibilities as an employee of the Company in accordance with this Agreement; provided Executive may not serve on the board of a publicly traded for profit corporation or similar body of a publicly traded for profit business organized in other than corporate form without the consent of the Compensation Committee of the Board of Directors of the Company. It is expressly understood and agreed that to the extent that any such activities have been conducted by the Executive prior to the Applicable Date, the continued conduct of such activities (or the conduct of activities similar in nature and scope thereto) subsequent to the Applicable Date shall not thereafter be deemed to interfere with the performance of the Executive's responsibilities to the Company. (b) COMPENSATION. (i) BASE SALARY. During the Employment Period, the Executive shall receive an annual base salary ("Annual Base Salary"), which shall be paid on a monthly basis, at least equal to twelve times the highest monthly base salary paid or payable to the Executive by the Company and its affiliated companies in respect of the twelve-month period immediately preceding the month in which the Applicable Date occurs. During the Employment Period, the Annual Base Salary shall be reviewed at least annually and may be increased at any time and from time to time as shall be substantially consistent with increases in base salary generally awarded in the ordinary course of business to other executives of the Company and its affiliated companies. Any increase in Annual Base Salary shall not serve to limit or reduce any other obligation to the Executive under this Agreement. As used in this Agreement, the term "affiliated companies" shall include any company controlled by, controlling or under common control with the Company. (ii) ANNUAL BONUS. In addition to Annual Base Salary, the Executive may be awarded at the discretion of the Company for any fiscal year ending during the Employment Period, a bonus. (iii) INCENTIVE, SAVINGS AND RETIREMENT PLANS. During the Employment Period, the Executive shall be entitled to participate in all incentive, savings and retirement plans, practices, policies and programs applicable generally to other executives of the Company and its affiliated companies. Such plans, practices, policies and programs shall provide the Executive with incentive opportunities (measured with respect to both regular and special incentive opportunities, to the extent, if any, that such distinction is applicable), savings opportunities and retirement benefit opportunities, in each case, equal to the most favorable of those provided by the Company and its affiliated companies for the Executive under such plans, practices, policies and programs as in effect at any time during the 90-day period immediately preceding the Applicable Date. -4- (iv) WELFARE BENEFIT PLANS. During the Employment Period, the Executive and/or the Executive's family, as the case may be, shall be eligible for participation in and shall receive all benefits under welfare benefit plans, practices, policies and programs provided by the Company and its affiliated companies (including, without limitation, medical, prescription, dental, disability, salary continuance, employee life, group life, accidental death and travel accident insurance plans and programs) to the extent applicable generally to other executives of the Company and its affiliated companies. Such plans, practices, policies and programs shall provide the Executive with benefits which are equal, in the aggregate, to the most favorable of such plans, practices, policies and programs in effect for the Executive at any time during the 90-day period immediately preceding the Applicable Date. (v) EXPENSES. During the Employment Period, the Executive shall be entitled to receive prompt reimbursement for all reasonable expenses incurred by the Executive in accordance with the most favorable policies, practices and procedures of the Company and its affiliated companies in effect for the Executive at any time during the 90-day period immediately preceding the Applicable Date. (vi) FRINGE BENEFITS. During the Employment Period, the Executive shall be entitled to fringe benefits in accordance with the most favorable plans, practices, programs and policies of the Company and its affiliated companies in effect for the Executive at any time during the 90-day period immediately preceding the Applicable Date. (vii) OFFICE AND SUPPORT STAFF. During the Employment Period, the Executive shall be entitled to an office or offices of a size and with furnishings and other appointments, and to personal secretarial and other assistance, at least equal to the most favorable of the foregoing provided to the Executive by the Company and its affiliated companies at any time during the 90-day period immediately preceding the Applicable Date. (viii) VACATION. During the Employment Period, the Executive shall be entitled to paid vacation in accordance with the most favorable plans, policies, programs and practices of the Company and its affiliated companies as in effect for the Executive at any time during the 90-day period immediately preceding the Applicable Date. 5. TERMINATION OF EMPLOYMENT. (a) DEATH OR DISABILITY. The Executive's employment shall terminate automatically upon the Executive's death during the Employment Period. If the Company determines in good faith that the Disability of the Executive has occurred during the Employment Period (pursuant to the definition of Disability set forth below), it may give to the Executive written notice in accordance with Section 12(c) of this Agreement of its intention to terminate the Executive's employment. In such event, the Executive's employment with the Company shall terminate effective on the 30th day after receipt of such notice by the Executive (the "Disability Effective Date"), provided that, within the 30 days after such receipt, the Executive shall not have returned to full-time performance of the Executive's duties. For purposes of this Agreement, "Disability" shall mean the absence of the Executive from the Executive's duties with the Company on a full-time basis for 180 consecutive business days as a result of incapacity due to mental or physical illness which is determined to be total and permanent by a physician selected by -5- the Company or its insurers and acceptable to the Executive or the Executive's legal representative (such agreement as to acceptability not to be withheld unreasonably). (b) CAUSE. The Company may terminate the Executive's employment during the Employment Period for Cause. For purposes of this Agreement, "Cause" shall mean (i) a material violation by the Executive of the Executive's obligations under Section 4(a) of this Agreement (other than as a result of incapacity due to physical or mental illness) which is willful and deliberate on the Executive's part, which is committed in bad faith or without reasonable belief that such violation is in the best interests of the Company and which is not remedied in a reasonable period of time after receipt of written notice from the Company specifying such violation or (ii) the conviction of the Executive of a felony involving moral turpitude. (c) GOOD REASON; WINDOW PERIOD; OTHER TERMINATIONS. The Executive's employment may be terminated (i) during the Employment Period by the Executive for Good Reason, (ii) during the Window Period by the Executive without any reason or (iii) by Executive other than (A) for Good Reason or (B) during a Window Period. For purposes of this Agreement, the "Window Period" shall mean the 180-day period immediately following the date a Change of Control occurs. Anything in this Agreement to the contrary notwithstanding, if a Change of Control occurs and if the Executive's employment with the Company is terminated prior to the date on which the Change of Control occurs, and if it is reasonably demonstrated by the Executive that such termination of employment or cessation of status as an officer (i) was at the request of a third party who has taken steps reasonably calculated to effect the Change of Control or (ii) otherwise arose in connection with or anticipation of the Change of Control, then for all purposes of this Agreement the "date a Change of Control occurs" shall mean the date immediately prior to the date of such termination of employment or cessation of status as an officer. For purposes of this Agreement, "Good Reason" shall mean (i) the assignment to the Executive of any duties inconsistent with the Executive's position (including status, offices, titles and reporting requirements), authority, duties or responsibilities as contemplated by Section 4(a) of this Agreement, or any other action by the Company which results in a diminution in such position, authority, duties or responsibilities excluding for this purpose an insubstantial or inadvertent action which is remedied by the Company promptly after receipt of notice thereof given by the Executive; (ii) any failure by the Company to comply with any of the provisions of Section 4(b) of this Agreement, other than an insubstantial or inadvertent failure which is remedied by the Company promptly after receipt of notice thereof given by the Executive; (iii) the Company's requiring the Executive to be based at any office or location other than that described in Section 4(a)(i)(B) hereof; (iv) any purported termination by the Company of the Executive's employment otherwise than as expressly permitted by this Agreement; or -6- (v) any failure by the Company to comply with and satisfy Section 11(c) of this Agreement. (d) NOTICE OF TERMINATION. Any termination by the Company for Cause, or by the Executive without any reason during the Window Period or for Good Reason, shall be communicated by Notice of Termination to the other party hereto given in accordance with Section 12(c) of this Agreement. For purposes of this Agreement, a "Notice of Termination" means a written notice which (i) indicates the specific termination provision in this Agreement relied upon, (ii) to the extent applicable, sets forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of the Executive's employment under the provision so indicated and (iii) if the Date of Termination (as defined below) is other than the date of receipt of such notice, specifies the termination date (which date shall be not more than fifteen days after the giving of such notice). The failure by the Executive or the Company to set forth in the Notice of Termination any fact or circumstance which contributes to a showing of Good Reason or Cause shall not waive any right of the Executive or the Company hereunder or preclude the Executive or the Company from asserting such fact or circumstance in enforcing the Executive's or the Company's right hereunder. (e) DATE OF TERMINATION. "Date of Termination" means (i) if the Executive's employment is terminated by the Company for Cause, or by the Executive during the Window Period or for Good Reason, the date of receipt of the Notice of Termination or any later date specified therein, as the case may be, (ii) if the Executive's employment is terminated by the Company other than for Cause or Disability, the Date of Termination shall be the date on which the Company notifies the Executive of such termination, (iii) if the Executive's employment is terminated by reason of death or Disability, the Date of Termination shall be the date of death of the Executive or the Disability Effective Date, as the case may be, and (iv) if the Executive's employment is terminated by the Executive other than for Good Reason or during a Window Period, the date of the receipt of the Notice of Termination or any later date specified therein. 6. OBLIGATIONS OF THE COMPANY UPON TERMINATION. (a) GOOD REASON OR DURING THE WINDOW PERIOD; OTHER THAN FOR CAUSE, DEATH OR DISABILITY. If, during the Employment Period, the Company shall terminate the Executive's employment other than for Cause or Disability or the Executive shall terminate employment either for Good Reason or without any reason during the Window Period: (i) the Company shall pay to the Executive in a lump sum in cash within 30 days after the Date of Termination the aggregate of the following amounts: A. the sum of (1) the Executive's Annual Base Salary through the Date of Termination to the extent not theretofore paid and (2) any compensation previously deferred by the Executive (together with any accrued interest or earnings thereon) and any accrued vacation pay, in each case to the extent not theretofore paid (the sum of the amounts described in clauses (1) and (2) shall be hereinafter referred to as the "Accrued Obligations"); and -7- B. the amount (such amount shall be hereinafter referred to as the "Severance Amount") equal to the product of (1) three and (2) the sum of (x) the Executive's Annual Base Salary and (y) any bonus described in Section 4(b)(ii) paid or payable in respect of the most recently completed fiscal year of the Company; and, provided further, that such amount shall be reduced by the present value (determined as provided in Section 280G(d)(4) of the Internal Revenue Code of 1986, as amended (the "Code")) of any other amount of severance relating to salary or bonus continuation to be received by the Executive upon termination of employment of the Executive under any severance plan, severance policy or severance arrangement of the Company; and C. a separate lump sum supplemental retirement benefit equal to the difference between (1) the actuarial equivalent (utilizing for this purpose the actuarial assumptions utilized with respect to the Employees Retirement Plan for Pogo Producing Company (or any successor plan thereto) (the "Retirement Plan") during the 90-day period immediately preceding the Applicable Date) of the benefit payable under the Retirement Plan and any supplemental and/or excess retirement plan of the Company and its affiliated companies providing benefits for the Executive (the "SERP") which the Executive would receive if the Executive's employment continued at the compensation level provided for in Sections 4(b)(i) and 4(b)(ii) of this Agreement for the remainder of the Employment Period, assuming for this purpose that all accrued benefits are fully vested and that benefit accrual formulas are no less advantageous to the Executive than those in effect during the 90-day period immediately preceding the Applicable Date, and (2) the actuarial equivalent (utilizing for this purpose the actuarial assumptions utilized with respect to the Retirement Plan during the 90-day period immediately preceding the Applicable Date) of the Executive's actual benefit (paid or payable), if any, under the Retirement Plan and the SERP (the amount of such benefit shall be hereinafter referred to as the "Supplemental Retirement Amount"); and (ii) for the remainder of the Employment Period, or such longer period as any plan, program, practice or policy may provide, the Company shall continue benefits to the Executive and/or the Executive's family at least equal to those which would have been provided to them in accordance with the plans, programs, practices and policies described in Section 4(b)(iv) of this Agreement if the Executive's employment had not been terminated in accordance with the most favorable plans, practices, programs or policies of the Company and its affiliated companies as in effect and applicable generally to other executives and their families during the 90-day period immediately preceding the Applicable Date, provided, however, that if the Executive becomes reemployed with another employer and is eligible to receive medical or other welfare benefits under another employer provided plan, the medical and other welfare benefits described herein shall be secondary to those provided under such other plan during such applicable period of eligibility (such continuation of such benefits for the applicable period herein set forth shall be hereinafter referred to as "Welfare Benefit Continuation"). For purposes of determining eligibility of the Executive for retiree benefits pursuant to such plans, practices, programs and policies, the Executive shall be considered to have remained employed until the end of the Employment Period and to have retired on the last day of such period; and (iii) to the extent not theretofore paid or provided, the Company shall timely pay or provide to the Executive and/or the Executive's family any other amounts or benefits required to -8- be paid or provided or which the Executive and/or the Executive's family is eligible to receive pursuant to this Agreement and under any plan, program, policy or practice or contract or agreement of the Company and its affiliated companies as in effect and applicable generally to other executives and their families during the 90-day period immediately preceding the Applicable Date (such other amounts and benefits shall be hereinafter referred to as the "Other Benefits"). (b) DEATH. If the Executive's employment is terminated by reason of the Executive's death during the Employment Period, this Agreement shall terminate without further obligations to the Executive's legal representatives under this Agreement, other than for (i) payment of Accrued Obligations (which shall be paid to the Executive's estate or beneficiary, as applicable, in a lump sum in cash within 30 days of the Date of Termination) and the timely payment or provision of the Welfare Benefit Continuation and Other Benefits and (ii) payment to the Executive's estate or beneficiary, as applicable, in a lump sum in cash within 30 days of the Date of Termination of an amount equal to the sum of the Severance Amount and the Supplemental Retirement Amount. (c) DISABILITY. If the Executive's employment is terminated by reason of the Executive's Disability during the Employment Period, this Agreement shall terminate without further obligations to the Executive, other than for (i) payment of Accrued Obligations (which shall be paid to the Executive in a lump sum in cash within 30 days of the Date of Termination) and the timely payment or provision of the Welfare Benefit Continuation and Other Benefits (excluding, in each case, Disability Benefits (as defined below)) and (ii) payment to the Executive in a lump sum in cash within 30 days of the Date of Termination of an amount equal to the greater of (A) the sum of the Severance Amount and the Supplemental Retirement Amount and (B) the present value (determined as provided in Section 280G(d)(4) of the Code) of any cash amount to be received by the Executive as a disability benefit pursuant to the terms of any long term disability plan, policy or arrangement of the Company and its affiliated companies, but not including any proceeds of disability insurance covering the Executive to the extent paid for on a contributory basis by the Executive (which shall be paid in any event as an Other Benefit) (the benefits included in this clause (B) shall be hereinafter referred to as the "Disability Benefits"). (d) CAUSE; BY EXECUTIVE OTHER THAN FOR GOOD REASON AND OTHER THAN DURING A WINDOW PERIOD. If the Executive's employment shall be terminated for Cause during the Employment Period, this Agreement shall terminate without further obligations to the Executive other than the obligation to pay to the Executive Annual Base Salary through the Date of Termination plus the amount of any compensation previously deferred by the Executive, in each case to the extent theretofore unpaid. If the Executive terminates employment during the Employment Period, excluding a termination either for Good Reason or without any reason during the Window Period, this Agreement shall terminate without further obligations to the Executive, other than for Accrued Obligations and the timely payment or provision of Other Benefits. In such case, all Accrued Obligations shall be paid to the Executive in a lump sum in cash within 30 days of the Date of Termination. 7. NON-EXCLUSIVITY OF RIGHTS. Except as provided in Section 6(a)(ii), 6(b) and 6(c) of this Agreement, nothing in this Agreement shall prevent or limit the Executive's continuing or future participation in any plan, program, policy or practice provided by the Company or any of its -9- affiliated companies and for which the Executive may qualify, nor shall anything herein limit or otherwise affect such rights as the Executive may have under any contract or agreement with the Company or any of its affiliated companies. Amounts which are vested benefits or which the Executive is otherwise entitled to receive under any plan, policy, practice or program of or any contract or agreement with the Company or any of its affiliated companies at or subsequent to the Date of Termination shall be payable in accordance with such plan, policy, practice or program or contract or agreement except as explicitly modified by this Agreement. 8. FULL SETTLEMENT; RESOLUTION OF DISPUTES. (a) The Company's obligation to make payments provided for in this Agreement and otherwise to perform its obligations hereunder shall not be affected by any set-off, counterclaim, recoupment, defense or other claim, right or action which the Company may have against the Executive or others. In no event shall the Executive be obligated to seek other employment or take any other action by way of mitigation of the amounts payable to the Executive under any of the provisions of this Agreement and, except as provided in Section 6(a)(ii) of this Agreement, such amounts shall not be reduced whether or not the Executive obtains other employment. If there is any contest by the Company concerning the Payments or benefits to be provided to the Executive hereunder whether through litigation, arbitration or mediation, or with respect to the validity or enforceability of, or liability under, any provision of this Agreement or any guarantee of performance thereof, and the Executive is the prevailing party, the Company agrees to pay promptly upon conclusion of the contest all legal fees and expenses which the Executive may reasonably have incurred. (b) If there shall be any dispute between the Company and the Executive (i) in the event of any termination of the Executive's employment by the Company, whether such termination was for Cause, or (ii) in the event of any termination of employment by the Executive, whether Good Reason existed, then, unless and until there is a final, nonappealable judgment by a court of competent jurisdiction declaring that such termination was for Cause or that Good Reason did not exist, the Company shall pay all amounts, and provide all benefits, to the Executive and/or the Executive's family or other beneficiaries, as the case may be, that the Company would be required to pay or provide pursuant to Section 6(a) hereof as though such termination were by the Company without Cause or by the Executive with Good Reason; provided, however, that the Company shall not be required to pay any disputed amounts pursuant to this paragraph except upon receipt of an undertaking (which need not be secured) by or on behalf of the Executive to repay all such amounts to which the Executive is ultimately adjudged by such court not to be entitled. 9. CERTAIN ADDITIONAL PAYMENTS BY THE COMPANY. (a) Anything in this Agreement to the contrary notwithstanding, in the event it shall be determined that any payment or distribution by the Company to or for the benefit of the Executive (whether paid or payable or distributed or distributable pursuant to the terms of this Agreement or otherwise, but determined without regard to any additional payments required under this Section 9) (a "Payment") would be subject to the excise tax imposed by Section 4999 of the Code or any interest or penalties are incurred by the Executive with respect to such excise tax (such excise tax, together with any such interest and penalties, are hereinafter collectively referred to as the "Excise Tax"), then the Executive shall be entitled to receive an additional payment (a "Gross-Up Payment") in an amount such that after payment by the Executive of all taxes (including any interest or penalties imposed with respect to such taxes), including, without limitation, any income taxes (and any interest and penalties imposed -10- with respect thereto) and Excise Tax imposed upon the Gross-Up Payment, the Executive retains an amount of the Gross-Up Payment equal to the Excise Tax imposed upon the Payments. (b) Subject to the provisions of Section 9(c), all determinations required to be made under this Section 9, including whether and when Gross-Up Payment is required and the amount of such Gross-Up Payment and the assumptions to be utilized in arriving at such determination, shall be made by Arthur Andersen LLP (the "Accounting Firm") which shall provide detailed supporting calculations both to the Company and the Executive within 15 business days of the receipt of notice from the Executive that there has been a Payment, or such earlier time as is requested by the Company. In the event that the Accounting Firm is serving as accountant or auditor for the individual, entity or group effecting the Change of Control, the Executive shall appoint another nationally recognized accounting firm to make the determinations required hereunder (which accounting firm shall then be referred to as the Accounting Firm hereunder). All fees and expenses of the Accounting Firm shall be borne solely by the Company. Any Gross-Up Payment, as determined pursuant to this Section 9, shall be paid by the Company to the Executive within five days of the receipt of the Accounting Firm's determination. If the Accounting Firm determines that no Excise Tax is payable by the Executive, it shall furnish the Executive with a written opinion that failure to report the Excise Tax on the Executive's applicable federal income tax return would not result in the imposition of a negligence or similar penalty. Any determination by the Accounting Firm shall be binding upon the Company and the Executive. As a result of the uncertainty in the application of Section 4999 of the Code at the time of the initial determination by the Accounting Firm hereunder, it is possible that Gross-Up Payments which will not have been made by the Company should have been made ("Underpayment"), consistent with the calculations required to be made hereunder. In the event that the Company exhausts its remedies pursuant to Section 9(c) and the Executive thereafter is required to make a payment of any Excise Tax, the Accounting Firm shall determine the amount of the Underpayment that has occurred and any such Underpayment shall be promptly paid by the Company to or for the benefit of the Executive. (c) The Executive shall notify the Company in writing of any claims by the Internal Revenue Service that, if successful, would require the payment by the Company of the Gross-Up Payment. Such notification shall be given as soon as practicable but no later than ten business days after the Executive is informed in writing of such claim and shall apprise the Company of the nature of such claim and the date on which such claim is requested to be paid. The Executive shall not pay such claim prior to the expiration of the 30-day period following the date on which it gives such notice to the Company (or such shorter period ending on the date that any payment of taxes with respect to such claim is due). If the Company notifies the Executive in writing prior to the expiration of such period that it desires to contest such claim, the Executive shall: (i) give the Company any information reasonably requested by the Company relating to such claim, (ii) take such action in connection with contesting such claim as the Company shall reasonably request in writing from time to time, including, without limitation, accepting legal representation with respect to such claim by an attorney reasonably selected by the Company, -11- (iii) cooperate with the Company in good faith in order effectively to contest such claim, and (iv) permit the Company to participate in any proceedings relating to such claim; provided, however, that the Company shall bear and pay directly all costs and expenses (including additional interest and penalties) incurred in connection with such contest and shall indemnify and hold the Executive harmless, on an after-tax basis, for any Excise Tax or income tax (including interest and penalties with respect thereto) imposed as a result of such representation and payment of costs and expenses. Without limitation on the foregoing provisions of this Section 9(c), the Company shall control all proceedings taken in connection with such contest and, at its sole option, may pursue or forego any and all administrative appeals, proceedings, hearings and conferences with the taxing authority in respect of such claim and may, at its sole option, either direct the Executive to pay the tax claimed and sue for a refund or contest the claim in any permissible manner, and the Executive agrees to prosecute such contest to a determination before any administrative tribunal, in a court of initial jurisdiction and in one or more appellate courts, as the Company shall determine; provided, however, that if the Company directs the Executive to pay such claim and sue for a refund, the Company shall advance the amount of such payment to the Executive, on an interest-free basis and shall indemnify and hold the Executive harmless, on an after-tax basis, from any Excise Tax or income tax (including interest or penalties with respect thereto) imposed with respect to such advance or with respect to any imputed income with respect to such advance; and further provided that any extension of the statute of limitations relating to payment of taxes for the taxable year of the Executive with respect to which such contested amount is claimed to be due is limited solely to such contested amount. Furthermore, the Company's control of the contest shall be limited to issues with respect to which a Gross-Up Payment would be payable hereunder and the Executive shall be entitled to settle or contest, as the case may be, any other issue raised by the Internal Revenue Service or any other taxing authority. (d) If, after the receipt by the Executive of an amount advanced by the Company pursuant to Section (c), the Executive becomes entitled to receive any refund with respect to such claim, the Executive shall (subject to the Company's complying with the requirements of Section 9(c)) promptly pay to the Company the amount of such refund (together with any interest paid or credited thereon after taxes applicable thereto). If, after the receipt by the Executive of an amount advanced by the Company pursuant to Section 9(c), a determination is made that the Executive shall not be entitled to any refund with respect to such claim and the Company does not notify the Executive in writing of its intent to contest such denial of refund prior to the expiration of 30 days after such determination, then such advance shall be forgiven and shall not be required to be repaid and the amount of such advance shall be offset, to the extent thereof, the amount of Gross-Up Payment required to be paid. 10. CONFIDENTIAL INFORMATION. The Executive shall hold in a fiduciary capacity for the benefit of the Company all secret or confidential information, knowledge or data relating to the Company or any of its affiliated companies, and their respective businesses, which shall have been obtained by the Executive during the Executive's employment by the Company or any of its affiliated companies and which shall not be or become public knowledge (other than by acts by the Executive or representatives of the Executive in violation of this Agreement). After termination of -12- the Executive's employment with the Company, the Executive shall not, without the prior written consent of the Company or as may otherwise be required by law or legal process, communicate or divulge any such information, knowledge or data to anyone other than the Company and those designated by it. In no event shall an asserted violation of the provisions of this Section 10 constitute a basis for deferring or withholding any amounts otherwise payable to the Executive under this Agreement. 11. SUCCESSORS. (a) This Agreement is personal to the Executive and without the prior written consent of the Company shall not be assignable by the Executive otherwise than by will or the laws of descent and distribution. This Agreement shall inure to the benefit of and be enforceable by the Executive's legal representatives. (b) This Agreement shall inure to the benefit of and be binding upon the Company and its successors and assigns. (c) The Company will require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Company to assume expressly and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform it if no such succession had taken place. As used in this Agreement, "Company" shall mean the Company as hereinbefore defined and any successor to its business and/or assets as aforesaid which assumes and agrees to perform this Agreement by operation of law, or otherwise. 12. MISCELLANEOUS. (a) This Agreement shall be an unfunded obligation of the Company. (b) THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF TEXAS, WITHOUT REFERENCE TO PRINCIPLES OF CONFLICT OF LAWS. The captions of this Agreement are not part of the provisions hereof and shall have no force or effect. This Agreement may not be amended or modified otherwise than by a written agreement executed by the parties hereto or their respective successors and legal representatives. (c) All notices and other communications hereunder shall be in writing and shall be given by hand delivery to the other party or by registered or certified mail, return receipt requested, postage prepaid, addressed as follows: IF TO THE EXECUTIVE: Gerald A. Morton 2321 Addison Houston, Texas 77030 -13- IF TO THE COMPANY: Pogo Producing Company P.O. Box 2504 Houston, Texas 77252-2504 Attention: Senior Vice President and Chief Administrative Officer or to such other address as either party shall have furnished to the other in writing in accordance herewith. Notice and communications shall be effective when actually received by the addressee. (d) The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement. (e) The Company may withhold from any amounts payable under this Agreement such Federal, state or local taxes as shall be required to be withheld pursuant to any applicable law or regulation. (f) The Executive's or the Company's failure to insist upon strict compliance with any provision hereof or any other provision of this Agreement or the failure to assert any right the Executive or the Company may have hereunder, including, without limitation, the right of the Executive to terminate employment for Good Reason pursuant to Section 5(c)(i)-(v) of this Agreement, shall not be deemed to be a waiver of such provision or right or any other provision or right of this Agreement. IN WITNESS WHEREOF, the Executive has hereunto set the Executive's hand and, pursuant to the authorization from its Board of Directors, the Company has caused these presents to be executed in its name on its behalf, all as of the day and year first above written. /s/ GERALD A. MORTON -------------------- POGO PRODUCING COMPANY By: /s/ PAUL G. VAN WAGENEN ------------------------ -14- EX-10.26 14 EXHIBIT 10.26 AMENDED AND RESTATED BAREBOAT CHARTER BETWEEN TANTAWAN PRODUCTION B.V. AND TANTAWAN SERVICES, L L C DATED AS OF FEBRUARY 9, 1996 AMENDED AND RESTATED BAREBOAT CHARTER TABLE OF CONTENTS
ARTICLE TITLE PAGE - ----------------------------------------------------------------------------------------------------------------- --------- 1. TRANSPORTATION, INSTALLATION AND COMMISSIONING OF THE FPSO............................................ 1 2. FPSO TO BE CHARTERED.................................................................................. 2 3. SERVICE............................................................................................... 2 4. DURATION OF CHARTER................................................................................... 2 5. GUARANTEES............................................................................................ 3 6. REPRESENTATIONS AND WARRANTIES........................................................................ 4 7. MAINTENANCE AND OPERATION............................................................................. 5 8. INSPECTION............................................................................................ 7 9. COMPENSATION.......................................................................................... 8 10. CHANGE IN LAW......................................................................................... 10 11. TAXES................................................................................................. 11 12. CONFLICTS OF INTEREST................................................................................. 11 13. LIENS AGAINST THE FPSO................................................................................ 11 14. INVENTORY............................................................................................. 13 15. GAS SALES AGREEMENT................................................................................... 13 16. DOWNTIME.............................................................................................. 13 17. INSURANCE............................................................................................. 14 18. INDEMNITY............................................................................................. 17 19. NONWAIVER OF DEFAULTS; NONRECOURSE.................................................................... 19 20. FORCE MAJEURE......................................................................................... 19 21. LAW AND ARBITRATION................................................................................... 20 22. NOTICES............................................................................................... 21 23. PURCHASE OPTION....................................................................................... 22 24. REVENUES.............................................................................................. 24 25. REDELIVERY OF FPSO.................................................................................... 24 26. REQUISITION........................................................................................... 25 27. GENERAL AND PARTICULAR AVERAGE........................................................................ 25 28. SALVAGE............................................................................................... 25 29. AUDIT................................................................................................. 25 30. DEFAULT............................................................................................... 26 31. REMEDIES.............................................................................................. 26 32. MISCELLANEOUS......................................................................................... 28
Appendix A TECHNICAL DESCRIPTION AND DESIGN BASIS Appendix B1 FORM OF JOINT VENTURER GUARANTEE AND INDEMNITY Appendix B2 FORM OF LESSOR PARENT COMPANY GUARANTEE AND INDEMNITY Appendix C1 Appendix C2
i AMENDED AND RESTATED BAREBOAT CHARTER This Amended and Restated Bareboat Charter (this "Agreement"), made and entered into as of the 9th day of February 1996, by and between Tantawan Production B.V., a Netherlands corporation ("Lessor"), and Tantawan Services, L L C, a Delaware limited liability company ("Charterer"), acting through its Thai branch. W I T N E S S E T H WHEREAS, the Petroleum Authority of Thailand ("PTT") and Thaipo Limited, Thai Romo Limited and The Sophonpanich Co., Ltd. have entered into that certain Gas Sales Agreement dated November 7, 1995 (the "Gas Sales Agreement") in connection with the Petroleum Concession Agreement No. 1/2534/36, dated August 1, 1991, covering block B8/32 offshore Thailand, awarded by the Ministry of Industry to Maersk Oil (Thailand) Ltd., Thaipo, Limited and Thai Romo, Limited, and Supplementary Petroleum Concession No. 1 to Petroleum Concession No. 1/2534/36, dated March 6, 1992, whereby The Sophonpanich Co., Ltd., entered into Petroleum Concession No. 1/2534/36 (collectively, the "Concession Agreement"); WHEREAS Thaipo Limited, Thai Romo Limited and Palang Sophon Limited (formerly known as Sophon Thai Gulf Limited which was successor in interest to The Sophonpanich Co. Ltd.) are currently the Concessionaires under the Concession Agreement (collectively "the Concessionaires"); WHEREAS, Charterer desires to charter from Lessor on a bareboat basis a Floating Production Storage and Offloading System known as the "Tantawan Explorer" (the "FPSO"), for use in the Tantawan Field, Thailand; NOW, THEREFORE, in consideration of the mutual covenants herein contained, Lessor and Charterer agree as follows: 1. TRANSPORTATION, INSTALLATION AND COMMISSIONING OF THE FPSO Lessor shall be responsible for delivery (the "Delivery") of the FPSO to Charterer in international waters offshore the yard at which the FPSO is being converted (the "Delivery Site") as evidenced by a certificate of delivery issued by Lessor and countersigned by Charterer. Prior to Delivery, Lessor shall be fully responsible for and assume all risks with respect to the FPSO. Charterer has hired an operator ("Operator") pursuant to an Operating Agreement (the "Operating Agreement") to operate the FPSO commencing with Delivery. Operator shall be responsible for completing all work to be performed in respect of the FPSO until Field Acceptance, as herein defined, has occurred, including transporting the FPSO from the Delivery Site to the site in the Tantawan Field designated by Charterer (the "Offshore Site"), hooking-up the FPSO on its anchoring system and hydrostatic, electrical and instrumentation testing. Operator shall also be responsible for commissioning the FPSO. 2. FPSO TO BE CHARTERED Charterer hereby agrees to bareboat charter the FPSO as described in APPENDIX A and its inventory from Lessor, for the period and upon the terms and conditions stated herein. Lessor represents, undertakes and warrants that at the time of Delivery the FPSO shall comply with the requirements of the design basis set forth in APPENDIX A hereto (the "Design Basis") and shall be properly documented and classed as ABS A1 Floating Production, Storage and Offloading System, with no recommendations and as per the particulars of APPENDIX A. Lessor shall before and at the time of Delivery make the FPSO seaworthy and in every respect ready in hull, machinery and equipment for service hereunder. 1 3. SERVICE Charterer shall have the full use of the FPSO at the Offshore Site and, subject to Lessor's approval, at any other place in the world where its operation is not prohibited by applicable law and/or regulations. Charterer may subcontract to identified subcontractors certain of its obligations hereunder, including, but not limited to, those relating to the operation, maintenance and repair of the FPSO. However, such subcontracts shall not relieve Charterer of such obligations. 4. DURATION OF CHARTER 4.1 The term (the "Initial Term") of this Agreement shall commence upon Delivery. The Initial Term shall end upon a date eleven (11) years and six (6) months after Hire Commencement Date (as defined in Article 9.1). 4.2 When the FPSO is hooked up at the Offshore Site and is ready to receive hydrocarbons, when hydrostatic tests have been satisfactorily completed and, to the extent possible, when electrical and instrumentation tests have been satisfactorily completed, Charterer or its nominee will make an inspection to determine whether such events have occurred. Within twenty-four (24) hours of the inspection, Charterer will notify Lessor in writing of whether or not such events have occurred. Lessor will cause Operator to have available at the Offshore Site appropriate and experienced staff to promptly correct all items found to be unacceptable. When Charterer is satisfied that such events have occurred ("Field Acceptance"), Charterer shall sign a certificate of field acceptance to this effect. (If Charterer's affiliate shall fail to perform or cause to be performed the work of installing pipeline end manifolds ("PLEMs") and the anchoring of the mooring system for the FPSO at the Offshore Site and such failure shall have directly and solely prevented the occurrence of Field Acceptance, then Field Acceptance shall be deemed to have occurred as of the date Field Acceptance would have occurred but for Charterer's actions or failure to perform such action.) Field Acceptance by Charterer shall not be construed as a waiver or discharge of any of the representations, warranties or undertakings of Lessor in or with respect to this Agreement or the FPSO. 4.3 Upon the expiration of the Initial Term, Charterer shall have the option to terminate this Agreement, extend this Agreement on an annual basis at prices to be agreed upon by Lessor and Charterer, or purchase the FPSO pursuant to Article 23. The election of any such option may be exercised by Charterer's giving Lessor notice thereof at least 360 days prior to the expiration of the Initial Term. If no such notice is received, Charterer shall be deemed to have exercised its option to terminate this Agreement as of the end of the Initial Term. If Charterer elects to extend this Agreement, then Charterer and Lessor shall negotiate in good faith in an effort to reach agreement prior to the end of the Initial Term on a Total Bareboat Rate for the subsequent annual term. If no such agreement is reached, Charterer shall have the additional option to purchase the FPSO as aforesaid by notice to Lessor at least 180 days prior to the end of the Initial Term. If no agreement on a Total Bareboat Rate for an extended term is timely reached and if no notice of an election to purchase the FPSO is timely given, Charterer shall be deemed to have exercised its option to terminate this Agreement as of the end of the Initial Term. If an agreement on Total Bareboat Rate for an extended term is reached, this Agreement shall be extended until the first anniversary date of the end of the Initial Term and this Article 4.3 shall apply at the end of said extended term MUTATIS MUTANDIS. 5. GUARANTEES 5.1 Simultaneously with the execution of this Agreement, Charterer shall furnish to Lessor several guarantees limited to field percentage interest (the "Joint Venturer Guarantees") of Charterer's performance under this Agreement which shall be given by Thaipo Limited, Thai Romo Limited and Sophon Thai Gulf Limited (the "Joint Venturers") in the form of APPENDIX B-1 hereto. 2 5.2 As security for payment of Hire (as hereinafter defined) and other amounts due to Lessor hereunder, Charterer shall grant or cause the Concessionaires to grant (to the extent permitted by Thai law) a security interest to Lessor in all oil produced from the Tantawan Field taken on board the FPSO and the proceeds thereof, such security interest to be subordinate to royalties, taxes and field operating expenses and granted on a PARI PASSU basis, with all lenders financing the development of the Tantawan Field. Charterer shall fully assist Lessor in perfecting such a security interest, to the extent permitted by the laws of the United States of America and the laws of Thailand. Charterer shall not agree to permit such other lenders to perfect their security interests if Lessor is unable or elects not to perfect its security interest. 5.3 Lessor has delivered to Charterer a Guarantee and Indemnity Agreement ("Lessor Parent Company Guarantee") in the form of APPENDIX B-2 hereto, executed by its ultimate corporate parent, IHC Caland N.V., guaranteeing the performance by Lessor of its obligations hereunder. 6. REPRESENTATIONS AND WARRANTIES 6.1 Lessor represents and warrants to Charterer that: a) Lessor is a corporation duly organized and in good standing under the laws of the Netherlands; has all requisite corporate power and all material governmental licenses, authorizations, consents and approvals necessary to own its assets and carry on its business as now being or as proposed to be conducted; and is qualified to do business and is in good standing in all jurisdictions in which the nature of the business conducted by it makes such qualification necessary and where failure so to qualify could be reasonably expected to have a material adverse effect on its business. b) Lessor has all necessary corporate power and authority to execute, deliver and perform its obligations under this Agreement; the execution, delivery and performance by Lessor of this Agreement has been duly authorized by all necessary corporate action on its part; and this Agreement has been duly and validly executed and delivered by Lessor and constitutes its legal, valid and binding obligation, enforceable against Lessor in accordance with its terms except to the extent such enforceability may be limited by (i) bankruptcy, insolvency, reorganization, moratorium or similar laws of general applicability affecting the enforcement of creditor's rights and (ii) the application of general principles of equity (regardless of whether such enforceability is considered in a proceeding in equity or at law). c) The execution and delivery of this Agreement and the consummation of the transactions herein contemplated will not conflict with or result in a breach of the articles of association (statuten) of Lessor or any applicable law or regulation or any material agreement or instrument to which Lessor is a party or by which it is bound or to which it is subject or constitute a default under any such material agreement or instrument. d) All authorizations, approvals and consents of, and filings or registrations with, any governmental or regulatory authority or agency, as are at the date of Delivery necessary for the execution, delivery or performance by Lessor of this Agreement and for the legality, validity, or enforceability hereof, will have been obtained at such date and thereafter will be maintained until the expiration or termination of this Agreement. 6.2 Charterer represents and warrants to Lessor that: a) Charterer is a corporation duly organized and in good standing under the laws of the State of Delaware; has all requisite corporate power and all material governmental licenses, authorizations, consents and approvals necessary to own its assets and carry on its business as now being or as proposed to be conducted; and is qualified to do business and is in good standing in all jurisdictions in which the nature of the business conducted by it makes such qualification 3 necessary and where failure so to qualify could be reasonably expected to have a material adverse effect on its business. b) Charterer has all necessary corporate power and authority to execute, deliver and perform its obligations under this Agreement; the execution, delivery and performance by Charterer of this Agreement has been duly authorized by all necessary corporate action on its part; and this Agreement has been duly and validly executed and delivered by Charterer and constitutes its legal, valid and binding obligation, enforceable against Charterer in accordance with its terms except to the extent such enforceability may be limited by (i) bankruptcy, insolvency, reorganization, moratorium or similar laws of general applicability affecting the enforcement of creditor's rights and (ii) the application of general principles of equity (regardless of whether such enforceability is considered in a proceeding in equity or at law). c) The execution and delivery of this Agreement and the consummation of the transactions herein contemplated will not conflict with or result in a breach of the certificate of incorporation or by-laws of Charterer or any applicable law or regulation or any material agreement or instrument to which Charterer is a party or by which it is bound or to which it is subject or constitute a default under any such material agreement or instrument. d) All authorizations, approvals and consents of, and filings or registrations with, any governmental or regulatory authority or agency, as are at the date of Delivery necessary for the execution, delivery or performance by Charterer of this Agreement and for the legality, validity, or enforceability hereof, will have been obtained at such date and thereafter will be maintained until the expiration or termination of this Agreement. e) Charterer will not, for the duration of the charter term, engage in significant activities or own substantial assets located in the United States of America. 6.3 OTHER THAN AS SPECIFICALLY STATED IN THIS AGREEMENT NEITHER PARTY SHALL BE DEEMED TO HAVE MADE ANY REPRESENTATION OR WARRANTY WHATSOEVER, EXPRESS OR IMPLIED, INCLUDING, WITHOUT LIMITATION, AS TO THE TITLE, SEAWORTHINESS, MERCHANTABILITY OR FITNESS FOR ANY PARTICULAR PURPOSE OR USE OF THE FPSO OR ANY PART THEREOF. 7. MAINTENANCE AND OPERATION 7.1 Lessor agrees that the FPSO shall, for the duration of the charter term, be in the full possession and at the absolute disposal for all purposes of Charterer and under its complete control in every respect. Subject to Article 7.3, as necessary to meet and maintain requirements of the American Bureau of Shipping ("ABS"), Charterer shall maintain the FPSO in a good state of repair. In addition, Charterer shall maintain the FPSO in efficient operating condition and in accordance with good commercial maintenance practice, and shall keep the FPSO with valid, unexpired classification of the class as indicated in Article 2, free of recommendations and notations affecting class. Charterer shall furnish Lessor with one duplicate original or certified true copy of all class and flag certificates issued or notated during the duration of the charter upon their issuance or notation. Lessor shall keep all Thai, Bahamian (the "Country of Registry") and other required certificates valid, up-to-date and in full force at all times. Charterer shall maintain the following maintenance reports, records, surveys and documents: Planned Maintenance System, Continuous Survey of Machinery and such other reports, records, surveys and documents as Lessor shall reasonably specify in writing. Charterer shall provide copies of such documents to Lessor upon Lessor's request. Lessor shall provide Charterer and Operator with all authorizations which Charterer may reasonably require in order to accomplish the actions required or permitted to Charterer under this Article 7. 4 7.2 Subject to Article 7.3, Charterer shall take immediate steps to have all necessary repairs done within a reasonable time. 7.3 Notwithstanding the terms of Articles 7.1 and 7.2, Major Repairs necessary to meet and maintain ABS requirements and the Design Basis shall be the responsibility of Lessor provided always that Charterer has not caused the need for such repairs as a result of Charterer's gross negligence or willful misconduct. "Major Repairs" shall mean all repairs to the FPSO other than: (a) repairs resulting from corrosion caused by a combination of carbon dioxide and water in the gas stream, and (b) repairs costing less than U.S. $100,000 per incident. Such Major Repairs shall be carried out by Lessor and Charterer shall provide all necessary assistance. 7.4 In the event of any improvement, structural changes or new equipment becoming necessary for the continued operation of the FPSO by reason of new class requirements or compulsory legislation or in order to maintain the FPSO in compliance with the Design Basis, then Lessor shall carry out such work at its expense. 7.5 Charterer shall establish and maintain financial security of responsibility in respect of oil or other pollution damage as required by any government or other division or authority thereof, to enable the FPSO, without penalty or charge, lawfully to enter and remain at the Offshore Site in performance of this Agreement or in the case of removal of the FPSO to another site as may be permitted by the terms hereof, at such other site. Charterer shall make and maintain all arrangements by bond or otherwise as may be necessary to satisfy such requirements at Charterer's sole expense. 7.6 Charterer shall at its own expense and by its own procurement, except as stated to the contrary elsewhere, man, victual, operate, supply, fuel and repair the FPSO whenever required during the duration of this Agreement and shall pay all charges and expenses of every kind and nature whatsoever incidental to its use and operation of the FPSO under this Agreement. The Master, officers, crew and production personnel of the FPSO shall be the servants of Charterer for all purposes whatsoever. 7.7 Charterer shall comply with the regulations of the Country of Registry and, to the extent applicable, the Kingdom of Thailand. Charterer will cause the FPSO to comply at all times with all applicable laws, treaties and conventions and with all rules and regulations issued thereunder and to have on board, when required thereby, valid certificates showing compliance therewith. 7.8 During the duration of this Agreement the FPSO shall retain her present name and shall remain under and fly the Bahamian flag, provided, however, that Charterer shall have the liberty to paint the FPSO in its own colors, install and display its funnel insignia and fly its own house flag. Painting and repainting, installment and re-instalment shall be for Charterer's account. 7.9 (a) Subject to Article 7.4 and Lessor's approval, which shall not be unreasonably withheld, Charterer shall have the right to add additional equipment, modify existing equipment or connect additional production facilities. Any such additions or modifications, including the installation thereof, shall be at the sole cost, risk and expense of Charterer. Such additions, modifications and connections so installed shall, without necessity of further act, become part of the FPSO and the property of Lessor; PROVIDED, HOWEVER, that so long as no Event of Default shall have occurred and be continuing, any such additions, modifications and connections not required to be installed in order to meet the requirements of Article 7.4 hereof and not installed as replacements for property included on board the FPSO on the date of Field Acceptance may be removed (so long as such removal can be accomplished without damage to the FPSO) by Charterer, at its own expense and risk, at any time during, or at the expiration of, the Initial Term upon reasonable prior notice, whereupon such equipment shall, without necessity of further act, become the property of Charterer. 5 (b) Charterer may, in the ordinary course of maintenance, repair or overhaul of the FPSO, remove any item of property constituting a part of the FPSO; PROVIDED, HOWEVER, that such item is replaced as promptly as possible by an item of property which is free and clear of all liens, encumbrances and rights of others and is in as good operating condition, is as seaworthy and has a value and utility at least equal to the item of property being replaced. Any item of property removed from the FPSO as provided in the preceding sentence shall remain the property of Lessor until replaced in accordance with the terms of such sentence, but shall then, without further act, become the property of Charterer. Any such replacement item of property shall, without further act, become the property of Lessor and be deemed part of the FPSO as defined herein for all purposes hereof. 7.10 Charterer shall have the use of all items of inventory, equipment and spares being part of or on board the FPSO on the date of Delivery, which Lessor undertakes to provide. Such inventory will be specified pursuant to Article 14. 8. INSPECTION 8.1 Lessor shall have the right at any reasonable time to inspect or survey the FPSO itself or to instruct a duly authorized third-party surveyor to carry out such survey on its behalf to ascertain the condition of the FPSO, and to satisfy itself that the FPSO is being properly repaired, maintained and operated. Such inspections and surveys shall be for Lessor's account. Charterer shall provide, free of charge to Lessor, upon reasonable request by Lessor, transportation from the shore base to the FPSO and vice versa on its regular flights and, to the extent available, accommodations, catering and communication on board for such inspectors or surveyors. 8.2 Charterer shall also permit Lessor to inspect the FPSO's log books whenever requested and shall immediately furnish Lessor with full information regarding any casualties or other accidents or damage to or caused by the FPSO. 9. COMPENSATION 9.1 As full compensation for the performance by Lessor of its obligations under this Agreement, Charterer shall pay Lessor a hire ("Hire"). Hire shall accrue in accordance with this Article 9 commencing at 0001 hours local time at the Offshore Site on the date ("Hire Commencement Date") on which both (a) Field Acceptance, and (b) the earlier of (i) December 20, 1996 or (ii) the date on which hydrocarbons begin flowing through the FPSO, shall have occurred. Except as otherwise provided herein, Hire shall continue to accrue until the date when the FPSO is redelivered to Lessor under the terms of this Agreement. Hire for the first ten (10) years after the Hire Commencement Date shall be paid at the rate of $65,752 per day, and Hire for the final eighteen (18) months of the Initial Term shall be paid at the rate of $43,227 per day (as applicable, the "Total Bareboat Rate") in the manner provided for in Article 24, subject to adjustment by mutual agreement of the parties, and, except as otherwise specifically provided herein, no other compensation or reimbursement shall be due to Lessor for the performance of its obligations hereunder. 9.2 Payment of Hire shall be made monthly in arrears, without any discount, adjustment, set off or deduction, except as specifically set forth in this Article 9 or otherwise in this Agreement. Lessor shall provide invoices to Charterer covering each payment of Hire at least ten (10) days before due. Payment of Hire shall be made to such U.S. Dollar account or accounts with such European office of a first class bank as Lessor shall designate in writing. Lessor shall not change such designations without Charterer's consent, which consent shall not be withheld unless Charterer determines that: (i) such change would increase Charterer's costs; or (ii) such change would expose Charterer to the risk of double payment. 6 The first payment of Hire shall be paid in same day funds before the close of business at the place of payment on the first business day of the calendar month beginning after the Hire Commencement Date. Except as otherwise provided in this Agreement, subsequent payments of Hire shall be paid in same day funds at the place of payment on the first business day of each applicable calendar month during the Initial Term or an extended term ("Hire Payment Date"). Hire shall accrue on a daily basis; provided that Hire for any periods that constitute less than a calendar day shall be a pro rata portion of Hire for such calendar day. If a Hire Payment Date falls on a day which is not a banking day at the place of payment, payment shall instead be made on the next succeeding day that is a banking day at such place. Any Hire paid but not earned shall be refunded on the next Hire Payment Date (or as otherwise provided under this Agreement) to Charterer by Lessor. 9.3 Upon request by Charterer, Lessor shall promptly pay to Charterer, or at the option of Charterer, at any time following an Event of Default by Lessor hereunder or a default under the Lessor Parent Company Guarantee, Charterer shall be entitled to deduct from the payments of Hire: (i) actual or reasonably estimated disbursements, if any, for Lessor's account; (ii) any advances to the master of the FPSO (the "Master") or to Lessor's affiliates, contractors, subcontractors, or agents for expenses or disbursements for Lessor's account; (iii) any previous overpayment of Hire, including payments made with respect to periods of Downtime; (iv) any sums due in respect of Lessor's failure to meet Lessor's performance undertakings under this Agreement; and (v) any other sums or credits to which Charterer is entitled under this Agreement. If a deduction is made based on an estimate, the next Hire payment shall be adjusted, if necessary, to reflect any difference between such estimate and the actual amount of deduction that Charterer is able to verify. All deductions from Hire shall be verified by Charterer by production of vouchers or supporting documentation corresponding to the deductions within thirty (30) days after the applicable Hire Payment Date. 9.4 Notwithstanding anything contained in this Article 9 to the contrary, the final payment of Hire hereunder shall be made on the date of redelivery of the FPSO to Lessor. Deductions, to the extent permitted by Article 9.3, from said final payment shall be those reasonably estimated by Charterer if the actual amounts have not been determined and also less the amount estimated by Charterer to become payable by Lessor for fuel and supplies on redelivery of the FPSO to Lessor as provided in Article 25. 9.5 (a) Should the FPSO become an actual total loss, Hire shall cease at the time of its loss or, if such time is unknown, at the time when the FPSO was last heard of. Should the FPSO become a total loss of any other kind, if approved in writing by Charterer in accordance with sub-clause (d) below, including, without limitation, a constructive, compromised, agreed or arranged total loss (a "constructive total loss"), Hire shall cease at the time of the casualty resulting in such loss. Within ninety (90) days after Hire has ceased under this Article 9.5, all monies owing to Charterer under the provisions of this Agreement at the time Hire ceases under this Article 9.5 shall be paid to Charterer, and likewise Lessor shall be paid the net amount of all sums due from Charterer. If the FPSO shall have been missing for at least forty-eight (48) hours when a payment of Hire would otherwise be due, such payment shall be postponed until the safety of the FPSO is ascertained. (b) Should the FPSO become an actual total loss or a constructive total loss (i) for reasons other than negligence or willful misconduct of Lessor Group and (ii) in circumstances where no Event of Default by Lessor or its affiliates, its Guarantor or the Operator (a "Lessor Party") has occurred and is continuing, this Agreement shall be deemed to be terminated as of the date on which the 7 obligation to pay Hire ceases in accordance with Article 9.5(a) without prejudice to (A) the payment obligations of Lessor and Charterer as described in Article 9.5(a) and (B) any other provisions which would otherwise survive termination of this Agreement which, for the avoidance of doubt, does not include any obligation to rebuild the FPSO or procure a new FPSO. (c) Should the FPSO become an actual total loss or a constructive total loss either (i) for reasons where the negligence or willful misconduct of a member of Lessor Group is a contributing factor or (ii) in circumstances where an Event of Default by a Lessor Party has occurred and is continuing, then, irrespective of such total loss, Charterer shall have the remedies set out in Article 31 hereof. (d) Lessor and its affiliates shall not be entitled to (i) claim under this Agreement or (ii) reach agreement with the insurers on the hull policies taken out by Lessor and its affilates that, in either case, the FPSO constitutes a total loss of any kind other than an actual total loss without the prior written approval of Charterer. (e) An actual total loss or a constructive total loss will not constitute in and of itself an Event of Default. 9.6 In the event Charterer fails to make any payment (including without limitation any payment of Hire) due and owing to Lessor under this Agreement, Lessor shall so notify Charterer. If Charterer fails to pay amounts due and owing within five (5) business days after receipt of such notice, Charterer shall pay to Lessor, in addition to all other amounts then due and owing, a late fee at a rate equal to one-month LIBOR plus two percent (2%) on the amounts then due and owing for the period of said fifth (5th) day until paid without prejudice to any other remedies under this Agreement. 9.7 All payments of Hire and other amounts due hereunder from one party to the other shall be made in U.S. Dollars by interbank transfer. Except as otherwise provided herein, all sums due by one party to the other shall be paid within 30 days of receipt of invoice. 9.8 Charterer shall be responsible for obtaining and shall use all reasonable efforts to obtain exchange control approval for payments under this Agreement. 10. CHANGE IN LAW 10.1 The Total Bareboat Rate is based on the tax laws of Thailand and Holland as of the date of this Agreement and assumes a tax burden of 1.1% of the Total Bareboat Rate. In the event there are any changes in Thailand tax laws or their interpretation which affect the cost to the Lessor of chartering the FPSO, the Total Bareboat Rate shall be revised upwards or downwards to take into account such change in costs; provided, however, Charterer shall not be obligated to pay any Thai, Dutch or U.S. tax burden up to a total amount equal to 2.2% of the Total Bareboat Rate and further provided Lessor shall use all reasonable efforts to maintain its present status under the tax treaty between Thailand and the Netherlands and shall take all reasonable actions to prevent or minimize any such increased expenses. Any increase in the total tax burden on the Total Bareboat Rate in excess of 2.2% of the Total Bareboat Rate attributable to any changes in Dutch tax laws shall be for Lessor's account. Any adjustment of said compensation shall be effective as of the effective date of the change in such tax burden; provided, Lessor shall furnish to Charterer the necessary supporting documentation evidencing such changes within a reasonable time. 10.2 The parties hereto do not believe that any U.S. taxes are applicable to payments made under this Agreement. To the extent that U.S. withholding taxes are assessed on Hire payable hereunder, Hire shall be increased such that the net Hire received by Lessor hereunder shall not be affected by such U.S. withholding taxes. Lessor agrees to use its best efforts to promptly obtain a refund of any such U.S. income taxes which have been withheld in excess of Lessor's U.S. tax obligations and to promptly repay such refund to Charterer. 8 11. TAXES Subject to Article 10, all taxes (including income and withholding taxes) which are due with respect to the payment of the Total Bareboat Rate pursuant to this Agreement shall be paid by Lessor or reimbursed to Charterer by Lessor, except that Thailand value added taxes ("VAT"), other Thailand sales/use taxes and Thailand customs and import duties applicable to the FPSO, shall be paid by Charterer or reimbursed to Lessor by Charterer. Charterer or its designee on the behalf of the Concessionaires shall be designated as the importer of the FPSO and be responsible for customs clearance and obtaining import licenses on the FPSO. 12. CONFLICTS OF INTEREST Neither Lessor nor any of its subcontractors shall pay any fee, commission, rebate or other thing of value to, or for the benefit of, any employee of Charterer, its principals or any of its or their affiliates, nor shall Lessor do business with any company knowing that the results thereof might benefit an employee of the Charterer, its principals or any of its or their affiliates. 13. LIENS AGAINST THE FPSO 13.1 a) Neither Charterer nor the master of the FPSO nor any other person shall have any right, power or authority to create, incur or permit to exist upon the FPSO any lien, charge or encumbrance other than Permitted Encumbrances. Lessor may fasten to the FPSO in a conspicuous place and maintain during the term of this Agreement a notice reading as follows: NOTICE OF CHARTER This Vessel is mortgaged to , and is under charter to Tantawan Services, L L C With the exception of such mortgage, under the terms of said charter, neither the charterer, any subcharterer, the master of this Vessel, nor any other person has the right, power or authority to create, incur or permit to be placed or imposed upon this Vessel, or its profits, any lien whatsoever, other than liens for master's and crew's wages or salvage or as otherwise provided under said charter. b) Lessor warrants that it has not created and covenants that it will not create or permit to exist, and shall indemnify, hold harmless and defend Charterer against any loss which Charterer may sustain by reason of, any Owner Encumbrances. c) "Permitted Encumbrances" shall mean (i) the rights of Charterer under this Agreement, (ii) the rights of Lessor under this Agreement, (iii) during the Initial Term or any extended term, liens for current master's and crew's wages and salvage, (iv) Lessor Group's mortgage of the FPSO in favor of certain lending institutions ("Lenders") provided Charterer shall have received satisfactory assurances from the Lenders as to the exercise of Charterer's rights under this Agreement in the absence of an Event of Default by Charterer and the expiration of all cure periods relevant thereto, and (v) liens arising in tort which are covered by insurance; and "Permitted Encumbrance" shall mean any of the foregoing. d) "Owner Encumbrances" shall mean any liens, security interests or encumbrances resulting from voluntary action by Lessor Group, as hereinafter defined, taken without the prior written approval of Charterer and not taken as the result of an Event of Default by Charterer. 13.2 Charterer agrees that if a libel or a complaint in admiralty (for purposes of this Article 13.2 called a "claim") shall be filed against the FPSO, or if the FPSO shall be otherwise levied upon or taken into custody or detained or sequestered by virtue of proceedings in any court or tribunal or by any government or other authority because of any claim (excluding a claim against Lessor), Charterer shall at its own expense within 15 days thereafter cause the FPSO to be released and each such 9 claim to be discharged (except to the extent that the same shall be contested by Charterer in good faith by appropriate proceedings and shall not affect the continued use of the FPSO). Charterer agrees forthwith to notify Lessor by telegram or telex, confirmed by letter, of each such claim involving amounts in excess of $500,000 and of the release and discharge of each such claim. Charterer agrees to advise in writing at least once in each three-month period as to the status and merits of all such claims not released and discharged within 15 days as provided above, which either are not bonded or affect the ability of Charterer to use the FPSO in the ordinary course of its business. Charterer agrees to indemnify, hold harmless and defend Lessor against any loss which Lessor may sustain by reason of any liens, security interests or encumbrances resulting from voluntary action by Charterer Group taken without the prior written approval of Lessor and not taken as the result of an Event of Default by Lessor. 14. INVENTORY A complete inventory of the FPSO's entire outfit, equipment (including vessel equipment and supplies, cabin, crew and galley equipment), furniture, furnishings, appliances, spare and replacement parts and all unbroached consumable stores, fuel and lubricants onboard shall be jointly taken within thirty (30) days following Field Acceptance by representatives of Lessor and Charterer or by an independent outside firm as may be mutually agreed upon. A similar inventory shall be taken and mutually agreed upon at the time of Redelivery. 15. GAS SALES AGREEMENT Charterer and Lessor recognize that compliance with the terms of the Gas Sales Agreement will be required by the parties thereto, and Lessor and Charterer will generally cooperate in facilitating such compliance by the parties thereto. 16. DOWNTIME 16.1 Downtime shall mean any calendar day on which the FPSO is unable to process sufficient gas so as to deliver (and actually deliver) into the export pipeline the lesser of (i) 150 million cubic feet ("Mmcf") of gas or (ii) the amount of gas that Charterer, its affiliates and designees are capable of delivering to the FPSO, as determined in good faith by Charterer on the basis of demonstrated measured data; provided that any shortfall in gas delivery on a given calendar day may be made up so as to avoid Downtime hereunder over the three succeeding calendar days. Downtime shall also mean any calendar day on which the FPSO is unable to process and deliver into the FPSO storage tanks the lesser of (i) 40,000 barrels of liquids or (ii) the amount of liquids that Charterer, its affiliates and designees are capable of delivering to the FPSO, as determined in good faith by Charterer on the basis of demonstrated measured data; provided, however, that no Downtime shall be deemed to have occurred pursuant to this sentence if the FPSO's inability to process the liquids so required results solely from the FPSO's inability to process the quantity of gas required by the immediately preceding sentence. Downtime shall also mean any calendar day on which the FPSO is unable to offload into shuttle tankers the oil stored on the FPSO, other than for adverse weather conditions as specified in the Terminal Regulations Manual, as defined in the Operating Agreement and in Charterer's reasonable opinion this adversely affects the normal operation of the fields served by the FPSO. For purposes of this Article 16.1, "process" shall be interpreted to mean the processing on board the FPSO of gas and liquids having the properties given in the Design Basis in circumstances which conform to the design criteria given in the Design Basis. 16.2 Downtime shall occur notwithstanding the fact that maintenance or repairs (including Major Repairs but excluding those resulting from Charterer's gross negligence or willful misconduct) are occurring. Downtime shall not occur during the period that Charterer is adding or modifying equipment or connecting additional facilities pursuant to Article 7.9 hereof. 16.3 Lessor shall give Charterer sixty (60) days' prior notice of any Major Repairs to the FPSO. 10 16.4 Downtime shall be deemed not to occur during an event which is a Force Majeure event hereunder. 16.5 A Downtime Penalty Period shall mean any year based upon a historical rolling year beginning after the earlier of (i) February 28, 1997 or (ii) the Contractual Delivery Date, as defined in the Gas Sales Agreement. If Charterer desires to fix the commencement of the Downtime Penalty Period by reference to a Contractual Delivery Date based on completion of the seventy two (72) hour test ("Test") referred to in clause 6.3 of the Gas Sales Agreement, Charterer shall be required to obtain confirmation from Lessor prior to commencement of the Test that the FPSO is able to process and deliver Sales Gas, as defined in the Gas Sales Agreement, consistent with the PTT nomination made pursuant to said clause 6.3. During any Downtime Penalty Period (i) Charterer shall not be obligated to pay Lessor the Total Bareboat Rate in respect of any Downtime occurring after the first thirty (30) days of Downtime and (ii) if the first thirty (30) days of Downtime are consecutive, in addition to the foregoing, Charterer shall not be obligated to pay Lessor the Total Bareboat Rate for said first thirty (30)-day period (and if Charterer has previously paid any or all of the Total Bareboat Rate in respect of said first thirty (30) day period, Lessor shall promptly refund such amount to Charterer). 17. INSURANCE 17.1 Lessor shall maintain in force or shall cause one of its affiliates to maintain during the term of this Agreement the following insurance coverages. Deductibles for insurance obtained pursuant to Article 17.1 a), b) and c) shall be shared equally by Charterer and Lessor; all other deductibles shall be for the account of Lessor. a) Hull and Machinery and Increased Value Insurance on the FPSO in the amount of one hundred twenty percent (120%) of the estimated value of the FPSO on the London Institute Hull Clauses, or equivalent, including Collision Liability to the extent not provided under Article 17.1 (d) below. b) Confiscation and Expropriation Insurance on the FPSO in the amount of one hundred twenty percent (120%) of the estimated value of the FPSO. c) War Risk Insurance on the FPSO subject to London Institute Hull War Risk and Strikes Clauses, or equivalent, in the amount of one hundred twenty percent (120%) of the estimated value of the FPSO, and War Risk Protection and Indemnity Clauses with a limit of one hundred twenty percent (120%) of the estimated value of the FPSO. d) Protection and Indemnity Insurance on the FPSO, subject to the rules of a Protection and Indemnity Club who are members of the International Group of P & I Clubs. The P & I entry to include that proportion, if any, of Collision Liabilities not covered under Article 17.1 (a) above. e) Workmen's Compensation and Employer's Liability Insurance covering Lessor Group's (as hereinafter defined) employees for statutory benefits as set out and required by local law in the area of operation or any area in which Lessor Group may become legally obligated to pay benefits. Appropriate maritime coverage shall be included. f) Comprehensive General Liability and Automobile Liability Insurance covering premises and operations, independent contractors and contractual liability, as well as all owned, hired and non-owned vehicles. Minimum policy limits for personal injury and property damage shall be: i) Comprehensive General Liability: US$25,000,000 single limit per occurrence; ii) Automobile Liability: US$1,000,000 single limit per occurrence or such greater amount as required by applicable law. 11 g) Pollution Insurance for the FPSO for US$300 million per occurrence, subject to market availability. 17.2 Before commencing performance of this Agreement, Lessor shall furnish Charterer with Certificates of Insurance indicating: a) the kinds and amounts of insurance as required; b) the insurance company or companies providing the aforesaid coverages; c) the effective and expiration dates of policies; d) that Charterer will be given thirty (30) days' (7 days for War Risk insurance policy) written advance notice of any material change, non-renewal or cancellation of any policy; e) the territorial limits of all policies; and f) that Charterer Group (as hereinafter defined) has been named as an additional insured on all policies referred to in Article 17.1 (except Article 17.1e)) with waivers of subrogation on the policies in Article 17.1. 17.3 Charterer shall maintain in force during the term of this Agreement the following insurance coverages. Deductibles shall be for the account of Charterer. a) Workman's Compensation and Employer's Liability Insurance covering Charterer Group's employees for statutory benefits as set out and required by local law in the area of operation or area in which Charterer Group may become legally obligated to pay benefits. Appropriate maritime coverage shall be included. b) Comprehensive General Liability and Automobile Liability Insurance covering premises and operations, independent contractors and contractual liability, as well as all owned, hired and non-owned vehicles. Minimum policy limits for personal injury and property damage shall be: i) Comprehensive General Liability: US$25,000,000 single limit per occurrence; and ii) Automobile Liability: US$1,000,000 single limit per occurrence or such greater amount as required by applicable law. c) Seepage and Pollution Insurance on normal industry terms for the reservoir and oil field installations for US$50 million per occurrence. 17.4 Charterer shall furnish Lessor with Certificates of Insurance indicating: a) the kinds and amounts of insurance as required; b) insurance company or companies providing the aforesaid coverages; c) effective and expiration dates of policies; d) Lessor will be given thirty (30) days' written advance notice of any material change, non-renewal or cancellation of any policy; e) the territorial limits of all policies; and f) that Lessor Group has been named as an additional insured on all policies referred to in Article 17.3 b) and c) with waivers of subrogation on the policies in Article 17.3. Charterer shall use reasonable efforts to obtain an agreement from PTT to indemnify Lessor Group and Charterer Group for losses and damages resulting from operations of shuttle tankers used or hired to transport oil from the FPSO. 12 17.5 Except as specifically provided above in this Article 17, Lessor and Charterer shall work toward establishing insurance values, amounts, coverages and deductibles on forms and with insurers which are compatible and consistent with the standards of prudent owners and operators of vessels of similar type, size, age, location and activity as the FPSO. 18. INDEMNITY 18.1 Charterer Group shall have no liability or responsibility whatsoever for injury, illness or death of or property loss or damage (including to the FPSO) sustained by Lessor and its affiliates, associates, co-venturers, subcontractors at all levels, sub-suppliers, lenders and their respective shareholders, officers and employees and agents and the Master and crew of the FPSO (hereinafter all such persons and companies called "Lessor Group") howsoever caused or arising. Lessor shall protect, defend, indemnify and hold harmless Charterer and its affiliates, associates, co-venturers, co- venturers of subsidiaries and affiliates, and subcontractors at all levels and their respective shareholders, officers, employees and agents (hereinafter all such companies and persons called "Charterer Group") from and against any loss, damage, claim, expense, suit or liability (including attorneys' fees and legal costs) as a result of such injury, illness or death or property loss or damage. 18.2 Lessor Group shall have no liability or responsibility whatsoever for injury, illness or death or property loss or damage (including oil and gas reservoirs, pipelines and platforms in which Charterer Group has an interest) sustained by Charterer Group, howsoever caused or arising, including the unseaworthiness of the FPSO or otherwise. Charterer shall protect, defend, indemnify and hold harmless Lessor Group from and against any loss, damage, claim, expense, suit or liability (including attorneys' fees and legal costs) as a result of such injury, illness or death or property loss or damage. 18.3 Subject to the provisions of Articles 18.5, 18.6 and 18.9, with respect to claims by third parties (which shall exclude Charterer Group and Lessor Group) to the extent arising out of Lessor Group's negligence, Lessor agrees to indemnify, defend and save Charterer Group harmless from and against any and all losses, claims, demands, liabilities, damages, suits or actions in rem or otherwise (including expenses and attorneys' fees) for loss or damage to or injury, illness or death of such third parties. 18.4 Subject to the provisions of Articles 18.5, 18.6 and 18.9, with respect to claims by third parties (which shall exclude Charterer Group and Lessor Group) to the extent arising out of Charterer Group's negligence, Charterer agrees to indemnify, defend and save Lessor Group harmless from and against any and all losses, claims, demands, liabilities, damages, suits or actions in rem or otherwise (including expenses and attorneys' fees) for loss or damage to or injury, illness or death of such third parties. 18.5 From and after Field Acceptance, Charterer shall be solely responsible for (i) seepage or pollution from reservoirs, pipelines, platforms and other property related thereto owned or leased by Charterer Group while such property is in Charterer Group's custody and control, including cost of cleanup of same, and (ii) with respect to amounts in excess of $10,000,000 per occurrence, pollution from the FPSO (including its risers). Charterer agrees to indemnify, defend and save Lessor Group harmless from and against any and all losses, claims, demands, liabilities, damages, suits or actions in rem or otherwise (including expenses and attorneys' fees) for loss or damage to Lessor Group arising out of the seepage or pollution described in clause (i) and the pollution (for amounts in excess of $10,000,000 per occurrence) described in clause (ii). With respect to said pollution from the FPSO, Charterer shall conduct cleanup operations and Lessor shall provide all reasonable assistance; ultimate financial responsibility for the cost of such cleanup (to the extent less than $10,000,000) will be allocated by mutual agreement of the parties or pursuant to applicable law. If Charterer causes crude oil or gas described in this Article 18.5 to be insured, Charterer shall cause Lessor Group to be named as co- insured in such policy as their interests may appear. 13 18.6 a) Notwithstanding Article 18.5, Lessor shall be solely responsible for all liabilities, costs, expenses, penalties and/or fines arising from or caused by any pollution originating in or above the surface of the water from (i) spills of fuels, bunkers, slop tanks, lubricants, motor oils, pipe dope, paints, solvents, ballast, bilge, garbage and sewage in Lessor Group's possession or control (including the FPSO) and (ii) any property or equipment (other than the FPSO) owned, leased or provided by the Lessor Group while such equipment is in a member of Lessor Group's custody and control, including costs of cleanup of same. b) Notwithstanding Article 18.5, Charterer shall be solely responsible for all liabilities, costs, expenses, penalties and/or fines arising from or caused by any pollution originating in or above the surface of the water from (i) spills of fuels, bunkers, slop tanks, lubricants, motor oils, pipe dope, paints, solvents, ballast, bilge, garbage and sewage in Charterer Group's possession or control (other than the FPSO) and (ii) any property or equipment owned, leased or provided by the Charterer Group (other than the FPSO) while such equipment is in a member of Charterer Group's custody and control, including costs of cleanup of same. 18.7 All excuses from liability for one party and all indemnities given by one party to the other party or to the other party's Group pursuant to this Agreement, including but not limited to the indemnities in this Article 18, shall apply regardless of the sole or concurrent negligence or gross negligence or breach of duty or strict liability of the parties to be indemnified but shall not apply in the case of willful misconduct. 18.8 As used herein, "affiliate" shall mean any company or legal entity which (i) controls either directly or indirectly a party hereto, (ii) which is itself effectively controlled directly or indirectly by such party or (iii) is directly or indirectly effectively controlled by a company or entity which directly or indirectly controls such party. "Control" means the right to exercise forty percent (40%) or more of the voting rights in the appointment of the directors of the company concerned. 18.9 In no event shall either party's Group be liable for any loss of production, loss of oil or gas, loss of revenue or profit, loss of commercial advantage, demurrage, or any consequential or indirect losses or damages suffered by the other party's Group as a result of any act or omission or negligence, unseaworthiness of the FPSO or otherwise, and each party shall protect, defend, indemnify and hold harmless the other party's Group with respect to its Group's losses in this regard. 18.10 The provisions of this Article 18 are intended to specifically allocate certain liabilities between the parties hereto in the events described in this Article 18 but shall not be interpreted to waive or excuse performance by any party of its representations, warranties and covenants set forth in this Agreement. 19. NON-WAIVER OF DEFAULTS; NON-RECOURSE 19.1 Any failure by either party at any time, or from time to time, to enforce or require the strict keeping and performance of any of the terms or conditions of this Agreement, or to exercise a right hereunder, shall not constitute a waiver of such terms or conditions. 19.2 Notwithstanding any provision herein to the contrary, Lessor's recourse in the event of occurrence of any Event of Default hereunder shall be as provided in Article 31 hereof, PROVIDED THAT Lessor shall have no recourse to the assets of Charterer (other than its rights with respect of the FPSO), but shall be permitted to exercise any and all rights under and with respect to the guarantees and collateral referred to in Article 5. 20. FORCE MAJEURE 20.1 Any loss or damage or delay in, or failure of performance of either party shall not constitute default hereunder or give rise to any claims for damages if and to the extent that such loss, damage, delay or failure is caused by "Force Majeure." 14 20.2 In this Agreement "Force Majeure" shall denote any event the happening of which could not be prevented even though a person against whom it happened or threatened to happen were to take such appropriate care as might be expected of a Reasonable and Prudent Operator, as hereinafter defined. "Reasonable and Prudent Operator" when used to describe the standard of care to be exercised by a party in performing its obligations means the degree of diligence and prudence and foresight reasonably and ordinarily exercised by experienced operators engaged in the same line of business under the same or similar circumstances and conditions and when used to determine the action that would be required of a party means the action an experienced commercial operator engaged in the same line of business under the same or similar circumstances and conditions would take in the exercise of such due diligence, prudence and foresight. Notwithstanding Article 20.1, Force Majeure shall not release either party from any obligation to give a notice or make any payment (including, in particular, any payment of Hire) under this Agreement except where the making of a payment is prevented by a Force Majeure event affecting the transfer of monies by the payor. Any payments which are so prevented from being made by reason of Force Majeure shall, upon the cessation of the Force Majeure event, be made as soon as practicable thereafter in addition to any other amounts which may then be payable by such party under this Agreement. 20.3 Events which may, subject to Article 20.2, be considered Force Majeure events shall include but not be limited to acts of government, strikes, lock-outs, acts of public enemy, wars whether declared or undeclared, blockades, insurrection, riots, epidemics, landslides, lightning, earthquakes, fires, storms, floods, washouts, civil disturbances, explosions, breakage or accident to machinery or lines of pipe, freezing of wells or lines of pipe, partial or entire failure of wells, inability to obtain necessary materials or supplies due to changes in laws and regulations, material changes in the obligations of the concessionaire under the Concession Agreement, as herein defined, imposed unilaterally by the Government of Thailand, and inability of PTT to accept delivery of natural gas delivered to PTT under the Gas Sales Agreement where such inability constitutes an event of Force Majeure under the Gas Sales Agreement which has been declared. 20.4 A party claiming relief on account of Force Majeure shall: (i) as soon as practicable give notice to the other party of the happening said to constitute Force Majeure, such notice to include full information about the circumstances and a statement of the steps and time believed necessary to remedy the failure but neither party shall be obligated to settle or prevent any strike or other industrial action except on terms which, in its sole judgment, are acceptable to it; and (ii) proceed as a Reasonable and Prudent Operator at its own expense to remedy the failure as rapidly as possible. 21. LAW AND ARBITRATION 21.1 This Agreement shall be construed and governed in accordance with the maritime law of the United States of America and, to the extent such law is inapplicable, with the laws of the State of New York excluding any conflict of law rules. In connection with the interpretation of any exhibit hereto, the choice of law of this Agreement shall prevail. 21.2 Any dispute arising under or in connection with this Agreement shall be settled by arbitration in New York City under the rules of the American Arbitration Association, except as provided herein. The party requesting arbitration shall be entitled to have arbitration of the dispute consolidated with any other pending dispute under this Agreement or with any dispute arising under the Operating Agreement. The party requesting arbitration shall serve upon the other party a written demand for arbitration with the name and address of the arbitrator appointed by it, and such other party shall, within ten (10) days thereafter, appoint an arbitrator, and the two arbitrators so named, if they can agree, shall appoint a third, and the decision or award of any two shall be final and 15 binding upon the parties. In no event shall any dispute or consolidated group of disputes be determined by more than three arbitrators. Should the party upon whom the demand for arbitration is served fail or refuse to appoint an arbitrator within ten (10) days, the single arbitrator shall have the right to decide alone, and his decision or award shall be final and binding upon the parties. The arbitrator(s) shall have the discretion to impose the cost of the arbitration proceedings, including reasonable attorney's fees upon the losing party, or divide it between the parties on any terms which may appear just. Any decision or award rendered hereunder may be made and entered as a rule or judgment of any Court, in any country having jurisdiction. 21.3 Judgment upon the arbitration award rendered may be entered in any Court having either personal or in rem jurisdiction, or application may be made to such Court for a judicial acceptance of the award and an Order of Enforcement, as the case may be. 22. NOTICES 22.1 Notices or other communications required to be given by either party pursuant to this Agreement shall be written in English and sent in letter form or by telex or facsimile to the address of the other party set forth in Article 22.2 below, or to such other address as may from time to time be designated by the other party through notification of such party. The dates on which notices shall be deemed to have been effectively given shall be determined as follows: 22.1.1 Notices given by personal delivery shall be deemed effectively given on the date of personal delivery; 22.1.2 Notices given in letter form shall be deemed effectively given on the seventh day after the date mailed (as indicated by the postmark) by registered airmail, postage prepaid, or the third day after delivery to an internationally recognized courier service; 22.1.3 Notices given by telex shall be deemed effectively given on the first business day following the date of transmission, as indicated on the document in question; and 22.1.4 Notices given by facsimile shall be deemed effectively given on the first business day following the date of transmission, as indicated on the document in question. 22.2 Except as otherwise provided in Article 22.1, the parties shall give all notices and send all invoices and communications under this Agreement to: 22.2.1 If to Lessor: Tantawan Production B.V. 557's - Gravelandseweg 3119 XT Schiedam The Netherlands Attention: R. Smulders 31-10-4260430 (ph) 31-10-4731434 (fax) 16 22.2.2 If to the Charterer: Tantawan Services, LLC with a copy to: 18th Floor, B.B. Building Pogo Producing Company 54 Soi Asoke, Sukhumvit 21 Rd. 5 Greenway Plaza, Suite 2700 Kwaeng Klongtoey Nua, Khet Houston, TX 77046-0504 Klontoey Attn: Legal Dept. Bangkok 10110, Thailand (713) 297-5000 (phone) Attn: Resident Manager (713) 297-4970 (fax) (662) 260-7151 (phone) (662) 260-7150 (fax) 22.3 All references in this Agreement to a business day shall refer to a day when both parties are open for business or, in the case of payments under Article 9, a day when banks at the place of payment are open for business. 23. PURCHASE OPTION Provided that an Event of Default by Charterer under Article 30 of this Agreement is not existing, Charterer shall have the right to exercise an option (the "Purchase Option") to purchase the FPSO (including its on-board spare parts) from the Lessor free from all encumbrances (except encumbrances created by Charterer), (i) at the expiration of the Initial Term for a price of five million dollars ($5,000,000), or (ii) at any time during the Initial Term or during any extended term at a price to be determined by reference to Appendix C-1, or (iii) at any time during the Initial Term or at any time during an extended term, (A) if an Event of Default by Lessor has occurred under Article 30 of this Agreement and Charterer has elected, pursuant to Article 31.1(b) hereof to exercise this Purchase Option, or (B) if, in the opinion of Charterer (and, if requested by Lessor, in the opinion of Charterer's outside counsel), such purchase is required by relevant governmental authorities pursuant to applicable laws, rules, regulations or agreements with such governmental authorities, for a price determined by reference to Appendix C-2; provided that, in each of the forgoing cases, such purchase price shall be reduced by any amounts due from Lessor under this Agreement which have been established at the time of such purchase; provided further, in the case of a purchase pursuant to subsections (i) or (ii) above only, the FPSO shall not be moved to operate in another field outside Thailand or, if within Thailand, (i) to a field in which a current or future member of the Charterer Group (as defined in Article 18.1) does not have an interest, or (ii) unless pursuant to the Concession Agreement. Any Thailand sales or transfer taxes attributable to the sale will be paid by Charterer. If Charterer is exercising its Purchase Option pursuant to (i) or (iii)(A) above, Charterer shall provide notice of its intent to do so in accordance with the relevant provisions of this Agreement. If Charterer is exercising its Purchase Option pursuant to (iii)(B) above, Charterer shall provide notice of its intent to do so at the earliest reasonable practicable opportunity. If Charterer is exercising its Purchase Option pursuant to (ii) above, Charterer shall provide notice of its intent to do so at least 180 days prior to such purchase. Upon notification by Charterer of its intent to exercise the Purchase Option, Lessor shall use reasonable diligence to cause the release of all liens (except liens caused or created by Charterer Group) on the FPSO to be effective not later than closing of the sale. In the event the Purchase Option is exercised, unless agreed otherwise between Charterer and Lessor, Lessor shall sell the FPSO and Charterer shall purchase the FPSO "as is," safely afloat, at the time and place of redelivery of the FPSO pursuant to Article 25, at which time: a) Lessor shall deliver to Charterer: (i) A certificate signed by a duly authorized executive of Lessor to the effect that the FPSO is free from all encumbrances (except encumbrances created by Charterer), 17 (ii) A certificate signed by the appropriate government official of the Country of Registry showing Lessor as the sole owner of the FPSO and no liens of record other than encumbrances to be satisfied out of the FPSO's sales proceeds, (iii) One or more bills of sale executed by duly authorized officers of Lessor on behalf of Lessor conveying full title of the FPSO to Charterer in suitable form for recording or registering title, (iv) Copies of class and trading certificates (where relevant to its class) for the FPSO valid at the time of re-delivery, (v) All government approvals necessary to transfer the FPSO to Charterer and, if requested by Charterer, to delete the FPSO from registry in the Country of Registry and any country claiming jurisdiction over Lessor's power to sell the FPSO, (vi) Copies of all log books, classification certificates, manuals and other documents in the Lessor's or Lessor's manager's possession related to the FPSO's operation and maintenance, and (vii) Physical possession of the FPSO. b) On delivery Charterer shall pay the purchase price to Lessor or its designee by transfer to Lessor's account then designated for receipt of Hire payments. c) Each party shall deliver to the other party such additional documentation or take such additional action as such other party may reasonably request or as may be customary at the time with respect to the sale of vessels registered in the Country of Registry and which is not in conflict with the provisions of this Agreement, provided that Lessor shall not be required to arrange or pay for a drydocking or inspection of the FPSO for purposes of said sale and purchase. 24. REVENUES Lessor and Charterer have entered into that certain Accounts Agreement dated December 19, 1996, among the Joint Venturers, Thaipo Limited as Field Operator, Lessor, Charterer, Operator and ABN AMRO Bank N.V., Bangkok Branch (the "Accounts Agreement"). If the Accounts Agreement terminates as the result of a Lessor Event of Default under this Agreement and, subsequent to such termination, such Lessor Event of Default is cured prior to Charterer exercising its rights to terminate this Agreement under Article 31 of this Agreement, then Lessor and Charterer shall as soon as reasonably practicable enter into a new accounts agreement in form and substance substantially similar to the Accounts Agreement. The obligations of Charterer under the said Accounts Agreement (and any successor accounts agreement entered into pursuant to the preceding sentence) shall be deemed for purposes of the Joint Venturer Guarantees to be obligations of Charterer hereunder. 25. REDELIVERY OF FPSO The FPSO shall at the expiration or termination or as provided in Article 31.2 (b) of this Agreement (unless lost or a constructive total loss or under requisition or purchased by Charterer) be redelivered to Lessor at the Offshore Site (the "Redelivery"), as is - where is, in accordance with the following conditions. The FPSO shall be redelivered to Lessor properly documented and in class with no recommendations, fair wear and tear not affecting class excepted. Charterer shall have discharged substantially all free crude oil (other than tank bottoms) from the FPSO. Any expenses of degassing or demucking conducted within 12 months of Redelivery shall be borne by Charterer. The FPSO shall upon Redelivery have her class certificates valid. Charterer will render the FPSO available to Lessor at the time of Redelivery for survey, inspection, testing and inventory check at 18 Lessor's expense. Charterer at its expense shall meet its Redelivery obligations and the charter period shall be extended for the period necessary to make any deficiencies good. During any such period the compensation payable under Article 9 before Redelivery shall not be so payable provided Charterer's obligations herein are met promptly and expeditiously. Prior to and during the Redelivery of the FPSO, Charterer shall provide such reasonable assistance to Lessor as Lessor requests in order to effect taking Redelivery of the FPSO, including but not limited to temporary office facilities onshore and transportation from Charterer's shore base to the FPSO and vice versa for Lessor's personnel and supplies as is reasonable under the circumstances. On Redelivery, Lessor shall be free (i) to cut and either remove or abandon the anchor chains, the risers, buoyancy tanks and the control umbilicals (but so as to leave no hazard to shipping and to avoid damage to Charterer's wells, wellheads, pipelines, PLEMS or other equipment) and to remove the FPSO from the Offshore Site but without having any obligation to remove subsurface equipment or materials including piling or any other obligation to clear the Offshore Site and (ii) to remove any free crude oil not previously removed by Charterer at Charterer's expense. 26. REQUISITION 26.1 If the FPSO is seized, expropriated, confiscated, nationalized or requisitioned by any authority (other than the government, or any department, commission or agency thereof, of the Country of Registry, whether a legally constituted governmental authority or otherwise), and such seizure, expropriation, confiscation, nationalization or requisition has continued for a period of at least 30 consecutive days, this Agreement, at the option of Charterer, may continue in force or may be terminated at any time during the period of seizure, expropriation, confiscation, nationalization or requisition, provided that in the event Charterer elects to terminate, notice shall be given to Lessor by Charterer and compensation, as specified in Article 9, shall cease as of the date occurring 30 days prior to the date of notice of termination and the FPSO shall be deemed to have been Redelivered to Lessor by Charterer. If Charterer has previously paid any or all of such compensation in respect of such 30 day period, Lessor shall promptly refund such amount to Charterer. 26.2 In the event the FPSO is seized, expropriated, confiscated, nationalized or requisitioned by the government, or any department, commission or agency thereof, of the Country of Registry, whether a legally constituted governmental authority or otherwise, this Agreement shall be deemed terminated and compensation, as specified in Article 9.1, shall cease as of the date of seizure, expropriation, confiscation, nationalization or requisition, and the FPSO shall be deemed to have been redelivered to Lessor by Charterer. 26.3 In the event any seizure, expropriation, confiscation, nationalization or requisition of the FPSO occurs, Lessor shall use its best efforts to arrange the release of the FPSO therefrom (including, without limitation, changing the Country of Registry of the FPSO) and shall afford Charterer the opportunity to join in any such action. 27. GENERAL AND PARTICULAR AVERAGE General average if any shall be adjusted according to the York-Antwerp Rules 1994 or any subsequent modification thereof current at the time of the casualty. 28. SALVAGE All salvage and towage shall be for Lessor's benefit and the cost of repairing damage occasioned thereby shall be borne by Lessor. 29. AUDIT Lessor shall maintain its records which pertain to Articles 9 and 11 hereof in accordance with generally accepted international accounting principles and will keep copies of all applicable 19 documents, forms and third-party invoices, etc., and will permit Charterer to inspect such records at any time upon request during regular business hours. 30. DEFAULT The following events by either party hereto or any guarantor ("Guarantor") under a Joint Venturer Guarantee or Lessor Parent Company Guarantee (any such Guarantee being defined as a "Guarantee") shall constitute an Event of Default: a) failure to observe any material covenant, condition or agreement to be performed or observed by said party hereunder or any Guarantor under the Guarantees; or b) any representation or warranty made herewith or pursuant hereto or pursuant to any of the Guarantees shall prove to be incorrect at any time in any material respect; or c) said party or Guarantor shall become insolvent or bankrupt or consent to the appointment of a trustee or receiver, or a trustee or receiver shall be appointed for said party or for a substantial part of its property without its consent and shall not be dismissed for a period of thirty (30) days, or bankruptcy, reorganization or insolvency proceedings shall be instituted by or against said party and, if instituted against said party, shall not be dismissed for a period of thirty (30) days, and at any time thereafter so long as the same shall be continuing; or d) an Event of Default with respect to that party or its Guarantor shall have occurred under the Operating Agreement (for purpose of this paragraph d) only, an Event of Default by Operator under the Operating Agreement shall be deemed an Event of Default by Lessor hereunder); or e) A Force Majeure Event shall have occurred preventing payment by either party and such failure to pay continues unremedied for a period of 60 consecutive days. 31. REMEDIES 31.1 Upon the occurrence of an Event of Default by Lessor or its affiliate and at any time thereafter so long as the same shall be continuing, Charterer may, at its option, upon ninety (90) days' notice thereof to Lessor, declare this Agreement to be in default; and, at any time thereafter, so long as Lessor shall not have remedied or have commenced and at all times thereafter diligently acted to remedy all outstanding Events of Default, Charterer (a) may terminate this Agreement, compensation as specified in Article 9.1 shall cease as of the date of termination and Charterer shall redeliver the FPSO to Lessor as if the FPSO were being redelivered pursuant to Article 25 hereof, or (b) accelerate its right to exercise the Purchase Option at a price to be determined by reference to Appendix C (offsetting any damages which have been established at the time of such purchase against the purchase price of the FPSO) and terminate compensation under Article 9.1. Lessor shall be liable for any and all damages to Charterer resulting from termination of this Agreement and for all legal fees and any other costs and expenses whatsoever incurred by Charterer by reason of the occurrence of any Event of Default or by reason of the exercise by Charterer of any remedy hereunder, including, without limitation, any costs and expenses incurred by Charterer in connection with Redelivery of the FPSO. Notwithstanding the remedies available to Charterer under this Article 31, the provisions of Article 18.9 shall apply so as to limit the damages of Charterer and any guarantors of Charterer's obligations hereunder, PROVIDED that if Lessor shall breach its obligation other than for reasons wholly outside its control to sell the FPSO to Charterer if Charterer exercises its Purchase Option under sub-clause (b) above, Lessor shall be liable to such guarantors for direct damages to the guarantors or any of their affiliates which are parties to the Gas Sales Agreement arising under Articles XV or XVIII of the Gas Sales Agreement. To the extent that such guarantors (and such affiliates) claim direct damages under the Gas Sales Agreement as provided in the preceding sentence, such guarantors and affiliates must use their reasonable efforts to mitigate their damages. Charterer must use reasonable efforts to mitigate its damages. 20 31.2 Upon the occurrence of an Event of Default by Charterer or its affiliate (provided that such Event of Default did not arise out of or result from actions, or omissions to act, of Operator under the Operating Agreement) and at any time thereafter so long as the same shall be continuing, Lessor may, at its option, upon ninety (90) (or, in the case of an Event of Default based on a failure to pay money when due (including a failure by reason of Force Majeure), thirty (30)) days' notice thereof to Charterer, declare this Agreement to be in default; and, at any time thereafter, so long as Charterer shall not have remedied or (except as to an Event of Default based on a failure to pay money when due) have commenced and at all times thereafter diligently acted to remedy all outstanding Events of Default Lessor may do, and Charterer shall comply with, one or more of the following, as Lessor in its sole discretion shall so elect, to the extent permitted by, and subject to compliance with any mandatory requirements of applicable law then in effect. Lessor must use reasonable efforts to mitigate its damages and shall apply any amounts received from the sale or re-charter (for a period equal to the remainder of the term of this Agreement) of the FPSO (after deducting Lessor's direct out-of-pocket expenses of making the FPSO ready for sale or re-charter) to reduce the amount of any charter hire and other amounts payable by Charterer to Lessor pursuant to the last paragraph of this Article 31.2. To the extent that Charterer fails to maintain in force any insurance coverage described in Article 17.3 and is not diligently acting to replace such coverage, Lessor shall be entitled to obtain such insurance for the account of Charterer. a) Lessor may terminate this Agreement. b) Upon written demand, Lessor may cause Charterer to, and Charterer hereby agrees that it will, redeliver the FPSO to Lessor within a reasonable period of time not to exceed 45 days and in the same manner and in the same condition as if the FPSO were being redelivered pursuant to Article 25 hereof; or Lessor or its agent, at Lessor's option, may, but shall be under no obligation to, retake the FPSO irrespective of whether Charterer or any other person may be in possession of the FPSO, upon 24 hours prior notice but without prior demand and without legal process, and for that purpose Lessor or its agent may take possession thereof. c) Lessor or its agent may sell the FPSO at public or private sale, with notice to Charterer, or otherwise may dispose of, hold, use, operate, charter (whether for a period greater or less than the balance of what would have been the charter period for the FPSO in the absence of the termination of Charterer's rights to the FPSO) to others or keep idle, all on such terms and conditions and at such place or places as Lessor may determine. In addition, Charterer shall be liable for and shall pay to Lessor within thirty days after Lessor takes redelivery or possession of the FPSO a lump sum equal to any and all additional Hire payable during the Initial Term and for all legal fees and any other costs and expenses whatsoever incurred by Lessor by reason of the occurrence of any Event of Default or by reason of the exercise by Lessor of any remedy hereunder, including, without limitation, any costs and expenses incurred by Lessor in connection with the Redelivery or retaking of the FPSO. 31.3 Each party's remedies referred to in this Article 31 are intended to be the exclusive remedies of such party under this Agreement; PROVIDED, HOWEVER, that either party may enforce performance of these remedies by all legal or equitable means. 31.4 No express or implied waiver by either party of any Event of Default shall be in any way, or be construed to be, a waiver of any further or subsequent Event of Default. 32. MISCELLANEOUS 32.1 a) All terms and conditions of this Agreement shall be binding upon and shall enure to the benefit of the parties hereto and their respective successors and permitted assigns. Any purported assignment in contravention of this Article 32 shall be null and void. 21 b) Charterer shall be entitled to assign its rights, duties and obligations hereunder to an affiliate without the consent of Lessor PROVIDED that Lessor receives simultaneously with such assignment guarantees from the Joint Venturers in respect of such assignee's obligations in the terms set out in Article 5 hereof. c) Any party having rights under this Agreement shall be entitled to pledge and/or assign its rights and, to the extent possible, and if requested, its duties and obligations under this Agreement by way of security to any lending institution providing financing for the transactions contemplated hereby or related to the development of the Tantawan Field or a collateral agent on their behalf provided that any such pledge or assignment does not release the assignor or any guarantor of the assignor's obligations hereunder, from any of their respective obligations to the Lessor or the Charterer as the case may be. d) Charterer shall not subcharter the FPSO to any party including an affiliate without the prior written consent of Lessor such consent not to be unreasonably withheld. Save as specifically provided above, neither party hereto shall be entitled to assign any rights or obligations under this Agreement without the prior consent of the other party, not to be unreasonably withheld. Charterer shall maintain a written record that identifies Lessor as the person entitled to payments under this Agreement. In the event of an assignment by Lessor of any of its rights under this Agreement, such assignment will be reflected on the record maintained by Charterer. 22 [THE REMAINDER OF THIS PAGE IS INTENTIONALLY BLANK] 23 32.2 This Agreement may be executed in one or more counterparts, all of which, taken together, shall constitute one original document. 32.3 Except as specifically provided herein to the contrary, each party hereto intends that this Agreement shall not benefit or create any right or cause of action to any person other than parties hereto or their permitted assignees. 32.4 The making, execution and delivery of this Agreement by the parties hereto have been induced by no representation, statements, warranties or agreements other than those herein expressed or set forth in the attached exhibits or schedules. This Agreement and such exhibits or schedules embody the entire understanding of the parties, and there are no further or other agreements or understandings, written or oral, in effect between the parties relating to the subject matter hereof, unless expressly referred to by reference herein. 32.5 This Agreement may be amended or modified and any condition herein specified may be waived by mutual consent of the parties by a written instrument executed on behalf of the parties. 32.6 The captions contained in this Agreement are for convenience of reference only and do not form a part of this Agreement and shall not affect the interpretation hereof. 32.7 If any portion of this Agreement shall be deemed by an arbitration tribunal or a court of competent jurisdiction to be unenforceable, the remaining portions shall be valid and enforceable only if, after excluding the portion deemed to be unenforceable, the remaining terms hereof shall provide for the consummation of the transactions contemplated herein in substantially the same manner as originally set forth at the date this Agreement was executed. 32.8 Each of the parties hereto intends this Agreement will be treated as a lease of the FPSO from Lessor to Charterer. Neither Charterer, Lessor, nor any of their respective affiliates will take any action nor file any document with any governmental authority including, without limitation, any tax return, which is inconsistent with such characterization of this Agreement as a lease. IN WITNESS WHEREOF, the parties have caused this Agreement to be executed in duplicate as of the 9th day of February, 1996. TANTAWAN PRODUCTION B.V. TANTAWAN SERVICES, L L C By: /s/ G. HAYTHORNTHWAITE By: THAILAND FINANCE COMPANY, its - --------------------------- Managing Member Name: G. HAYTHORNTHWAITE TITLE: Managing Director By: /s/ JOHN W. ELSENHANS ------------------------------------- Name: John W. Elsenhans TITLE: Vice President and Treasurer 24 EX-10.27 15 EXHIBIT 10.27 FLOATING STORAGE AND OFFLOADING SYSTEM BAREBOAT CHARTER BETWEEN WATERTIGHT SHIPPING B.V. AS LESSOR AND THAIPO LIMITED, THAI ROMO LIMITED, PALANG SOPHON LIMITED AND B8/32 PARTNERS LIMITED, AS CHARTERER DATED AS OF AUGUST 24, 1998 TABLE OF CONTENTS
PAGE --------- 1. TRANSPORTATION, INSTALLATION AND COMMISSIONING OF THE FSO............................................. 1 2. FSO TO BE CHARTERED................................................................................... 2 3. SERVICE............................................................................................... 2 4. DURATION OF CHARTER................................................................................... 2 5. [INTENTIONALLY OMITTED]............................................................................... 3 6. REPRESENTATIONS AND WARRANTIES........................................................................ 3 7. MAINTENANCE AND OPERATION............................................................................. 5 8. INSPECTION............................................................................................ 7 9. COMPENSATION.......................................................................................... 7 10. CHANGE IN LAW......................................................................................... 11 11. TAXES................................................................................................. 11 12. CONFLICTS OF INTEREST................................................................................. 11 13. LIENS AGAINST THE FSO................................................................................. 11 14. INVENTORY............................................................................................. 13 15. GAS SALES AGREEMENT................................................................................... 13 16. DOWNTIME.............................................................................................. 13 17. INSURANCE............................................................................................. 14 18. INDEMNITY............................................................................................. 18 19. NON-WAIVER OF DEFAULTS................................................................................ 21 20. FORCE MAJEURE......................................................................................... 22 21. LAW AND ARBITRATION................................................................................... 23 22. NOTICES............................................................................................... 23 23. PURCHASE OPTION....................................................................................... 24 24. GUARANTY.............................................................................................. 26 25. REDELIVERY OF FSO..................................................................................... 27 26. REQUISITION........................................................................................... 28 27. GENERAL AND PARTICULAR AVERAGE........................................................................ 28 28. SALVAGE............................................................................................... 28 29. AUDIT................................................................................................. 29 30. DEFAULT............................................................................................... 29 31. REMEDIES.............................................................................................. 29 32. MISCELLANEOUS......................................................................................... 32
Appendix A TECHNICAL DESCRIPTION AND SPECIFICATIONS Appendix B-1 FORM OF LESSOR PARENT COMPANY GUARANTY AND INDEMNITY Appendix B-2 FORM OF PERFORMANCE GUARANTY Appendix C-1 PURCHASE PRICE Appendix C-2 PURCHASE PRICE Appendix D-1 INITIAL PERFORMANCE TESTS Appendix D-2 FINAL PERFORMANCE TESTS Appendix E QUIET ENJOYMENT LETTER
i FLOATING STORAGE AND OFFLOADING SYSTEM BAREBOAT CHARTER This Bareboat Charter (this "Agreement"), made and entered into as of August 24, 1998, by and among Watertight Shipping B.V., a company organized under the laws of The Netherlands ("Lessor"), and Thaipo Limited, a company organized under the laws of the Kingdom of Thailand ("Thaipo"), Thai Romo Limited, a company organized under the laws of the Kingdom of Thailand ("Thai Romo"), Palang Sophon Limited, a company organized under the laws of the Kingdom of Thailand ("Palang"), and B8/32 Partners Limited, a company organized under the laws of the Kingdom of Thailand ("B8/32" and, together with Thaipo, Thai Romo and Palang, the "Charterer"). W I T N E S S E T H WHEREAS, the Petroleum Concession Agreement No. 1/2q534/36, dated August 1, 1991, covering block B8/32 offshore Thailand was awarded by the Ministry of Industry to Maersk Oil (Thailand) Ltd., Thaipo and Thai Romo, and Supplementary Petroleum Concession No. 1 to Petroleum Concession No. 1/2534/36, dated March 6, 1992, permitted The Sophonpanich Co., Ltd., to enter into Petroleum Concession No. 1/2534/36 (collectively, the "Concession Agreement"); WHEREAS Thaipo, Thai Romo, Palang (formerly known as Sophon Thai Gulf Limited which was successor in interest to The Sophonpanich Co. Ltd.) and B8/32 (formerly known as Maersk Oil (Thailand) Ltd.) are currently the concessionaires under the Concession Agreement in that portion of the concession known as the Benchamas Field; WHEREAS, Charterer desires to charter from Lessor on a bareboat basis a Floating Storage and Offloading System known as the "Benchamas Explorer" (the "FSO"), for use in the Benchamas Field, Thailand; NOW, THEREFORE, in consideration of the mutual covenants herein contained, Lessor and Charterer agree as follows: 1. TRANSPORTATION, INSTALLATION AND COMMISSIONING OF THE FSO. Lessor shall be responsible for delivery (the "Delivery") of the FSO to Charterer in international waters in the vicinity of Thailand (the "Delivery Site") as evidenced by a certificate of delivery issued by Lessor and countersigned by Charterer. Prior to Delivery, Lessor shall be fully responsible for and assume all risks with respect to the FSO. Charterer has hired an operator ("Operator") pursuant to an Operating Agreement (the "Operating Agreement") to operate the FSO commencing with Delivery. Operator shall be responsible for completing all work to be performed in respect of the FSO from Delivery until Field Acceptance, as herein defined, has occurred, including completing all construction work, transporting the FSO from the Delivery Site to the site in the Benchamas Field designated by Charterer (the "Offshore Site"), hooking-up the FSO on its anchoring system and completing all Performance Tests, as herein defined. Operator shall also be responsible for commissioning the FSO. 2. FSO TO BE CHARTERED. Charterer hereby agrees to bareboat charter the FSO as described in APPENDIX A and its inventory from Lessor, for the period and upon the terms and conditions stated herein. Lessor represents, undertakes and warrants that at the time of Delivery the FSO shall comply with the requirements of the Technical Specifications set forth in APPENDIX A hereto (the "Technical Specifications") and shall be properly documented and classed as ABS A1 Floating Storage and Offloading System, with no recommendations affecting class and as per the particulars of APPENDIX A. At the time of Delivery, the FSO shall be seaworthy and in every respect ready in hull, machinery and equipment for service hereunder. 1 3. SERVICE. Charterer shall have the full use of the FSO at the Offshore Site and, subject to Lessor's approval, not to be unreasonably withheld or delayed, at any other place in the world where its operation is not prohibited by applicable law and/or regulations excluding, however, the United States of America and its territories. Charterer may subcontract to identified subcontractors certain of its obligations hereunder, including, but not limited to, those relating to the operation, maintenance and repair of the FSO. However, such subcontracts shall not relieve Charterer of such obligations, except to the extent that such obligations are subcontracted to a party acceptable to Lessor. 4. DURATION OF CHARTER. 4.1. The term (the "Initial Term") of this Agreement shall commence upon Delivery. The Initial Term shall end upon a date ten (10) years after the Hire Commencement Date (as defined in Article 9.1.). 4.2. Neither Field Acceptance (as defined in the Operating Agreement) nor Final Acceptance (as defined in the Operating Agreement) by Charterer shall be construed as a waiver or discharge of any of the representations, warranties or undertakings of Lessor in or with respect to this Agreement or the FSO. 4.3. Upon the expiration of the Initial Term, (a) Charterer shall have the option to terminate this Agreement, extend this Agreement on an annual basis at hire to be agreed upon by Lessor and Charterer, or purchase the FSO pursuant to Article 23. and (b) the Performance Guaranty shall be promptly returned to the issuer thereof. If Charterer is considering extending this Agreement, it shall give revocable notice of its desire to extend this Agreement at least 360 days prior to the expiration of the Initial Term. Upon the giving of such notice, Charterer and Lessor shall negotiate in good faith in an effort to reach agreement prior to 180 days prior to the end of the Initial Term on a Total Bareboat Rate for the term for which Charterer desires to extend this Agreement. In addition, Charterer shall have the option to purchase the FSO pursuant to Article 23. by irrevocable notice to Lessor at least 180 days prior to the end of the Initial Term. If no agreement on a Total Bareboat Rate for an extended term is timely reached and if no notice of an election to purchase the FSO is timely given, Charterer shall be deemed to have exercised its option to terminate this Agreement as of the end of the Initial Term. 5. [INTENTIONALLY OMITTED]. 6. REPRESENTATIONS AND WARRANTIES. 6.1. Lessor represents and warrants to Charterer that: (a) Lessor is a corporation duly organized and in good standing under the laws of The Netherlands; has all requisite corporate power and all material governmental licenses, authorizations, consents and approvals necessary to own its assets and carry on its business as now being or as proposed to be conducted; and is qualified to do business and is in good standing in all jurisdictions in which the nature of the business conducted by it makes such qualification necessary and where failure so to qualify could be reasonably expected to have a material adverse effect on its business. (b) Lessor has all necessary corporate power and authority to execute, deliver and perform its obligations under this Agreement; the execution, delivery and performance by Lessor of this Agreement have been duly authorized by all necessary corporate action on its part; and this Agreement has been duly and validly executed and delivered by Lessor and constitutes its legal, valid and binding obligation, enforceable against Lessor in accordance with its terms except to the extent such enforceability may be limited by (i) bankruptcy, insolvency, reorganization, moratorium or similar laws of general applicability affecting the enforcement of creditor's 2 rights and (ii) the application of general principles of equity (regardless of whether such enforceability is considered in a proceeding in equity or at law). (c) The execution and delivery of this Agreement and the consummation of the transactions herein contemplated will not conflict with or result in a breach of the articles of association of Lessor or any applicable law or regulation or any material agreement or instrument to which Lessor is a party or by which it is bound or to which it is subject or constitute a default under any such material agreement or instrument. (d) All authorizations, approvals and consents of, and filings or registrations with, any governmental or regulatory authority or agency, as are at the date of Delivery necessary for the execution, delivery or performance by Lessor of this Agreement and for the legality, validity, or enforceability hereof, will have been obtained at such date and thereafter will be maintained until the expiration or termination of this Agreement. (e) Lessor is a "tax resident" as such term is defined in the Netherlands-Thailand tax treaty. Lessor covenants that neither Lessor nor any agent acting on its behalf in connection with the performance of Lessor's obligations under this Agreement has, or during the term of the Agreement will have, a permanent establishment in Thailand. 6.2. Charterer represents and warrants to Lessor that: (a) Each of the companies comprising Charterer is duly organized and in good standing under the laws of the Kingdom of Thailand; has all requisite power and all material governmental licenses, authorizations, consents and approvals necessary to own its assets and carry on its business as now being or as proposed to be conducted; and is qualified to do business and is in good standing in all jurisdictions in which the nature of the business conducted by it makes such qualification necessary and where failure so to qualify could be reasonably expected to have a material adverse effect on its business. (b) Each of the companies comprising Charterer has all necessary power and authority to execute, deliver and perform its obligations under this Agreement; the execution, delivery and performance by each of the companies comprising Charterer of this Agreement have been duly authorized by all necessary action on its part; and this Agreement has been duly and validly executed and delivered by each of the companies comprising Charterer and constitutes its legal, valid and binding obligation, enforceable against each of the companies comprising Charterer in accordance with its terms except to the extent such enforceability may be limited by (i) bankruptcy, insolvency, reorganization, moratorium or similar laws of general applicability affecting the enforcement of creditor's rights and (ii) the application of general principles of equity (regardless of whether such enforceability is considered in a proceeding in equity or at law). (c) The execution and delivery of this Agreement and the consummation of the transactions herein contemplated will not conflict with or result in a breach of the organizational documents of each of the companies comprising Charterer or any applicable law or regulation or any material agreement or instrument to which any of the companies comprising Charterer is a party or by which it is bound or to which it is subject or constitute a default under any such material agreement or instrument. (d) All authorizations, approvals and consents of, and filings or registrations with, any governmental or regulatory authority or agency, as are at the date of Delivery necessary for the execution, delivery or performance by Charterer of this Agreement and for the legality, validity, or enforceability hereof, will have been obtained at such date and thereafter will be maintained until the expiration or termination of this Agreement. 3 6.3. OTHER THAN AS SPECIFICALLY STATED IN THIS AGREEMENT NO PARTY SHALL BE DEEMED TO HAVE MADE ANY REPRESENTATION OR WARRANTY WHATSOEVER, EXPRESS OR IMPLIED, INCLUDING, WITHOUT LIMITATION, AS TO THE TITLE, SEAWORTHINESS, MERCHANTABILITY OR FITNESS FOR ANY PARTICULAR PURPOSE OR USE OF THE FSO OR ANY PART THEREOF. 7. MAINTENANCE AND OPERATION. 7.1. Lessor agrees that the FSO shall, from the date of Delivery and until termination of this Agreement in accordance with its terms, be in the full possession and at the absolute disposal for all purposes of Charterer and under Charterer's complete control in every respect. Subject to Lessor's obligations pursuant to Article 7.3. to cause the FSO to meet and maintain requirements of the American Bureau of Shipping ("ABS"), Charterer shall maintain the FSO in a good state of repair. In addition, Charterer shall maintain the FSO in efficient operating condition and in accordance with good commercial maintenance practice, and shall keep the FSO (subject to Article 7.3.) with valid, unexpired classification of the class as indicated in Article 2., free of recommendations and notations affecting class. Charterer shall furnish Lessor with one duplicate original or certified true copy of all class and flag certificates issued or notated during the duration of the charter upon their issuance or notation. Lessor shall keep all Thai, Panamanian (Panama being hereinafter referred to as the "Country of Registry") and other required certificates valid, up-to-date and in full force at all times. Charterer shall maintain the following maintenance reports, records, surveys and documents: Planned Maintenance System, Continuous Survey of Machinery and such other reports, records, surveys and documents as Lessor shall reasonably specify in writing. Charterer shall provide copies of such documents to Lessor upon Lessor's request. Lessor shall provide Charterer and Operator with all authorizations which Charterer may reasonably require in order to accomplish the actions required or permitted to Charterer under this Article 7. 7.2. Charterer shall take immediate steps to have all necessary repairs done within a reasonable time. 7.3. Provided that the FSO is located at the Offshore Site, in the event of any improvement, structural changes or new equipment becoming necessary for the continued operation of the FSO by reason of new class requirements or compulsory legislation or in order to maintain the FSO in compliance with the Technical Specifications, then Lessor shall carry out such work at its expense. 7.4. Charterer shall establish and maintain financial security of responsibility in respect of oil or other pollution damage as required by any government or other division or authority thereof, to enable the FSO, without penalty or charge, lawfully to enter and remain at the Offshore Site in performance of this Agreement or in the case of removal of the FSO to another site as may be permitted by the terms hereof, at such other site. Charterer shall make and maintain all arrangements by bond or otherwise as may be necessary to satisfy such requirements at Charterer's sole expense. 7.5. Charterer shall at its own expense and by its own procurement, except as stated to the contrary elsewhere, man, victual, operate, supply, fuel and repair the FSO whenever required during the duration of this Agreement and shall pay all charges and expenses of every kind and nature whatsoever incidental to its use and operation of the FSO under this Agreement. The master of the FSO (the "Master"), officers, crew and production personnel of the FSO shall be the servants of Operator for all purposes whatsoever. 7.6. Charterer shall comply with the regulations of the Country of Registry and, to the extent applicable, the Kingdom of Thailand or any other jurisdiction within which the FSO is operating. Charterer will cause the FSO to comply at all times with all applicable laws, treaties and conventions and with all rules and regulations issued thereunder and to have on board, when required thereby, valid certificates showing compliance therewith. 4 7.7. During the duration of this Agreement the FSO shall retain her present name and shall remain under and fly the flag of the Country of Registry, provided, however, that Charterer shall have the right to paint the FSO in its own colors, install and display its funnel insignia and fly its own house flag. Any change in such painting or change in such funnel insignia shall be for Charterer's account. 7.8. (a) Subject to Article 7.4. and Lessor's approval, which shall not be unreasonably withheld or delayed, Charterer shall have the right to add additional equipment, modify existing equipment or connect additional production facilities. Any such additions or modifications, including the installation thereof, shall be at the sole risk and expense of Charterer. Such additions, modifications and connections so installed shall, without necessity of further act, become part of the FSO and the property of Lessor; PROVIDED, HOWEVER, that so long as no Event of Default caused by Charterer (as defined in Article 30.) shall have occurred and be continuing, any such additions, modifications and connections not installed as replacements for property included on board the FSO on the date of Field Acceptance may be removed (so long as such removal can be accomplished without damage to the FSO) by Charterer, at its own expense and risk, at any time during, or at the expiration of, the Initial Term or any extension term upon reasonable prior notice, whereupon such equipment shall, without necessity of further act, become the property of Charterer. (b) Charterer may, in the ordinary course of maintenance, repair or overhaul of the FSO, remove any item of property constituting a part of the FSO; PROVIDED, HOWEVER, that such item is replaced as promptly as possible by an item of property which is free and clear of all liens, encumbrances and rights of others and is in as good operating condition, is as seaworthy and has a value and utility at least equal to the item of property being replaced. Any item of property removed from the FSO as provided in the preceding sentence shall remain the property of Lessor until replaced in accordance with the terms of such sentence, but shall then, without further act, become the property of Charterer. Any such replacement item of property shall, without further act, become the property of Lessor and be deemed part of the FSO as defined herein for all purposes hereof. (c) In the event that the FSO is relocated from the Offshore Site pursuant to Article 3. (but not as a result of any failure of the FSO to perform in accordance with the Technical Specifications at the Offshore Site or as a result of any required maintenance), Charterer shall be responsible for all costs of removal and installation and any design changes or equipment necessary for the FSO to perform in accordance with the Technical Specifications at its relocated site. 7.9. Charterer shall have the use of all items of inventory, equipment and spares being part of or on board the FSO on the date of Delivery, which Lessor undertakes to provide at its expense. Such inventory will be specified pursuant to Article 14. At Redelivery, Charterer shall replace all items of inventory, equipment and spares so that the inventory at Redelivery equals the items of inventory, equipment and spares on board the FSO on the date of Delivery, or shall pay the Lessor a mutually agreeable price for any unreplaced items of inventory. 8. INSPECTION. 8.1. Lessor shall have the right at any reasonable time to inspect or survey the FSO itself or to instruct a duly authorized third-party surveyor to carry out such survey on its behalf to ascertain the condition of the FSO, and to satisfy itself that the FSO is being properly repaired, maintained and operated. Such inspections and surveys shall be at Lessor's risk and for Lessor's account. Charterer shall provide, free of charge to Lessor, upon reasonable request by Lessor, transportation from the shore base to the FSO and vice versa on its regular flights and, to the extent available, accommodations, catering and communication on board for such inspectors or surveyors. 8.2. Charterer shall also permit Lessor to inspect the FSO's log books whenever requested and shall promptly furnish Lessor with full information regarding any material casualties or other accidents or damage to or caused by the FSO. 5 9. COMPENSATION. 9.1. As full compensation for the performance by Lessor of its obligations under this Agreement, Charterer shall pay Lessor a hire ("Hire"). Hire shall accrue in accordance with this Article 9. commencing at 0001 hours local time at the Offshore Site on the date ("Hire Commencement Date") on later of (a) Field Acceptance, and (b) the earlier of (i) May 15, 1999 or (ii) the date on which crude oil is stored on the FSO. Except as otherwise provided herein, Hire shall continue to accrue until the date when the FSO is redelivered to Lessor under the terms of this Agreement. Hire for the ten (10) years after the Hire Commencement Date shall be paid at the rate of Twenty-Three Thousand Three Hundred and Thirty Dollars (US $23,330) per day, (the "Total Bareboat Rate"), except as otherwise specifically provided herein, no other compensation or reimbursement shall be due to Lessor for the performance of its obligations hereunder. Except as provided below, with respect to all Hire and all other amounts payable by Charterer hereunder, the maximum liability of Thaipo shall be limited to 31.66667% of such Hire and other amounts, the maximum liability of Thai Romo shall be limited to 31.66667% of such Hire and other amounts, the maximum liability of Palang shall be limited to 5.00000% of such Hire and other amounts, and the maximum liability of B8/32 shall be limited to 31.666666% of such Hire and other amounts (each such percentage being referred to herein as the "Concessionaire Percentage"). Notwithstanding a member's Concessionaire Percentage, any member of Charterer shall have the right to pay Hire and other amounts on behalf of any other member of Charterer. The Concessionaire Percentages are intended to be the same as the percentage interest of each member of the Charterer under the Concession Agreement. If (i) any member of Charterer shall increase its percentage interest under the Concession Agreement or (ii) any member of Charterer shall assign any of its interest under the Concession Agreement to an entity that is not a member of Charterer, the Field Operator shall promptly notify Lessor of such change. Upon Lessor's receipt of notice from the Field Operator certifying an increase in percentage interest under the Concession Agreement or an assignment of an interest under the Concession Agreement, the Concessionaire Percentage for each member of Charterer shall be adjusted appropriately with respect to the maximum liability for Hire and other amounts that shall become payable on or after the date of such notice but such adjustment shall not affect the percentage liability of a member of Charterer for any Hire and all other amounts payable prior to the date of such notice. Notwithstanding the foregoing limitation of liability, the obligation of Charterer to pay Hire and all other amounts hereunder is absolute and unconditional to the extent set forth in this Agreement and Lessor shall have the remedies provided in Article 31.2. for any failure to pay Hire and all other amounts hereunder. If any member of Charterer shall assign any of its interest under the Concession Agreement to an entity that is not a member of Charterer, the assignee of such interest under the Concession Agreement shall at the time of such assignment be deemed to have a Concessionaire Percentage and to be a member of Charterer for all purposes of this Agreement as if such assignee had been an original signatory to this Agreement. If any member of Charterer assigns all of its interest under the Concession Agreement and provided that no Event of Default of Charterer (as defined in Article 30.) with respect to such assignor has occurred and is continuing, such member of Charterer shall be without further act released from any and all obligations under this Agreement which arise or accrue after the date of such assignment. Upon any change in Concession Percentages, Lessor, Charterer and each present and former member of Charterer agree to execute such additional documents and releases as may be requested to evidence the foregoing provisions including, without limitation, the assignee's agreement to be bound by the terms of this Agreement. 9.2. Payment of Hire shall be made monthly in advance, without any discount, adjustment, set off or deduction, except as specifically set forth in this Article 9. or otherwise in this Agreement. Lessor 6 shall provide invoices to Charterer covering each payment of Hire at least ten (10) days before due. Payment of Hire shall be made to such account or accounts with such first class bank as Lessor shall designate in writing. Lessor shall not change such designations without Charterer's consent, which consent shall not be unreasonably withheld. The first and second payment of Hire shall be paid in same day funds before the close of business at the place of payment on the fifth business day of the calendar month beginning after the Hire Commencement Date. Except as otherwise provided in this Agreement, subsequent payments of Hire shall be paid in same day funds at the place of payment on the fifth business day of each applicable calendar month during the Initial Term or an extended term ("Hire Payment Date"). Hire shall accrue on a daily basis; provided that Hire for any periods that constitute less than a calendar day shall be a pro rata portion of Hire for such calendar day. If a Hire Payment Date falls on a day which is not a banking day at the place of payment, payment shall instead be made on the next succeeding day that is a banking day at such place, without interest. Any Hire paid but not earned shall be refunded on the next Hire Payment Date (or as otherwise provided under this Agreement) to Charterer by Lessor. 9.3. Upon request by Charterer, Lessor shall promptly pay to Charterer, or at the option of Charterer, at any time following an Event of Default by Lessor hereunder or a default under the Lessor Parent Company Guaranty, Charterer shall be entitled to deduct from the payments of Hire: (a) actual or reasonably estimated disbursements, if any, for Lessor's account; (b) any advances to Lessor's affiliates, contractors, subcontractors, or agents for expenses or disbursements for Lessor's account; (c) any previous overpayment of Hire, including payments made with respect to agreed periods of Downtime; PROVIDED, HOWEVER, that with respect to periods of Downtime that have not been agreed, Charterer shall not withhold Hire with respect thereto but that Hire paid with respect to such Downtime shall accrue interest at the rate of twelve percent (12%) per annum, compounded monthly, until agreed or settled through arbitration, whereupon Charterer may withhold such overpayment plus accrued interest through the date that Charterer recoups such Hire and interest; (d) any sums due in respect of Lessor's failure to meet Lessor's performance undertakings under this Agreement; and (e) any other sums or credits to which Charterer is entitled under this Agreement. If a deduction is made based on an estimate, the next Hire payment shall be adjusted, if necessary, to reflect any difference between such estimate and the actual amount of deduction that Charterer is able to verify. All deductions from Hire shall be verified by Charterer by production of vouchers or supporting documentation corresponding to the deductions within thirty (30) days after the applicable Hire Payment Date. 9.4. Notwithstanding anything contained in this Article 9. to the contrary, if when a payment of Hire is due hereunder, Charterer reasonably expects to redeliver the FSO before the next Hire Payment Date, Hire shall be paid prorated to the estimated date of Redelivery (as defined), and from which estimate Charterer may deduct amounts due or reasonably expected to come due to Charterer from Lessor for (i) disbursements on Lessor's behalf or charges for Lessor's account pursuant to any provision hereof including Article 9.3. and (ii) bunkers on board at Redelivery. Promptly after Redelivery, any overpayment shall be refunded by Lessor, or any underpayment made good by Charterer. 9.5. (a) Should the FSO become an actual total loss, Hire shall cease at the time of its loss or, if such time is unknown, at the time from which the FSO was last heard. Should the FSO become a total 7 loss of any other kind, if approved in writing by Charterer in accordance with sub-clause (d) below, including, without limitation, a constructive, compromised, agreed or arranged total loss (a "constructive total loss"), Hire shall cease at the time of the casualty resulting in such loss. Within ninety (90) days after Hire has ceased under this Article 9.5., all monies owing to Charterer under the provisions of this Agreement at the time Hire ceases under this Article 9.5. shall be paid to Charterer, and likewise Lessor shall be paid the net amount of all sums due from Charterer. If the FSO shall have been missing for at least forty-eight (48) hours when a payment of Hire would otherwise be due, such payment shall be postponed until the safety of the FSO is ascertained. (b) Should the FSO become an actual total loss or a constructive total loss (i) for reasons other than negligence or willful misconduct of Lessor Group (as defined in Article 18.) and (ii) in circumstances where no Event of Default by Lessor or its affiliates, its Guarantor or the Operator (a "Lessor Party") has occurred and is continuing, this Agreement shall be deemed to be terminated as of the date on which the obligation to pay Hire ceases in accordance with Article 9.5.(a) without prejudice to (A) the payment obligations of Lessor and Charterer as described in Article 9.5.(a) and (B) any other provisions which would otherwise survive termination of this Agreement which, for the avoidance of doubt, does not include any obligation to rebuild the FSO or procure a new FSO. (c) Should the FSO become an actual total loss or a constructive total loss either (i) for reasons where the gross negligence or willful misconduct of a member of Lessor Group is a contributing factor; PROVIDED, THAT, no member of Charterer Group is either grossly negligent or guilty of willful misconduct in connection with such loss, or (ii) in circumstances where an Event of Default by a Lessor Party has occurred and is continuing, then, irrespective of such total loss, Charterer shall have the remedies set out in Article 31. hereof. (d) Lessor and its affiliates shall not be entitled to (i) claim under this Agreement or (ii) reach agreement with the insurers on the hull policies taken out by Lessor and its affiliates that, in either case, the FSO constitutes a total loss of any kind other than an actual total loss without the prior written approval of Charterer. (e) An actual total loss or a constructive total loss will not constitute in and of itself an Event of Default and, provided that there are no unpaid claims which have been asserted by Charterer, the Performance Guaranty shall promptly be returned to the issuer thereof. 9.6. In the event Charterer fails to make any payment (including without limitation any payment of Hire) due and owing to Lessor under this Agreement, Lessor shall so notify Charterer. If Charterer fails to pay amounts due and owing within five (5) business days after receipt of such notice, Charterer shall pay to Lessor, in addition to all other amounts then due and owing, a late fee at a rate equal to one-month LIBOR plus two percent (2%) on the amounts then due and owing for the period commencing on the date that such payment was due until paid without prejudice to any other remedies under this Agreement. 9.7. All payments of Hire and other amounts due hereunder from one party to the other shall be made in United States Dollars by interbank transfer. Except as otherwise provided herein, all sums due by one party to the other shall be paid within 30 days of receipt of invoice. 10. CHANGE IN LAW. The Total Bareboat Rate is based on the tax laws of Thailand and The Netherlands as of the date of this Agreement and Lessor's qualification as a Netherlands corporation entitled to protection under The Netherlands-Thailand tax treaty. In the event there are any changes in (i) tax laws of The Netherlands or their interpretation, or (ii) Lessor's qualification as a "tax resident" (as defined in the Netherlands-Thailand tax treaty) of The Netherlands which affect the cost to Lessor of chartering the FSO, such additional costs shall be for Lessor's account and Lessor shall hold 8 Charterer harmless from the consequences thereof. In the event there are any changes in tax laws in Thailand (including The Netherlands-Thailand tax treaty) or their interpretation which affect the cost to Lessor of chartering the FSO which cannot be remedied by reasonable actions on Lessor's part, such additional costs shall be for Charterer's account and Hire shall be adjusted accordingly. 11. TAXES. Subject to the provisions of Article 10. regarding changes in existing tax laws or the interpretation thereof, all taxes (including income and withholding taxes) which are due with respect to the payment of the Total Bareboat Rate pursuant to this Agreement shall be paid by Lessor or reimbursed to Charterer by Lessor, except that Thailand value added taxes ("VAT"), other Thailand sales/use taxes and Thailand customs and import duties applicable to the FSO, shall be paid by Charterer or reimbursed to Lessor by Charterer. Charterer or its designee shall work together with Operator to ensure the importation of the FSO in the most cost efficient manner and, if necessary, Charterer or its designee shall be designated as the importer of the FSO. The party ultimately designated as the importer of the FSO shall be responsible for customs clearance and obtaining import licenses on the FSO. 12. CONFLICTS OF INTEREST. Neither Lessor, its affiliates nor any of its subcontractors shall pay any fee, commission, rebate or other thing of value to, or for the benefit of, any employee of Charterer, its principals or any of its or their affiliates, nor shall Lessor or its affiliates do business with any company knowing that the results thereof might benefit an employee of the Charterer, its principals or any of its or their affiliates. 13. LIENS AGAINST THE FSO. 13.1. (a) Neither Lessor, Charterer nor the Master nor any other person shall have any right, power or authority to create, incur or permit to exist upon the FSO any lien, charge or encumbrance other than Permitted Encumbrances. (b) Lessor shall fasten to the FSO in a conspicuous place and maintain during the term of this Agreement a notice reading as follows: NOTICE OF CHARTER This Vessel is mortgaged to , and is under charter to Thaipo Limited, Thai Romo Limited, Palang Sophon Limited and B8/32 Partners Limited. With the exception of such mortgage, neither the Lessor, any affiliate of the Lessor, Charterer, any subcharterer, the master of this Vessel, nor any other person has the right, power or authority to create, incur or permit to be placed or imposed upon this Vessel, or its profits, any lien whatsoever, other than liens for master's and crew's wages or salvage. (c) Lessor warrants that it has not created and covenants that it will not create or permit to exist any Owner Encumbrance other than Permitted Encumbrances. Furthermore, Lessor shall indemnify, hold harmless and defend Charterer against any loss which Charterer may sustain by reason of, any Owner Encumbrances and/or Permitted Encumbrances (other than those set forth in Articles 13.1.(d)(i) and 13.1.(d)(ii) hereof). (d) "Permitted Encumbrances" shall mean (i) the rights of Charterer under this Agreement, (ii) the rights of Lessor under this Agreement, (iii) during the Initial Term or any extended term, liens for current master's and crew's wages and salvage, (iv) the rights of the Lessor Group under any lease consented to by Charterer in writing and a Lessor Group's mortgage of the FSO and security assignments in favor of certain lending institutions ("Lenders"), provided 9 Charterer shall have received a Quiet Enjoyment Letter in the form attached hereto as APPENDIX E, and (v) liens arising in tort; and "Permitted Encumbrance" shall mean any of the foregoing. (e) "Owner Encumbrances" shall mean any liens, security interests or encumbrances resulting from voluntary or involuntary action by Lessor Group taken without the prior written approval of Charterer and not taken as the result of an Event of Default by Charterer. 13.2. Charterer agrees that if a libel or a complaint in admiralty (for purposes of this Article 13.2. called a "claim") shall be filed against the FSO, or if the FSO shall be otherwise levied upon or taken into custody or detained or sequestered by virtue of proceedings in any court or tribunal or by any government or other authority because of any claim (excluding a claim arising by the action or inaction of Lessor, the Lessor Group or any of their affiliates), Charterer shall at its own expense within 15 days thereafter cause the FSO to be released and each such claim to be discharged (except to the extent that the same shall be contested by Charterer in good faith by appropriate proceedings and there exists at the time no Charterer Event of Default). Charterer agrees forthwith to notify Lessor by telegram or facsimile, confirmed by letter, of each such claim involving amounts in excess of US $500,000 and of the release and discharge of each such claim. Charterer agrees to advise in writing at least once in each three-month period as to the status and merits of all such claims not released and discharged within 15 days as provided above, which either are not bonded or affect the ability of Charterer to use the FSO in the ordinary course of its business. Charterer agrees to indemnify, hold harmless and defend Lessor against any loss which Lessor may sustain by reason of any liens, security interests or encumbrances resulting from voluntary action by Charterer Group taken without the prior written approval of Lessor and not taken as the result of an Event of Default by Lessor. 14. INVENTORY. A complete inventory of the FSO's entire outfit, equipment (including vessel equipment and supplies, cabin, crew and galley equipment), furniture, furnishings, appliances, spare and replacement parts and all unbroached consumable stores, fuel and lubricants onboard shall be jointly taken within thirty (30) days following Field Acceptance by representatives of Lessor and Charterer or by an independent outside firm as may be mutually agreed upon. A similar inventory shall be taken and mutually agreed upon at the time of Redelivery. 15. GAS SALES AGREEMENT. Charterer and Lessor recognize that compliance with the terms of the gas sales agreement governing the Block B8/32 Concession will be required by the parties thereto, and Lessor and Charterer will generally cooperate in facilitating such compliance by the parties thereto. 16. DOWNTIME. 16.1. Downtime shall mean any calendar day or part thereof on which the FSO is unable to: (a) load and deliver into its storage tanks the lesser of (i) 50,000 barrels of liquids or (ii) the amount of liquids that Charterer, its affiliates and designees are capable of delivering to the FSO, as determined in good faith by Charterer on the basis of demonstrated measured data; (b) store and keep at a minimum of 135 degrees Fahrenheit or such lower temperature as Charterer shall request at least 1,000,000 barrels of Crude Oil in its storage tanks; and (c) offload into offtake tankers the oil stored on the FSO at a minimum sustained rate of 24,000 barrels per hour or such lesser rate as the offtake tanker is warranted to accept or which Charterer has ordered to be pumped into the offtake tanker; PROVIDED, THAT, the FSO shall not 10 be required to sustain such rates in the event of adverse weather conditions as specified in the Terminal Regulations Manual, as defined in the Operating Agreement. 16.2. Downtime shall occur notwithstanding the fact that maintenance or repairs are occurring, but excluding those resulting from Charterer's (but not Operator's) gross negligence or willful misconduct. Downtime shall not occur during the period that Charterer is adding or modifying equipment or connecting additional facilities pursuant to Article 7.8.(a) hereof. 16.3. Downtime shall be deemed not to occur during an event which is a Force Majeure event hereunder. 16.4. A Downtime Damages Period shall mean any calendar day, or a portion thereof beginning after Field Acceptance in which Downtime occurs. During any Downtime Damages Period resulting from the Downtime under Articles 16.1.(a) and (b) above, Charterer shall not be obligated to pay Lessor the Total Bareboat Rate in respect of any Downtime which occurs. Downtime under Articles 16.1.(a) and (b) shall be calculated on an hourly basis with any Downtime rounded to the nearest whole hour. A Downtime Damages Period under Article 16.1.(c) above shall mean any calendar day or a portion thereof during which Downtime under Article 16.1.(c) has caused an offtake tanker to incur demurrage. As a result of a Downtime Damages Period under Article 16.1.(c), Charterer shall be entitled to deduct any demurrage incurred during such Downtime Damages Period up to an amount not to exceed US $30,880 per day from the Total Bareboat Rate; PROVIDED, THAT, Charterer shall not deduct any demurrage if the amount of demurrage incurred during any single offloading does not exceed US $5,000. Charterer shall as soon as reasonably practicable notify Lessor of the occurrence of, and its estimate of the total amount of Downtime incurred. The Total Bareboat Rate, as invoiced on a monthly basis, shall be credited with any undisputed Downtime occurring during the prior month in accordance with Article 9.3. 17. INSURANCE. 17.1. Lessor shall maintain or cause to be maintained in force during the term of this Agreement the following insurance coverages: (a) Hull and Machinery and Increased Value Insurance on the FSO in an amount not less than the estimated replacement value of the FSO on the London Institute Hull Clauses, or equivalent, including 3/4 Collision Liability coverage and be endorsed to Charterer as an additional insured and loss payee as its interest may appear during the term of this Agreement. (b) Protection and Indemnity Insurance on the FSO in an amount not less than US $100,000,000, subject to the rules of a Protection and Indemnity Club who are members of the International Group of P & I Clubs. The P & I entry to include 1/4 Collision Liability coverage and removal of debris. The P & I entry shall be endorsed to name the Charterer Group (as defined in Article 18.1.) as covered under the P & I insurance for misdirected arrow exposures (i.e., Rule 23 of London Steamship P & I Club Rule Book). (c) Supplemental Protection and Indemnity Insurance in an amount not less than US $100,000,000 (and in the case of Article 17.1.(g), not less than US $300,000,000) in favor of the Charterer Group and covering the Charterer Group in any circumstance in which misdirected arrow coverage is unavailable to any member of the Charterer Group as a result of an act or omission of any member of the Lessor Group (as defined in Article 18.1.) or any other person. (d) Workmen's Compensation and Employer's Liability Insurance (in an amount not less than US $1,000,000) covering Lessor Group's employees for statutory benefits as set out and required by local law in the area of operation or any area in which Lessor Group may become legally obligated to pay benefits. 11 (e) Comprehensive General Liability and Automobile Liability Insurance covering premises and operations, independent contractors and contractual liability, as well as all owned, hired and non-owned vehicles. Minimum policy limits for personal injury and property damage shall be: (i) Comprehensive General Liability: US $1,000,000 single limit per occurrence; (ii) Automobile Liability: US $1,000,000 single limit per occurrence or such greater amount as required by applicable law. (f) Excess Liability, in an amount not less than US $25,000,000, excess of: (i) Employer's or Maritime Employer's Liability Insurance (ii) Comprehensive General Liability Insurance; and (iii) Automobile Liability Insurance. (g) Pollution Insurance for the FSO of US $300,000,000 per occurrence, subject to market availability. Lessor shall promptly notify Charterer if market availability results in Pollution Insurance of less than $300,000,000. For purposes of this Article 17.1.(g) only, "FSO" shall mean the portion of the FSO from and including the import flange on the single point mooring system to and including the export hose string up to the import flange of the offtake tanker. 17.2. All insurance pursuant to Article 17.1. shall include the waiver by the insurers of all rights of subrogation against the Charterer Group and also a clause specifying that the insurers shall file no claims whatsoever against the Charterer Group, and shall not exercise against the Charterer Group any right of counterclaim or setoff in respect of any liability of Lessor. Charterer Group shall be included as additional insureds under all insurance policies (other than Articles 17.1.(b), 17.1.(d), 17.1.(f)(i) and 17.1.(g)). Coverage under all insurance to be carried by Lessor shall be primary insurance and exclusive of any other insurance. In addition, all such insurance (other than Article 17.1.(b), 17.1.(d), 17.1.(f)(i) and 17.1.(g)) shall include a clause (i) requiring that each insurer promptly notify the Charterer in writing at the address to which notices are to be given to Charterer pursuant to Article 22. of any occurrence, including, without limitation, non-payment of premiums, which threatens to invalidate or render such insurance unenforceable, or result in its lapse, cancellation or reduction, in whole or in part, (ii) providing that any such lapse, cancellation or reduction shall not be effective as to the Charterer Group until fourteen (14) Days (seven (7) Days in the case of war risks) after receipt by Charterer of the notice referred to in (i) above, (iii) expressly providing that all of the provisions thereof, except the agreed values and the limits of the liability of the insurer under such policies, shall operate in the same manner as if there were a separate policy covering each insured and (iv) provide that in respect of the Charterer Group and each other indemnified party, such insurance shall not be invalidated by any action or inaction by a member of Lessor Group or other person or entity and shall insure the interest of the Charterer Group and any other indemnified party regardless of any breach or violation by a member of Lessor Group or any other person or entity of any representation, warranty, declaration or condition contained in such policy. Before commencing performance of this Agreement, Lessor shall furnish Charterer with either policies or brokers' letters satisfactory to them demonstrating compliance with this Article 17. Lessor shall, whenever so requested by Charterer, produce the insurance policies, the receipts evidencing payment of the current premiums, and documentation certified by the insurers as to the coverage and value of the policies. 17.3. Charterer shall maintain or cause to be maintained in force during the term of this Agreement the following insurance coverages: 12 (a) Workman's Compensation and Employer's Liability Insurance (in an amount not less than US$1,000,000) covering Charterer Group's employees for statutory benefits as set out and required by local law in the area of operation or area in which Charterer Group may become legally obligated to pay benefits. (b) Comprehensive General Liability and Automobile Liability Insurance covering premises and operations, independent contractors and contractual liability, as well as all owned, hired and non-owned vehicles. Minimum policy limits for personal injury and property damage shall be: (i) Comprehensive General Liability: US $1,000,000 single limit per occurrence; and (ii) Automobile Liability: US $1,000,000 single limit per occurrence or such greater amount as required by applicable law. (c) Excess Liability, in an amount not less than US $25,000,000, excess of: (i) Employer's or Maritime Employer's Liability Insurance (ii) Comprehensive General Liability Insurance; and (iii) Automobile Liability Insurance. (d) Seepage and Pollution Insurance on normal industry terms for the reservoir, oil field installations and the flexible risers for US $50,000,000 per occurrence. 17.4. All insurance pursuant to Article 17.3. shall include the waiver by the insurers of all rights of subrogation against the Lessor Group and also a clause specifying that the insurers shall file no claims whatsoever against the Lessor Group, and shall not exercise against the Lessor Group any right of counterclaim or setoff in respect of any liability of Charterer. Lessor Group shall be included as additional insureds under all insurance policies (other than Article 17.3.(a)). Coverage under all insurance to be carried by Charterer shall be primary insurance and exclusive of any other insurance. In addition, all such insurance shall include a clause (i) requiring that each insurer promptly notify Lessor in writing at the address to which notices are to be given to Lessor pursuant to Article 22. of any occurrence, including, without limitation, non-payment of premiums, which threatens to invalidate or render such insurance unenforceable, or result in its lapse, cancellation or reduction, in whole or in part, (ii) providing that any such lapse, cancellation or reduction shall not be effective as to the Lessor Group until fourteen (14) Days (seven (7) Days in the case of war risks) after receipt by Lessor of the notice referred to in (i) above, (iii) expressly providing that all of the provisions thereof, except the agreed values and the limits of the liability of the insurer under such policies, shall operate in the same manner as if there were a separate policy covering each insured and (iv) provide that in respect of the Lessor Group and each other indemnified party, such insurance shall not be invalidated by any action or inaction by a member of Charterer Group or other person or entity and shall insure the interest of the Lessor Group and any other indemnified party regardless of any breach or violation by a member of Charterer Group or any other person or entity of any representation, warranty, declaration or condition contained in such policy. Before commencing performance of this Agreement, Charterer shall furnish Lessor with either policies or brokers' letters satisfactory to them demonstrating compliance with this Article 17. Charterer shall, whenever so requested by Lessor, produce the insurance policies, the receipts evidencing payment of the current premiums, and documentation certified by the insurers as to the coverage and value of the policies. 17.5. Except as specifically provided above in this Article 17., Lessor shall establish, and Charterer shall approve, insurance values, amounts, coverages and deductibles on forms and with insurers which are compatible and consistent with the standards of prudent owners and operators of vessels of similar type, size, age, location and activity as the FSO. Hull and machinery insurance shall be 13 written on Institute Time Clauses - Hulls (1/10/83), Norwegian Hull Form or American Institute Hull Clauses (2nd June 1977). Charterer reserves the right to reject a specific insurance company for reasonable cause. 17.6. Notwithstanding anything else in this Article or elsewhere in this Agreement to the contrary, if a party or its affiliate fails to obtain the insurance which it has agreed to provide herein, or such insurance lapses or is terminated, such event shall constitute an immediate Event of Default under Article 30. by such party, and the other party, in addition to other remedies available to it under Article 31., shall have the immediate right, without notice or demand to the defaulting party, to obtain the insurance required pursuant to this Article which shall give rise to an immediate right of setoff for any expenses incurred, as a deduction from Hire payable, by drawing upon the Performance Guaranty, or as an additional payment due hereunder, as applicable. 17.7. The fact that the insurance policies required under this Article 17. have been taken out shall not be deemed to relieve either party in whole or in part of any of its obligations and responsibilities to the other party under this Agreement or to any third party, including its indemnification obligations under Article 18., nor does either party warrant to the other that such policies are adequate to indemnify it against any such risk, and the indemnifying party shall therefore be responsible for taking out, at its sole expense, such further or other policies as it considers necessary or prudent for its protection. 17.8. Each party shall bear all deductibles, franchises or self-insured retentions applicable to insurance taken out by such party. 17.9. Each party shall give the other prompt notice of any claim with respect of any of the insurance policies referred to in this Article, accompanied by full details of the incident giving rise to such claim and shall afford each other all such assistance as may be required, or reasonably requested, for the preparation and negotiation of any insurance claims hereunder. 18. INDEMNITY. 18.1. Lessor shall protect, defend, indemnify and hold harmless Charterer and its affiliates, associates, co-venturers, co-venturers' subsidiaries and affiliates, and subcontractors at all levels and their respective shareholders, officers, employees and agents (hereinafter all such companies and persons called "Charterer Group") from and against any loss, damage, claim, expense, suit or liability (including attorneys' fees and legal costs) arising out of, or in any way related to, the injury, illness or death or property loss or damage (including to the FSO) sustained by Lessor, its affiliates, associates, co-venturers, subcontractors at all levels, sub-suppliers, lenders and their respective shareholders, officers and employees and agents and the Master and crew of the FSO (hereinafter all such persons and companies called "Lessor Group") howsoever caused or arising and regardless of a member of Charterer Group's or of any third party's (i) sole, concurrent, active or passive negligence, (ii) a defect in its property or equipment and (iii) liability or limitation thereof under any applicable statute of law or theory including strict liability. 18.2. Charterer shall protect, defend, indemnify and hold harmless Lessor Group from and against any loss, damage, claim, expense, suit or liability (including attorneys' fees and legal costs) arising out of, or in any way related to the injury, illness or death or property loss or damage (including oil and gas reservoirs, pipelines and platforms in which Charterer Group has an interest, but excluding the FSO) sustained by Charterer Group howsoever caused or arising and regardless of a member of Lessor Group's or of any third party's (i) sole, concurrent, active or passive negligence, (ii) a defect in its property or equipment and (iii) liability or limitation thereof under any applicable statute of law or theory including strict liability. 18.3. Subject to the provisions of Articles 18.5., 18.6. and 18.9., Lessor agrees to indemnify, defend and save Charterer Group harmless from and against any and all losses, claims, demands, liabilities, 14 damages, suits or actions in rem or otherwise (including expenses and attorneys' fees) for loss or damage to or injury, illness or death of, third parties regardless of any right that may be afforded to any member of Lessor Group to claim limitation of liability under any applicable law, statute or convention with respect to claims by third parties (which shall exclude Charterer Group and Lessor Group) to the extent, and only to the extent, such losses, claims, demands, liabilities, damages, suits or actions arise out of Lessor Group's sole or concurrent active negligence; PROVIDED, FURTHER, that to the extent that any loss, claim, demand, liability, damage, suit or action brought by any third party arises in part out of Charterer Group's concurrent active negligence, Lessor shall indemnify, defend and save Charterer Group harmless from and against such loss, claim, demand, liability, damage, suit or action in the proportion to which the collective concurrent active negligence of all members of the Lessor Group bears to the total collective concurrent active negligence of all members of both the Lessor Group and the Charterer Group. 18.4. Subject to the provisions of Articles 18.5., 18.6. and 18.9., Charterer agrees to indemnify, defend and save Lessor Group harmless from and against any and all losses, claims, demands, liabilities, damages, suits or actions in rem or otherwise (including expenses and attorneys' fees) for loss or damage to or injury, illness or death of third parties regardless of any right that may be afforded to any member of Charterer Group to claim limitation of liability under any applicable law, statute or convention with respect to claims by third parties (which shall exclude Charterer Group and Lessor Group) to the extent, and only to the extent, such losses, claims, demands, liabilities, damages, suits or actions arise out of Charterer Group's sole or concurrent active negligence; PROVIDED, FURTHER, that to the extent that any loss, claim, demand, liability, damage, suit or action brought by any third party arises in part out of Lessor Group's concurrent active negligence, Charterer shall indemnify, defend and save Lessor Group harmless from and against such loss, claim, demand, liability, damage, suit or action in the proportion to which the collective concurrent active negligence of all members of the Charterer Group bears to the total collective concurrent active negligence of all members of both the Lessor Group and the Charterer Group. 18.5. (a) From and after Field Acceptance, Charterer agrees to indemnify, defend and save Lessor Group harmless from and against any and all losses, claims, demands, liabilities, damages, costs, expenses, penalties and/or fines, suits or actions in rem or otherwise (including expenses and attorneys' fees) for loss or damage to Lessor Group arising out of seepage or pollution of crude oil and gas from reservoirs, pipelines, platforms and other property related thereto (excluding the FSO) owned or leased by Charterer Group while such property is in Charterer Group's custody and control, including cost of cleanup of same. (b) With respect to seepage or pollution from the FSO, Charterer shall conduct cleanup operations and Lessor shall provide all reasonable assistance; ultimate financial responsibility for the cost of such cleanup will be borne by Lessor Group as provided in Article 18.6.(a). If Charterer causes crude oil or gas located on the FSO to be insured, Charterer shall cause Lessor Group to be named as co-insureds in such policy as their interests may appear. 18.6. (a) Notwithstanding Article 18.5., Lessor shall be solely responsible for and shall indemnify, defend and save Charterer Group harmless from and against any and all losses, claims, demands, liabilities, damages, costs, expenses, penalties and/or fines, suits or actions in rem or otherwise (including expenses and attorneys' fees) for loss or damage to Charterer Group arising from or caused by any seepage or pollution originating under or above the surface of the water from (i) spills of crude oil, gas, fuels, bunkers, slop tanks, lubricants, motor oils, pipe dope, paints, solvents, ballast, bilge, garbage and sewage in Lessor Group's possession or control (including the FSO) and (ii) any property or equipment (including the FSO) owned, leased or provided by the Lessor Group including costs of cleanup of same. 15 (b) Notwithstanding Article 18.5., Charterer shall be solely responsible for and shall indemnify, defend and save Lessor Group harmless from and against any and all losses, claims, demands, liabilities, damages, costs, expenses, penalties and/or fines, suits or actions in rem or otherwise (including expenses and attorneys' fees) for loss or damage to Lessor Group arising from or caused by any pollution originating under or above the surface of the water from (i) spills of fuels, bunkers, slop tanks, lubricants, motor oils, pipe dope, paints, solvents, ballast, bilge, garbage and sewage in Charterer Group's possession or control (other than FSO) and (ii) any property or equipment owned, leased or provided by the Charterer Group (other than the FSO) including costs of cleanup of same. 18.7. Except as provided in Articles 18.3. and 18.4., all excuses from liability for one party and all indemnities given by one party to the other party or to the other party's Group pursuant to this Agreement shall apply regardless of the sole negligence or gross negligence or breach of duty or strict liability of the parties to be indemnified but shall not apply in the case of willful misconduct. 18.8. As used herein, "affiliate" shall mean any company or legal entity which (i) controls either directly or indirectly a party hereto, or (ii) which is itself effectively controlled directly or indirectly by such party, or (iii) is directly or indirectly effectively controlled by a company or entity which directly or indirectly controls such party. "Control" means the right, whether by voting or otherwise, to appoint a director of the company concerned. "FSO," as used herein, shall include the FSO, the swivel and risers down to the outlet flange from the PLEM, and the export hoses up to and including the output flange on such hoses. 18.9. In no event shall either party's Group be liable for any loss of production, loss of oil or gas, loss of revenue or profit, loss of commercial advantage, demurrage, or any consequential or indirect losses or damages suffered by the other party's Group as a result of any act or omission or negligence, unseaworthiness of the FSO or otherwise. This Article shall not be construed as a limitation upon the third party indemnification provisions of this Agreement. 18.10. The provisions of this Article 18. are intended to specifically allocate certain liabilities between the parties hereto in the events described in this Article 18 but shall not be interpreted to waive or excuse performance by any party of its representations, warranties and covenants set forth in this Agreement. 18.11. (a) For the purposes of this Article 18.11., the term "Indemnitee" will refer to the person or persons indemnified or entitled (or claiming to be entitled) to be indemnified pursuant to the provisions of this Agreement; and the term "Indemnitor" will refer to the person having the obligation to indemnify pursuant to such provision. (b) An Indemnitee will promptly give the Indemnitor notice of any matter that an Indemnitee has determined has given or could give rise to a right of indemnification under this Agreement, stating the amount of the loss, claim, demand, liability, damages, cost, expense, penalty and/or fine, suit or action in rem or otherwise (the "Claim") if known, and method of computation thereof, all with reasonable particularity, and stating with particularity the nature of such matter. Failure to provide such notice will not affect the right of the Indemnitee to indemnification except to the extent such failure will have resulted in liability to the Indemnitor that could have been avoided had such notice been provided promptly. (c) The obligations and liabilities of an Indemnitor under this Agreement with respect to Claims of any third party that are subject to the indemnification provided for in this Article 18. ("Third Party Claims") will be governed by the following additional terms and conditions: if an Indemnitee receives notice of any Third Party Claim, the Indemnitee will give the Indemnitor notice of such Third Party Claim pursuant to clause (b) above, and the Indemnitor may, at its option, assume and control the defense of such Third Party Claim at the Indemnitor's expense and through counsel of 16 the Indemnitor's choice that is reasonably acceptable to the Indemnitee. In the event the Indemnitor assumes the defense against any such Third Party Claim as provided above, the Indemnitee will have the right to participate at its own expense in the defense of such asserted liability, will cooperate with the Indemnitor in such defense and make available on a reasonable basis to the Indemnitor all witnesses, pertinent records, materials and information in its possession or under its control relating thereto as is reasonably required by the Indemnitor. In the event the Indemnitor does not elect to assume the defense against any such Third Party Claim, the Indemnitor will pay all reasonable costs and expenses of such defense as incurred and will cooperate with the Indemnitee (and be entitled to participate) in such defense and make available on a reasonable basis all such witnesses, records, materials and information in its possession or under its control relating thereto as is reasonably required by the Indemnitee. Except for the settlement of a Third Party Claim that involves the payment of money only and for which the Indemnitee is totally indemnified by the Indemnitor, no Third Party Claim may be settled without the prior written consent of the Indemnitee, which consent will not unreasonably be withheld or action with respect thereto unduly delayed. No Indemnitee shall be entitled to any indemnification under this Agreement from the Indemnitor for any Third Party Claim that it settles without the prior written consent of the Indemnitor in each instance. 19. NON-WAIVER OF DEFAULTS. 19.1. Any failure by either party at any time, or from time to time, to enforce or require the strict keeping and performance of any of the terms or conditions of this Agreement, or to exercise a right hereunder, shall not constitute a waiver of such terms or conditions. 20. FORCE MAJEURE. 20.1. Any loss or damage or delay in, or failure of performance of either party shall not constitute default hereunder or give rise to any claims for damages if and to the extent that such loss, damage, delay or failure is caused by "Force Majeure." 20.2. In this Agreement "Force Majeure" shall denote any event the happening of which could not be prevented even though a person against whom it happened or threatened to happen were to take such appropriate care as might be expected of a Reasonable and Prudent Operator, as hereinafter defined. "Reasonable and Prudent Operator" when used to describe the standard of care to be exercised by a party in performing its obligations means the degree of diligence and prudence and foresight reasonably and ordinarily exercised by experienced operators engaged in the same line of business under the same or similar circumstances and conditions and when used to determine the action that would be required of a party means the action an experienced commercial operator engaged in the same line of business under the same or similar circumstances and conditions would take in the exercise of such due diligence, prudence and foresight. Notwithstanding Article 20.1., Force Majeure shall not release either party from any obligation to give a notice or make any payment (including, in particular, any payment of Hire) under this Agreement except where the making of a payment is prevented by a Force Majeure event affecting the transfer of monies by the payor. Any payments which are so prevented from being made by reason of Force Majeure shall, upon the cessation of the Force Majeure event, be made as soon as practicable thereafter in addition to any other amounts which may then be payable by such party under this Agreement. 20.3. Events which may, subject to Article 20.2., be considered Force Majeure events shall include but not be limited to acts of government, strikes, lock-outs, acts of public enemy, wars whether declared or undeclared, blockades, insurrection, riots, epidemics, landslides, lightning, earthquakes, fires, storms, floods, washouts, civil disturbances, explosions, breakage or accident to machinery or lines of pipe, freezing of wells or lines of pipe, partial or entire failure of wells, inability to obtain necessary materials or supplies due to changes in laws and regulations and material changes in the obligations of the concessionaire under the Concession Agreement, as herein defined, imposed 17 unilaterally by the Government of Thailand and inability of PTT to accept delivery of gas delivered to PTT under the Gas Sales Agreement where such inability constitutes an event of Force Majeure under the Gas Sales Agreement which has been declared. 20.4. A party claiming relief on account of Force Majeure shall: (a) as soon as practicable give notice to the other party of the happening said to constitute Force Majeure, such notice to include full information about the circumstances and a statement of the steps and time believed necessary to remedy the failure but neither party shall be obligated to settle or prevent any strike or other industrial action except on terms which, in its sole judgment, are acceptable to it; and (b) proceed as a Reasonable and Prudent Operator at its own expense to remedy the failure as rapidly as possible. 21. LAW AND ARBITRATION. 21.1. This Agreement shall be construed and governed in accordance with the maritime law of the United States of America and, to the extent such law is inapplicable, with the laws of the State of New York excluding any conflict of law rules. In connection with the interpretation of any exhibit hereto, the choice of law of this Agreement shall prevail. 21.2. Any dispute arising under or in connection with this Agreement shall be settled by arbitration in New York City under the rules of the American Arbitration Association. The party requesting arbitration shall serve upon the other party a written demand for arbitration with the name and address of the arbitrator appointed by it, and such other party shall, within ten (10) days thereafter, appoint an arbitrator, and the two arbitrators so named, if they can agree, shall appoint a third. If the two arbitrators cannot agree, a third arbitrator shall be appointed by the American Arbitration Association. The decision or award of any two arbitrators shall be final and binding upon the parties. In no event shall any dispute or consolidated group of disputes be determined by more than three arbitrators. Should the party upon whom the demand for arbitration is served fail or refuse to appoint an arbitrator within ten (10) days, the single arbitrator shall have the right to decide alone, and his decision or award shall be final and binding upon the parties. The arbitrator(s) shall have the discretion to impose the cost of the arbitration proceedings, including reasonable attorney's fees upon the losing party, or divide it between the parties on any terms which may appear just; PROVIDED, HOWEVER, that in no event may the arbitrator(s) award any punitive, special or exemplary damages. 21.3. Judgment upon the arbitration award rendered may be entered in any Court having either personal or in rem jurisdiction, or application may be made to such Court for a judicial acceptance of the award and an Order of Enforcement, as the case may be. In this regard, Lessor and Charterer hereby submit to the jurisdiction of the federal and state courts located in Houston, Harris County, Texas. 22. NOTICES. 22.1. Notices or other communications required to be given by either party pursuant to this Agreement shall be written in English and delivered personally or sent by mail or by facsimile to the address of the other party set forth in Article 22.2. below, or to such other address as may from time to time be designated by the other party through notification of such party. The dates on which notices shall be deemed to have been effectively given shall be determined as follows: 22.1.1 Notices given by personal delivery shall be deemed effectively given on the date of personal delivery; 18 22.1.2 Notices given by mail shall be deemed effectively given on the seventh day after the date mailed (as indicated by the postmark) by registered airmail, postage prepaid, or the third day after delivery to an internationally recognized courier service; 22.1.3 Notices given by facsimile shall be deemed effectively given on the first business day following the date of transmission, as indicated on the document in question. 22.2. Except as otherwise provided in Article 22.1., the parties shall give all notices and send all invoices and communications under this Agreement to: 22.2.1 If to Lessor: Watertight Shipping B.V. Einstein Building Kabelweg 21 1014 BA Amsterdam The Netherlands Attention: Mr. Jacob Sajet Fax: 31-20-684-7552 22.2.2 If to the Charterer: Thaipo Limited Thai Romo Limited Palang Sophon Limited B8/32 Partners Limited 18th Floor, B.B. Building 54 Soi Asoke, Sukhumvit 21 Rd. Kwaeng Klongtoey Nua, Khet Klontoey Bangkok 10110, Thailand Attn: Resident Manager (662) 260-7151 (phone) (662) 260-7150 (fax) 22.2.3 All references in this Agreement to a Business Day shall refer to a day other than Saturdays and Sundays or other days on which banks in New York City and Bangkok are required or authorized to be closed for business. 23. PURCHASE OPTION. 23.1. Provided that an Event of Default by Charterer under Article 30. of this Agreement is not existing, Charterer shall have the right to exercise an option (the "Purchase Option") to purchase the FSO (including its on-board spare parts) from the Lessor free from all encumbrances (except encumbrances created by Charterer), (a) at the expiration of the Initial Term for a price of Twelve Million Six Hundred Twenty-Eight Thousand Dollars (US $12,628,000.00); or (b) at any time during the Initial Term at a price to be determined by reference to APPENDIX C-1, or (c) at any time during the Initial Term, if an Event of Default by Lessor has occurred under Article 30. of this Agreement and Charterer has elected, pursuant to Article 31.1.(b) hereof to exercise this Purchase Option for a price determined by reference to APPENDIX C-2; or (d) if, in the opinion of Charterer (and, if requested by Lessor, in the opinion of Charterer's outside counsel), such purchase is required by relevant governmental authorities pursuant to 19 applicable laws, rules, regulations or agreements with such governmental authorities, for a price determined by reference to APPENDIX C-1. 23.2. Lessor agrees that if Charterer exercises any option pursuant to this Article 23. to purchase the FSO, Lessor will on or before the scheduled closing of such purchase cause all liens with respect to the FSO (except liens caused by the Charterer Group) to be lifted. 23.3. Except with respect to Article 23.1.(c), in the event that Charterer exercises its Purchase Option, such purchase price shall be reduced by any amounts due from Lessor under this Agreement which have been mutually agreed or determined pursuant to the terms of Article 21. at the time of such purchase. 23.4. If Charterer is exercising its Purchase Option pursuant to Article 23.1.(a), (b) or (c) above, Charterer shall provide notice of its intent to do so in accordance with the relevant provisions of this Agreement. If Charterer is exercising its Purchase Option pursuant to Article 23.1.(d) above, Charterer shall provide notice of its intent to do so at the earliest reasonable practicable opportunity. 23.5. In the event the Purchase Option is exercised, unless agreed otherwise between Charterer and Lessor, Lessor shall sell the FSO and Charterer shall purchase the FSO "as is," safely afloat, at the time and place of redelivery of the FSO pursuant to Article 25., at which time: (a) Lessor shall deliver to Charterer: (i) A certificate signed by a duly authorized executive of Lessor to the effect that the FSO is free from all encumbrances (except encumbrances created by Charterer), (ii) A certificate signed by the appropriate government official of the Country of Registry showing Lessor as the sole owner of the FSO and no liens of record other than encumbrances to be satisfied out of the FSO's sales proceeds, (iii) A legal bill of sale for the FSO free from all encumbrances and maritime liens and any other debts whatsoever, duly notorially attested and legalized by the appropriate authority and a letter of undertaking to provide for the deletion of the FSO from the Panamanian registry of vessels within thirty (30) days of the date of delivery of the FSO to Charterer, (iv) Copies of class and trading certificates (where relevant to its class) for the FSO valid at the time of delivery, (v) All government approvals necessary to transfer the FSO to Charterer and, if requested by Charterer, to delete the FSO from registry in the Country of Registry and any country claiming jurisdiction over Lessor's power to sell the FSO, (vi) Copies of all log books, classification certificates, manuals and other documents in the Lessor's possession or control arising out of or related in any way to the FSO's design, engineering, construction, operation and maintenance, and (vii) Physical possession of the FSO. (b) On delivery, Charterer shall pay the purchase price to Lessor or its designee by transfer to Lessor's account then designated for receipt of Hire payments. Payment of any Thailand sales, VAT or other taxes attributable the sale shall be the responsibility of Charterer. At the time of delivery, if there are no unpaid claims which have been asserted hereunder, Charterer shall promptly return the Performance Guaranty to the issuer thereof. (c) Each party shall deliver to the other party such additional documentation or take such additional action as such other party may reasonably request or as may be customary at the time with respect to the sale of vessels registered in the Country of Registry and which is not in 20 conflict with the provisions of this Agreement, provided that Lessor shall not be required to arrange or pay for a dry-docking or inspection of the FSO for purposes of said sale and purchase. 24. GUARANTY. 24.1. Lessor has delivered to Charterer a Guaranty and Indemnity Agreement ("Lessor Parent Company Guaranty") in the form of APPENDIX B-1 hereto, executed by its ultimate corporate parent, Omni Offshore Holdings, Limited, a company organized under the laws of Liberia, guaranteeing the performance by Lessor of its obligations hereunder. 24.2. Upon Delivery, Lessor or its designee shall provide to Charterer, at Lessor's sole expense, an irrevocable and unconditional letter of credit in favor of Charterer in the amount of Five Million Dollars (US $5,000,000) to guarantee the due, proper and full performance by Lessor of its obligations under this Agreement (the "Performance Guaranty"). The Performance Guaranty shall be (i) executed on a form attached hereto as APPENDIX B-2 with such modifications as are acceptable to Charterer, (ii) issued by a bank acceptable to Charterer, and (iii) valid and available to Charterer until a date not less than ninety (90) days after the end of the Initial Term; PROVIDED, HOWEVER, that the term of the Performance Guaranty shall initially be for a period of one (1) year, but shall be continually renewed and extended, each renewal and extension to be for a period of one year if, as of ten (10) days prior to the expiration of the initial term of the Performance Guaranty, or any renewal or extension thereof, the term of the Performance Guaranty is less than ninety (90) days more than the Initial Term. In addition to any other rights Charterer may have to draw upon the Performance Guaranty, Charterer shall have the immediate right to draw upon the Performance Guaranty in full prior to its expiration if (i) Lessor has not timely renewed and extended the Performance Guaranty in accordance with the immediately preceding sentence or (ii) Lessor attempts to terminate the Performance Guaranty prior to ninety (90) days after the expiration of the Initial Term; PROVIDED, HOWEVER, that if Lessor subsequently delivers a new Performance Guaranty and there is no other existing Event of Default by Lessor, Charterer shall promptly pay to Lessor any amounts drawn by Charterer pursuant to this sentence. In the event that Lessor or its Guarantor or its or their subcontractors fail to comply with any of their obligations under this Agreement and Charterer, as a result, shall have the right at any time under this Agreement either to (i) be reimbursed or indemnified by Lessor or its Guarantor for any loss or expenditure incurred by Charterer or (2) receive any contractual damages (including liquidated damages) from Lessor, then Charterer shall have the right to draw on the Performance Guaranty on its first demand and thereafter from time to time in such amount as needed to satisfy such obligation of Lessor or its Guarantor to Charterer. In the event of a draw on the Performance Guaranty, other than a draw in connection with the termination of the Agreement, Lessor shall, within ten (10) Business Days from the date of such draw, restore the Performance Guaranty to Five Million Dollars (US $5,000,000). Any draw on the Performance Guaranty shall be effected by the member of the Charterer that is at the time such draw the field operator pursuant to the Concession Agreement (the "Field Operator"). 25. REDELIVERY OF FSO. The FSO shall at the expiration or termination or as provided in Article 31.2.(b) of this Agreement (unless lost or a constructive total loss or under requisition or purchased by Charterer) be redelivered to Lessor at the Offshore Site (the "Redelivery"), as is - where is, in accordance with the following conditions. The FSO shall be redelivered to Lessor properly documented and in class with no recommendations, fair wear and tear not affecting class excepted. Charterer shall have discharged substantially all free crude oil (other than tank bottoms) from the FSO. Any expenses of degassing or demucking upon Redelivery shall be borne by Lessor. The FSO shall upon Redelivery have her class certificates valid. Charterer will render the FSO available to Lessor at the time of 21 Redelivery for survey, inspection, testing and inventory check at Lessor's expense. Charterer at its expense shall meet its Redelivery obligations and the charter period shall be extended for the period necessary to make any deficiencies good. During any such period the compensation payable under Article 9. before Redelivery shall not be so payable provided Charterer's obligations herein are met promptly and expeditiously. Prior to and during the Redelivery of the FSO, Charterer shall provide such reasonable assistance to Lessor as Lessor requests in order to effect taking Redelivery of the FSO, including but not limited to temporary office facilities onshore and transportation from Charterer's shore base to the FSO and vice versa for Lessor's personnel and supplies as is reasonable under the circumstances. On Redelivery, Lessor shall be free (i) to cut and either remove or abandon the anchor chains, the risers, buoyancy tanks and the control umbilicals (but so as to leave no hazard to shipping and to avoid damage to Charterer's wells, wellheads, pipelines, PLEM or other equipment) and to remove the FSO from the Offshore Site but without having any obligation to remove subsurface equipment or materials including piling or any other obligation to clear the Offshore Site and (ii) to remove any free crude oil not previously removed by Charterer at Charterer's expense. 26. REQUISITION. 26.1. If the FSO is seized, expropriated, confiscated, nationalized or requisitioned by any authority (other than the government, or any department, commission or agency thereof, of the Country of Registry, whether a legally constituted governmental authority or otherwise), and such seizure, expropriation, confiscation, nationalization or requisition has continued for a period of at least 30 consecutive days, this Agreement, at the option of Charterer, may continue in force or may be terminated at any time during the period of seizure, expropriation, confiscation, nationalization or requisition, provided that in the event Charterer elects to terminate, notice shall be given to Lessor by Charterer and compensation, as specified in Article 9., shall cease as of the date occurring 30 days prior to the date of notice of termination and the FSO shall be deemed to have been Redelivered to Lessor by Charterer. If Charterer has previously paid any or all of such compensation in respect of such 30 day period, Lessor shall promptly refund such amount to Charterer. 26.2. In the event the FSO is seized, expropriated, confiscated, nationalized or requisitioned (collectively, an "Expropriation") by the government, or any department, commission or agency thereof, of the Country of Registry, whether a legally constituted governmental authority or otherwise, this Agreement shall be deemed terminated and compensation, as specified in Article 9.1., shall cease as of the date of Expropriation and the FSO shall be deemed to have been redelivered to Lessor by Charterer; PROVIDED, THAT, the provisions of this Article 26.2. with respect to termination of this Agreement shall not become applicable until the earlier of (a) one (1) month after such Expropriation or (b) the date that Lessor and, if applicable, Charterer have agreed that the FSO cannot be released from such Expropriation. 26.3. In the event any seizure, expropriation, confiscation, nationalization or requisition of the FSO occurs, Lessor shall use its best efforts to arrange the release of the FSO therefrom (including, without limitation, changing the Country of Registry of the FSO) and shall afford Charterer the opportunity to join in any such action. 27. GENERAL AND PARTICULAR AVERAGE. General average if any shall be adjusted according to the York-Antwerp Rules 1994 or any subsequent modification thereof current at the time of the casualty. 28. SALVAGE. All salvage and towage shall be for Lessor's benefit and the cost of repairing damage occasioned thereby shall be borne by Lessor. 22 29. AUDIT. Lessor shall maintain its records which pertain to Articles 9. and 11. hereof in accordance with generally accepted international accounting principles and will keep copies of all applicable documents, forms and third-party invoices, etc., and will permit Charterer to inspect such records at any time upon request during regular business hours. 30. DEFAULT. The following events by either party hereto or any guarantor ("Guarantor") under the Lessor Parent Company Guaranty shall constitute an Event of Default: (a) failure to observe any material covenant, condition or agreement to be performed or observed by said party hereunder or any Guarantor under the Lessor Parent Guaranty; or (b) any representation or warranty made herewith or pursuant hereto or pursuant to the Lessor Parent Company Guaranty shall prove to be incorrect at any time in any material respect; or (c) said party or Guarantor shall become insolvent or bankrupt or consent to the appointment of a trustee or receiver, or a trustee or receiver shall be appointed for said party or for a substantial part of its property without its consent and shall not be dismissed for a period of thirty (30) days, or bankruptcy, reorganization or insolvency proceedings shall be instituted by or against said party and, if instituted against said party, shall not be dismissed for a period of thirty (30) days, and at any time thereafter so long as the same shall be continuing; PROVIDED, THAT, in any such case, no other Guarantor has agreed within such thirty (30) day period to accept and fulfill the obligations of such insolvent, reorganizing or bankrupt party or Guarantor; or (d) A Force Majeure Event shall have occurred preventing payment by Charterer of amounts due hereunder and such failure to pay continues unremedied for a period of 60 consecutive days. 31. REMEDIES. 31.1. Upon the occurrence of an Event of Default of Lessor or its affiliate and at any time thereafter so long as the same shall be continuing, Charterer may, at its option, upon ninety (90) days' (or in the case of a failure to maintain or renew the full amount of the Performance Guaranty, two (2) Business Days') notice thereof to Lessor, declare this Agreement to be in default; and, at any time thereafter, so long as Lessor shall not have remedied or have commenced and at all times thereafter diligently acted to remedy all outstanding Events of Default, Charterer may: (a) terminate this Agreement, compensation as specified in Article 9.1. shall cease as of the date of termination and Charterer shall redeliver the FSO to Lessor as if the FSO were being redelivered pursuant to Article 25. hereof; or (b) exercise its right to exercise the Purchase Option at a price to be determined by reference to APPENDIX C-2 (offsetting any damages which have been established at the time of such purchase against the purchase price of the FSO to the extent provided below) and terminate compensation under Article 9.1. In either case, Charterer shall also have the additional right to draw upon the Performance Guaranty as provided in Article 24.2. If Charterer exercises its Purchase Option under sub-clause (b) above, it will not offset any damages against the price set forth in APPENDIX C-2 except to the extent that (i) no additional drawings under the Performance Guaranty are available, and (ii) Charterer's damages exceed the difference between the amount set forth in APPENDIX C-1 minus the amount set forth in APPENDIX C-2 as of the date of purchase of the FSO; PROVIDED, HOWEVER, that the foregoing limitation on offset of 23 damages shall not in any manner limit or diminish Charterer's claim for damages under this Agreement, the Performance Guaranty or the Lessor Parent Guaranty. In addition to all other remedies available at law or in contract (and otherwise permitted by this Agreement), Lessor shall be liable for any and all damages to Charterer resulting from termination of this Agreement and for all legal fees and any other costs and expenses whatsoever incurred by Charterer by reason of the occurrence of any Event of Default or by reason of the exercise by Charterer of any remedy hereunder, including, without limitation, any costs and expenses incurred by Charterer in connection with Redelivery of the FSO. Notwithstanding the remedies available to Charterer under this Article 31., the provisions of Article 18.9. shall apply so as to limit the damages of Charterer, PROVIDED that if Lessor shall breach its obligation other than for reasons wholly outside its control to sell the FSO to Charterer if Charterer exercises its Purchase Option under sub-clause (b) above, Lessor shall be liable to the Charterer for direct damages to Charterer arising from such breach. Charterer must use reasonable efforts to mitigate its damages. 31.2. Upon the occurrence of an Event of Default of Charterer (provided that such Event of Default did not arise out of or result from actions, or omissions to act, of Operator under the Operating Agreement) and at any time thereafter so long as the same shall be continuing, Lessor may, at its option, upon ninety (90) days' notice (or, in the case of an Event of Default based on a failure to pay money when due (including a failure by reason of Force Majeure), thirty (30) days' notice) thereof to Charterer, declare this Agreement to be in default; and, at any time thereafter, so long as Charterer shall not have remedied or (except as to an Event of Default based on a failure to pay money when due) have commenced and at all times thereafter diligently acted to remedy all outstanding Events of Default, Lessor may do, and Charterer shall comply with, one or more of the following, as Lessor in its sole discretion shall so elect, to the extent permitted by, and subject to compliance with any mandatory requirements of applicable law then in effect: (a) Lessor may terminate this Agreement. (b) Upon written demand, Lessor may cause Charterer to, and Charterer hereby agrees that it will, redeliver the FSO to Lessor within a reasonable period of time not to exceed 45 days and in the same manner and in the same condition as if the FSO were being redelivered pursuant to Article 25. hereof; or Lessor or its agent, at Lessor's option, may, but shall be under no obligation to, retake the FSO irrespective of whether Charterer or any other person may be in possession of the FSO, upon 24 hours prior notice but without prior demand and without legal process, and for that purpose Lessor or its agent may take possession thereof. (c) Lessor or its agent may sell the FSO at public or private sale, with notice to Charterer, or otherwise may dispose of, hold, use, operate, charter (whether for a period greater or less than the balance of what would have been the charter period for the FSO in the absence of the termination of Charterer's rights to the FSO) to others or keep idle, all on such terms and conditions and at such place or places as Lessor may determine. Notwithstanding the foregoing, in the event of an Event of Default by Charterer under Article 30., the Event of Default of Charterer shall be deemed to be cured for all purposes if any member of Charterer which has not caused the Event of Default of Charterer pursuant to Article 30. shall increase its respective Concessionaire Percentage so that the Concessionaire Percentages of all members of Charterer which have not caused the Event of Default of Charterer pursuant to Article 30. shall total 100% and no amounts are due and owing by Charterer under this Agreement. In addition, Charterer shall be liable for and shall pay to Lessor within thirty days after Lessor takes redelivery or possession of the FSO a lump sum equal to the discounted present value (discounted at an annually compounded percentage rate of twelve percent (12%) per annum) of any and all remaining Hire payable during the Initial Term, as well as the actual amount of all legal fees and 24 any other costs and expenses whatsoever incurred by Lessor by reason of the occurrence of any Event of Default of Charterer or by reason of the exercise by Lessor of any remedy hereunder, including, without limitation, any costs and expenses incurred by Lessor in connection with the Redelivery or retaking of the FSO. Lessor must use reasonable efforts to mitigate its damages and shall apply any amounts received from the sale or re-charter (for a period equal to the remainder of the term of this Agreement) of the FSO (after deducting Lessor's direct out-of-pocket expenses of making the FSO ready for sale or re-charter) to reduce the amount of any charter hire and other amounts payable by Charterer to Lessor pursuant to the last paragraph of this Article 31.2. 31.3. Each party's remedies referred to in this Article 31. are intended to be the exclusive remedies of such party under this Agreement; PROVIDED, HOWEVER, that either party may enforce performance of these remedies by all legal or equitable means. 31.4. No express or implied waiver by either party of any Event of Default shall be in any way, or be construed to be, a waiver of any further or subsequent Event of Default. 32. MISCELLANEOUS. 32.1. (a) All terms and conditions of this Agreement shall be binding upon and shall inure to the benefit of the parties hereto and their respective successors and permitted assigns. Any purported assignment in contravention of Article 9.1. or this Article 32. shall be null and void. (b) Charterer shall be entitled to assign its rights, duties and obligations hereunder to an affiliate without the consent of Lessor; PROVIDED, THAT, such assignment shall not relieve Charterer for any of its obligations under this Agreement. (c) Any member of Charterer shall be entitled to pledge and/or assign its rights under this Agreement by way of security to any lending institution providing financing for the transactions contemplated hereby or related to the development of the concession or a collateral agent on their behalf provided that any such pledge or assignment does not release the assignor of the assignor's obligations hereunder, from any of their respective obligations to the Lessor. (d) Charterer shall not subcharter the FSO to any party including an affiliate without the prior written consent of Lessor such consent not to be unreasonably withheld. Save as specifically provided above and in Articles 9.1. and 13.1.(d), neither party hereto shall be entitled to assign any rights or obligations under this Agreement without the prior consent of the other party, not to be unreasonably withheld. Charterer shall maintain a written record that identifies Lessor as the person entitled to payments under this Agreement. In the event of a permitted assignment by Lessor of any of its rights under this Agreement, such assignment will be reflected on the record maintained by Charterer. 32.2. This Agreement may be executed in one or more counterparts, all of which, taken together, shall constitute one original document. 32.3. Except as specifically provided herein to the contrary, each party hereto intends that this Agreement shall not benefit or create any right or cause of action to any person other than parties hereto or their permitted assignees. 32.4. This Agreement may be amended or modified and any condition herein specified may be waived by mutual consent of the parties by a written instrument executed on behalf of the parties. 32.5. The captions contained in this Agreement are for convenience of reference only and do not form a part of this Agreement and shall not affect the interpretation hereof. 32.6. If any provision of this Agreement is held to be illegal, invalid or unenforceable under present or future law effective during the term hereof, such provision shall be fully severable. This Agreement 25 shall be construed and enforced as if such illegal, invalid or unenforceable provision had never comprised a part hereof and the remaining portions hereof shall remain in full force and effect and shall not be effected by the illegal, invalid or unenforceable provision or by its severance herefrom. Furthermore, in lieu of such illegal, invalid or unenforceable provision there shall be added automatically as part of this Agreement a provision as similar in terms to such illegal, invalid or unenforceable provision as may be possible and be legal, valid and enforceable. 32.7. Each of the parties hereto intends this Agreement will be treated as a lease of the FSO from Lessor to Charterer. Neither Charterer, Lessor, nor any of their respective affiliates will take any action nor file any document with any governmental authority including, without limitation, any tax return, which is inconsistent with such characterization of this Agreement as a lease. 32.8. Termination of this Agreement, regardless of cause, shall not relieve either party of its respective obligations and limitations arising from or incident to this Agreement prior to its termination including, without limitation, each parties indemnification obligations hereunder. 26 IN WITNESS WHEREOF, the parties have caused this Agreement to be executed in duplicate as of the day, month and year just written above. LESSOR: CHARTERER: Watertight Shipping B.V. Thaipo Limited /s/ JACOB SAJET /s/ STEPHEN R. BRUNNER ------------------------------ ------------------------------ Name: Jacob Sajet Name: Stephen R. Brunner Title: Managing Director Title: Director By: By: Thai Romo Limited /s/ DAVID CHAVENSON ------------------------------ Name: David Chavenson Title: Managing Director By: Palang Sophon Limited /s/ CHARN SOPHONPANICH ------------------------------ Name: Charn Sophonpanich Title: Director By: /s/ SIRITAS PRAESERT-MANUKITCH ------------------------------ Name: Siritas Praesert-Manukitch Title: Director By: B8/32 Partners Limited /s/ DAVID CHAVENSON ------------------------------ Name: David Chavenson Title: Director By: /s/ JEFFREY SEVERIN ------------------------------ Name: Jeffrey Severin Title: Director By: /s/ SIRITAS PRAESERT-MANUKITCH ------------------------------ Name: Siritas Praesert-Manukitch Title: Director By: 27 EX-21 16 EXHIBIT 21 EXHIBIT 21 SIGNIFICANT SUBSIDIARIES NAME JURISDICTION OF INCORPORATION ---- ----------------------------- Thaipo Limited Thailand B8/32 Partners Limited Thailand Arch Petroleum Inc. Delaware Pogo Canada Ltd. Alberta, Canada EX-23.1 17 EXHIBIT 23.1 EXHIBIT 23.1 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the incorporation of our report dated February 19, 1999 included in this Annual Report on Form 10-K, into Pogo Producing Company's previously filed Registration Statement File Nos. 33-54969, 333-04233 and 333-72129. /s/ ARTHUR ANDERSEN LLP ARTHUR ANDERSEN LLP Houston, Texas February 26, 1999 EX-23.2 18 EXHIBIT 23.2 EXHIBIT 23(b) CONSENT OF INDEPENDENT PETROLEUM ENGINEERS As independent petroleum engineers, we hereby consent to the use of our name in the Annual Report on Form 10-K for the year ended December 31, 1998. We further consent to the inclusion of our estimate of reserves and present value of future net reserves in such Annual Report. /s/ RYDER SCOTT COMPANY RYDER SCOTT COMPANY PETROLEUM ENGINEERS Houston, Texas February 25, 1999 EX-24 19 EXHIBIT 24 EXHIBIT 24.1 POWER OF ATTORNEY I, JERRY M. ARMSTRONG, in my individual capacity and as a director of Pogo Producing Company (the "Company"), do hereby appoint PAUL G. VAN WAGENEN and THOMAS E. HART, and each of them severally, my true and lawful attorney or attorneys with power to act with or without the other, and with full power of substitution and resubstitution, to prepare, execute and file, in my name, place and stead in my individual capacity and as a director of the Company, such documents, reports and filings as may be necessary or advisable under the Securities Exchange Act of 1934, as amended (the "Act"), the Securities Act of 1933, as amended (the "Securities Act") or any other federal, state or local law regulating the Company, including, without limitation, the Company's Annual Report of Form 10-K for the fiscal year ended December 31, 1998, as prescribed by the Securities and Exchange Commission (the "Commission") pursuant to the Act, and the rules and regulations promulgated thereunder, with any and all exhibits and other documents relating thereto, any and all amendments to said Annual Report and all instruments as said attorneys or any of them shall deem necessary or incidental in connection therewith and to file the same with the Commission. Each of said attorneys shall have full power and authority to do and perform in my name and on my behalf any act whatsoever to accomplish the purpose and intent of the forgoing that said attorneys deem may be necessary or desirable to be done in the premises as fully and to all intents and purposes as I might or could do in person, and by my signature hereto, I hereby ratify and approve any and all of such acts of said attorneys and each of them. IN WITNESS WHEREOF, I have executed this instrument on this 28th day of January, 1999. /s/ Jerry M. Armstrong --------------------------------- Jerry M. Armstrong POWER OF ATTORNEY I, TOBIN ARMSTRONG, in my individual capacity and as a director of Pogo Producing Company (the "Company"), do hereby appoint PAUL G. VAN WAGENEN and THOMAS E. HART, and each of them severally, my true and lawful attorney or attorneys with power to act with or without the other, and with full power of substitution and resubstitution, to prepare, execute and file, in my name, place and stead in my individual capacity and as a director of the Company, such documents, reports and filings as may be necessary or advisable under the Securities Exchange Act of 1934, as amended (the "Act"), the Securities Act of 1933, as amended (the "Securities Act") or any other federal, state or local law regulating the Company, including, without limitation, the Company's Annual Report of Form 10-K for the fiscal year ended December 31, 1998, as prescribed by the Securities and Exchange Commission (the "Commission") pursuant to the Act, and the rules and regulations promulgated thereunder, with any and all exhibits and other documents relating thereto, any and all amendments to said Annual Report and all instruments as said attorneys or any of them shall deem necessary or incidental in connection therewith and to file the same with the Commission. Each of said attorneys shall have full power and authority to do and perform in my name and on my behalf any act whatsoever to accomplish the purpose and intent of the forgoing that said attorneys deem may be necessary or desirable to be done in the premises as fully and to all intents and purposes as I might or could do in person, and by my signature hereto, I hereby ratify and approve any and all of such acts of said attorneys and each of them. IN WITNESS WHEREOF, I have executed this instrument on this 26th day of January, 1999. /s/ Tobin Armstrong --------------------------------- Tobin Armstrong POWER OF ATTORNEY I, JACK S. BLANTON, in my individual capacity and as a director of Pogo Producing Company (the "Company"), do hereby appoint PAUL G. VAN WAGENEN and THOMAS E. HART, and each of them severally, my true and lawful attorney or attorneys with power to act with or without the other, and with full power of substitution and resubstitution, to prepare, execute and file, in my name, place and stead in my individual capacity and as a director of the Company, such documents, reports and filings as may be necessary or advisable under the Securities Exchange Act of 1934, as amended (the "Act"), the Securities Act of 1933, as amended (the "Securities Act") or any other federal, state or local law regulating the Company, including, without limitation, the Company's Annual Report of Form 10-K for the fiscal year ended December 31, 1998, as prescribed by the Securities and Exchange Commission (the "Commission") pursuant to the Act, and the rules and regulations promulgated thereunder, with any and all exhibits and other documents relating thereto, any and all amendments to said Annual Report and all instruments as said attorneys or any of them shall deem necessary or incidental in connection therewith and to file the same with the Commission. Each of said attorneys shall have full power and authority to do and perform in my name and on my behalf any act whatsoever to accomplish the purpose and intent of the forgoing that said attorneys deem may be necessary or desirable to be done in the premises as fully and to all intents and purposes as I might or could do in person, and by my signature hereto, I hereby ratify and approve any and all of such acts of said attorneys and each of them. IN WITNESS WHEREOF, I have executed this instrument on this 26th day of January, 1999. /s/ Jack S. Blanton --------------------------------- Jack S. Blanton POWER OF ATTORNEY I, W.M. BRUMLEY, JR., in my individual capacity and as a director of Pogo Producing Company (the "Company"), do hereby appoint PAUL G. VAN WAGENEN and THOMAS E. HART, and each of them severally, my true and lawful attorney or attorneys with power to act with or without the other, and with full power of substitution and resubstitution, to prepare, execute and file, in my name, place and stead in my individual capacity and as a director of the Company, such documents, reports and filings as may be necessary or advisable under the Securities Exchange Act of 1934, as amended (the "Act"), the Securities Act of 1933, as amended (the "Securities Act") or any other federal, state or local law regulating the Company, including, without limitation, the Company's Annual Report of Form 10-K for the fiscal year ended December 31, 1998, as prescribed by the Securities and Exchange Commission (the "Commission") pursuant to the Act, and the rules and regulations promulgated thereunder, with any and all exhibits and other documents relating thereto, any and all amendments to said Annual Report and all instruments as said attorneys or any of them shall deem necessary or incidental in connection therewith and to file the same with the Commission. Each of said attorneys shall have full power and authority to do and perform in my name and on my behalf any act whatsoever to accomplish the purpose and intent of the forgoing that said attorneys deem may be necessary or desirable to be done in the premises as fully and to all intents and purposes as I might or could do in person, and by my signature hereto, I hereby ratify and approve any and all of such acts of said attorneys and each of them. IN WITNESS WHEREOF, I have executed this instrument on this 26th day of January, 1999. /s/ W.M. Brumley, Jr. --------------------------------- W.M. Brumley, Jr. POWER OF ATTORNEY I, JOHN B. CARTER, JR., in my individual capacity and as a director of Pogo Producing Company (the "Company"), do hereby appoint PAUL G. VAN WAGENEN and THOMAS E. HART, and each of them severally, my true and lawful attorney or attorneys with power to act with or without the other, and with full power of substitution and resubstitution, to prepare, execute and file, in my name, place and stead in my individual capacity and as a director of the Company, such documents, reports and filings as may be necessary or advisable under the Securities Exchange Act of 1934, as amended (the "Act"), the Securities Act of 1933, as amended (the "Securities Act") or any other federal, state or local law regulating the Company, including, without limitation, the Company's Annual Report of Form 10-K for the fiscal year ended December 31, 1998, as prescribed by the Securities and Exchange Commission (the "Commission") pursuant to the Act, and the rules and regulations promulgated thereunder, with any and all exhibits and other documents relating thereto, any and all amendments to said Annual Report and all instruments as said attorneys or any of them shall deem necessary or incidental in connection therewith and to file the same with the Commission. Each of said attorneys shall have full power and authority to do and perform in my name and on my behalf any act whatsoever to accomplish the purpose and intent of the forgoing that said attorneys deem may be necessary or desirable to be done in the premises as fully and to all intents and purposes as I might or could do in person, and by my signature hereto, I hereby ratify and approve any and all of such acts of said attorneys and each of them. IN WITNESS WHEREOF, I have executed this instrument on this 26th day of January, 1999. /s/ John B. Carter, Jr. --------------------------------- John B. Carter, Jr. POWER OF ATTORNEY I, WILLIAM L. FISHER, in my individual capacity and as a director of Pogo Producing Company (the "Company"), do hereby appoint PAUL G. VAN WAGENEN and THOMAS E. HART, and each of them severally, my true and lawful attorney or attorneys with power to act with or without the other, and with full power of substitution and resubstitution, to prepare, execute and file, in my name, place and stead in my individual capacity and as a director of the Company, such documents, reports and filings as may be necessary or advisable under the Securities Exchange Act of 1934, as amended (the "Act"), the Securities Act of 1933, as amended (the "Securities Act") or any other federal, state or local law regulating the Company, including, without limitation, the Company's Annual Report of Form 10-K for the fiscal year ended December 31, 1998, as prescribed by the Securities and Exchange Commission (the "Commission") pursuant to the Act, and the rules and regulations promulgated thereunder, with any and all exhibits and other documents relating thereto, any and all amendments to said Annual Report and all instruments as said attorneys or any of them shall deem necessary or incidental in connection therewith and to file the same with the Commission. Each of said attorneys shall have full power and authority to do and perform in my name and on my behalf any act whatsoever to accomplish the purpose and intent of the forgoing that said attorneys deem may be necessary or desirable to be done in the premises as fully and to all intents and purposes as I might or could do in person, and by my signature hereto, I hereby ratify and approve any and all of such acts of said attorneys and each of them. IN WITNESS WHEREOF, I have executed this instrument on this 26th day of January, 1999. /s/ William L. Fisher --------------------------------- William L. Fisher POWER OF ATTORNEY I, GERRIT W. GONG, in my individual capacity and as a director of Pogo Producing Company (the "Company"), do hereby appoint PAUL G. VAN WAGENEN and THOMAS E. HART, and each of them severally, my true and lawful attorney or attorneys with power to act with or without the other, and with full power of substitution and resubstitution, to prepare, execute and file, in my name, place and stead in my individual capacity and as a director of the Company, such documents, reports and filings as may be necessary or advisable under the Securities Exchange Act of 1934, as amended (the "Act"), the Securities Act of 1933, as amended (the "Securities Act") or any other federal, state or local law regulating the Company, including, without limitation, the Company's Annual Report of Form 10-K for the fiscal year ended December 31, 1998, as prescribed by the Securities and Exchange Commission (the "Commission") pursuant to the Act, and the rules and regulations promulgated thereunder, with any and all exhibits and other documents relating thereto, any and all amendments to said Annual Report and all instruments as said attorneys or any of them shall deem necessary or incidental in connection therewith and to file the same with the Commission. Each of said attorneys shall have full power and authority to do and perform in my name and on my behalf any act whatsoever to accomplish the purpose and intent of the forgoing that said attorneys deem may be necessary or desirable to be done in the premises as fully and to all intents and purposes as I might or could do in person, and by my signature hereto, I hereby ratify and approve any and all of such acts of said attorneys and each of them. IN WITNESS WHEREOF, I have executed this instrument on this 27th day of January, 1999. /s/ Gerrit W. Gong --------------------------------- Gerrit W. Gong POWER OF ATTORNEY I, J. STUART HUNT, in my individual capacity and as a director of Pogo Producing Company (the "Company"), do hereby appoint PAUL G. VAN WAGENEN and THOMAS E. HART, and each of them severally, my true and lawful attorney or attorneys with power to act with or without the other, and with full power of substitution and resubstitution, to prepare, execute and file, in my name, place and stead in my individual capacity and as a director of the Company, such documents, reports and filings as may be necessary or advisable under the Securities Exchange Act of 1934, as amended (the "Act"), the Securities Act of 1933, as amended (the "Securities Act") or any other federal, state or local law regulating the Company, including, without limitation, the Company's Annual Report of Form 10-K for the fiscal year ended December 31, 1998, as prescribed by the Securities and Exchange Commission (the "Commission") pursuant to the Act, and the rules and regulations promulgated thereunder, with any and all exhibits and other documents relating thereto, any and all amendments to said Annual Report and all instruments as said attorneys or any of them shall deem necessary or incidental in connection therewith and to file the same with the Commission. Each of said attorneys shall have full power and authority to do and perform in my name and on my behalf any act whatsoever to accomplish the purpose and intent of the forgoing that said attorneys deem may be necessary or desirable to be done in the premises as fully and to all intents and purposes as I might or could do in person, and by my signature hereto, I hereby ratify and approve any and all of such acts of said attorneys and each of them. IN WITNESS WHEREOF, I have executed this instrument on this 26th day of January, 1999. /s/ J. Stuart Hunt --------------------------------- J. Stuart Hunt POWER OF ATTORNEY I, FREDERICK A. KLINGENSTEIN, in my individual capacity and as a director of Pogo Producing Company (the "Company"), do hereby appoint PAUL G. VAN WAGENEN and THOMAS E. HART, and each of them severally, my true and lawful attorney or attorneys with power to act with or without the other, and with full power of substitution and resubstitution, to prepare, execute and file, in my name, place and stead in my individual capacity and as a director of the Company, such documents, reports and filings as may be necessary or advisable under the Securities Exchange Act of 1934, as amended (the "Act"), the Securities Act of 1933, as amended (the "Securities Act") or any other federal, state or local law regulating the Company, including, without limitation, the Company's Annual Report of Form 10-K for the fiscal year ended December 31, 1998, as prescribed by the Securities and Exchange Commission (the "Commission") pursuant to the Act, and the rules and regulations promulgated thereunder, with any and all exhibits and other documents relating thereto, any and all amendments to said Annual Report and all instruments as said attorneys or any of them shall deem necessary or incidental in connection therewith and to file the same with the Commission. Each of said attorneys shall have full power and authority to do and perform in my name and on my behalf any act whatsoever to accomplish the purpose and intent of the forgoing that said attorneys deem may be necessary or desirable to be done in the premises as fully and to all intents and purposes as I might or could do in person, and by my signature hereto, I hereby ratify and approve any and all of such acts of said attorneys and each of them. IN WITNESS WHEREOF, I have executed this instrument on this 26th day of January, 1999. /s/ Frederick A. Klingenstein --------------------------------- Frederick A. Klingenstein POWER OF ATTORNEY I, JACK A. VICKERS, in my individual capacity and as a director of Pogo Producing Company (the "Company"), do hereby appoint PAUL G. VAN WAGENEN and THOMAS E. HART, and each of them severally, my true and lawful attorney or attorneys with power to act with or without the other, and with full power of substitution and resubstitution, to prepare, execute and file, in my name, place and stead in my individual capacity and as a director of the Company, such documents, reports and filings as may be necessary or advisable under the Securities Exchange Act of 1934, as amended (the "Act"), the Securities Act of 1933, as amended (the "Securities Act") or any other federal, state or local law regulating the Company, including, without limitation, the Company's Annual Report of Form 10-K for the fiscal year ended December 31, 1998, as prescribed by the Securities and Exchange Commission (the "Commission") pursuant to the Act, and the rules and regulations promulgated thereunder, with any and all exhibits and other documents relating thereto, any and all amendments to said Annual Report and all instruments as said attorneys or any of them shall deem necessary or incidental in connection therewith and to file the same with the Commission. Each of said attorneys shall have full power and authority to do and perform in my name and on my behalf any act whatsoever to accomplish the purpose and intent of the forgoing that said attorneys deem may be necessary or desirable to be done in the premises as fully and to all intents and purposes as I might or could do in person, and by my signature hereto, I hereby ratify and approve any and all of such acts of said attorneys and each of them. IN WITNESS WHEREOF, I have executed this instrument on this 26th day of January, 1999. /s/ Jack A. Vickers --------------------------------- Jack A. Vickers EX-27 20 EXHIBIT 27
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) OF POGO PRODUCING COMPANY, INCLUDING THE CONSOLIDATED BALANCE SHEETS AS OF 12-31-1998 AND THE CONSOLIDATED STATEMENTS OF INCOME FOR THE 12 MOS. ENDED 12-31-1998, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH CONSOLIDATED FINANCIAL STATEMENTS. 1,000 12-MOS DEC-31-1997 DEC-31-1998 7,959 0 63,031 0 11,563 85,367 1,718,284 992,759 862,396 107,479 434,947 0 0 40,136 209,524 862,396 202,895 202,803 71,213 71,213 188,810 0 24,682 (70,849) 27,751 (43,098) 0 0 0 (43,098) (1.14) (1.14) THIS AMOUNT IS NOT DISCLOSED ON THE FACE OF THE CONSOLIDATED FINANCIAL STATEMENTS DUE TO LACK OF MATERIALITY, BUT IS INCLUDED AS A CONTRA-ASSET IN ACCOUNTS RECEIVABLE. DOES NOT INCLUDE GAINS OR LOSSES ON PROPERTY SALES. INCLUDES LEASE OPERATING EXPENSE AND NATURAL GAS PURCHASES AND PIPELINE OPERATIONS, BUT EXCLUDES GENERAL AND ADMINISTRATIVE, EXPLORATION, DRY HOLE AND IMPAIRMENT AND DEPRECIATION, DEPLETION AND AMORTIZATION EXPENSES. INCLUDES GENERAL AND ADMINISTRATIVE, EXPLORATION, DRY HOLE AND IMPAIRMENT AND DEPRECIATION, DEPLETION AND AMORTIZATION EXPENSES. THIS AMOUNT IS NOT DISCLOSED ON THE FACE OF THE CONSOLIDATED FINANCIAL STATEMENTS DUE TO LACK OF MATERIALITY, BUT IS INCLUDED IN OIL AND GAS REVENUES.
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