3. INVESTMENT IN OIL AND GAS PROPERTIES

Investment in oil and gas properties consists entirely of our Guinea Concession in offshore West Africa. We owned a 77% participating interest in our Guinea Concession prior to the sale of a 40% gross interest to Tullow which closed on December 31, 2012. We now own a 37% interest in the Concession.

Guinea Concession

We have been conducting exploration work related to the area off the coast of Guinea since 2002. On September 22, 2006, we, acting through SCS, entered into the PSC with Guinea. Under that agreement, we were granted certain exclusive contractual rights by Guinea to explore and exploit offshore oil and gas reserves, if any, off the coast of Guinea. We are conducting our current work in Guinea under the PSC, as amended on March 25, 2010.

The PSC Amendment clarified that we retained a Contract Area of approximately 25,000 square kilometers, which is approximately equivalent to 9,650 square miles or 30% of the original Contract Area under the PSC, following a December 31, 2009 relinquishment of approximately 70% of the original Contract Area. The PSC Amendment requires that the Consortium relinquish an additional 25% of the retained Contract Area by September 30, 2013. Under the terms of the PSC Amendment, the first exploration period ended and the Consortium entered into the second exploration period on September 21, 2010. The second exploration period runs until September 2013, may be renewed to September 2016 and may be extended for one (1) additional year to allow the completion of a well in process and for two (2) additional years to allow the completion of the appraisal of any discovery made. The Consortium sent a notice to the Government of Guinea of our intention to renew the second exploration period to September 2016 and the coordinates of the area to be relinquished.

The PSC Amendment required the drilling of an exploration well, which had to be commenced by the year-end 2011, to a minimum depth of 2,500 meters below seabed. This requirement was satisfied with the drilling of the Sabu-1 well which was commenced during October of 2011 and reached the minimum depth of 2,500 meters below the seabed in February of 2012. The Consortium is required to drill an additional exploration well, which is to be commenced by the end of September 2016, to a minimum depth of 2,500 meters below seabed. The PSC Amendment requires the expenditure of $15 million on each of the exploration wells ($30 million in the aggregate). The Consortium is also required to acquire a minimum of 2,000 square kilometers of 3D seismic by September 2013 with a minimum expenditure of $12 million. This requirement was satisfied with the first 3D seismic survey acquired in 2010. Fulfillment of work obligations exempts us from expenditure obligations and exploration work in excess of minimum work obligations for each exploration period may be carried forward to the following exploration period.

Under the PSC Amendment, Guinea may participate in development of any discovery at a participating interest of up to 15% of costs being carried for its share. The cost of that carry is to be recovered out of 62.5% of Guinea's share of cost and profit oil. The PSC Amendment removed the right of first refusal held by us covering the relinquished acreage under the original PSC. The PSC Amendment clarified that only those eligible expenditures, which were made following the date the PSC was signed, on September 22, 2006, are eligible for cost recovery. We are required to establish an annual training budget of $200,000 for the benefit of Guinea's oil industry personnel, and we are also obligated to pay an annual surface tax of $2.00 per square kilometer on our retained Concession acreage. The PSC Amendment also provides that should the Guinea government note material differences between provisions of the PSC Amendment and international standards or the Petroleum Code, the parties will renegotiate the relevant articles.

In July 2013, a proposal was submitted for a Second Amendment to the PSC (the "Second PSC Amendment") to the Government of Guinea formally adding Tullow as a Contractor to the PSC as well as addressing other administrative issues.

Under the PSC and PSC Amendment our Guinea Concession is subject to a 10% royalty interest to Guinea. Of the remaining 90% of the first production, we will receive 75% of the revenue for recovery of the cost of operations, and Guinea will receive 25%.

After recovery cost of operations, revenue will be split as outlined in the table below:

Daily production (b/d)

From 0 to 2,000	25	%	75	%
From 2,001 to 5,000	30	%	70	%
From 5,001 to 100,000	41	%	59	%
Over 100,001	60	%	40	%

The Guinea Government may elect to take a 15% working interest in any exploitation area.

In May 2010, the government of Guinea issued a Presidential Decree approving the PSC, as amended for the sale of the 23% participating interest to Dana, and again in December 2012 for the sale of a 40% gross interest to Tullow.

Sale of Interest to Tullow

On December 31, 2012, our wholly owned subsidiary, SCS, closed a sale to Tullow of a 40% gross interest in the Concession. As consideration, SCS received $27 million from Tullow as reimbursement of past costs of SCS in the Concession and, as additional consideration, Tullow agreed to: (i) pay SCS's participating interest share of future costs associated with the drilling of an exploration well in at least 2,000 meters of water in the deep water fan area of the Concession, up to a gross expenditure cap of $100 million; and (ii) pay SCS's share of costs associated with an appraisal well of the initial exploration well, if drilled, subject to a gross expenditure cap on the appraisal well of $100 million. Tullow is obligated to pay its 40% participating interest share of costs associated with the Concession as of November 20, 2012, the date of execution of the purchase and sale agreement. Tullow will begin to pay SCS's costs attributable to the Concession at the earlier of (i) the commencement of the next exploration period, September 21, 2013, or (ii) should a decision be made to begin spending on an exploration well prior to committing to the next exploration period, the date of such spending. Tullow will continue to pay SCS's costs, subject to the gross expenditure cap of $100 million, until 90 days following the date on which the rig contracted to drill the exploration well moves off the well location. Tullow agreed to use reasonable endeavors to provide for the commencement of drilling of the exploration well not later than April 1, 2014. The $27 million payment was received by us on December 31, 2012 and was recorded as a reduction in unproved oil and gas properties, net of transaction costs of approximately $3.3 million.

In connection with the transaction, SCS, Tullow and Dana entered into a Joint Operating Agreement Novation and Amendment Agreement reflecting that as a result of the sale to Tullow, the interest of the parties in the Concession are SCS 37%, Dana 23%, and Tullow 40%, and that Tullow will be bound by the PSC and the Joint Operating Agreement previously entered into between SCS and Dana. Tullow will assume all the respective liabilities and obligations of SCS in respect of the assigned 40% interest. SCS and Tullow executed a Deed of Assignment. The Assignment was approved by Guinea's Ministry of Mines and Geology by issuing an Arrêté on December 27, 2012 which formally authorized our assignment of a participating interest to Tullow. SCS, Dana and Tullow have elected Tullow as the Operator of the Concession beginning April 1, 2013.

AGR Peak Well Management Limited

Effective November 30, 2010, we contracted with AGR to manage our exploration drilling project offshore Republic of Guinea to handle well construction project management services, logistics, tendering and contracting for materials as well as overall management responsibilities for the drilling program. On June 21, 2012, our wholly-owned subsidiary, SCS, filed suit against AGR following unsuccessful negotiations to address the cost overruns associated with the Sabu-1 well drilled off the coast of the Republic of Guinea. See additional discussion within Note 11.

CGG Veritas

On September 20, 2011, we entered into an Agreement for the Supply of Marine Seismic Data ("3D Seismic Contract") with CGG Veritas ("Veritas"). The area of the 3D acquisition is just southwest and adjacent to one of the 3D surveys obtained by us in 2010. Under the terms of the 3D Seismic Contract, Veritas agreed to conduct the acquisition phase of a 4,000 square kilometer 3D seismic survey of the area that is subject to our rights, or Concession, to explore offshore Republic of Guinea. Our goal in contracting for the 3D seismic survey is to investigate multiple possible deepwater submarine fans seen on 2D seismic data that was previously obtained by us. The survey commenced in November 2011, using the survey vessel Oceanic Endeavour. The cost for acquiring the survey, processing and other services is expected to total approximately $27.7 million gross. As of June 30, 2013 the Consortium has incurred $27.5 million on a gross basis.

Accounting for oil and gas property and equipment costs

We follow the "full-cost" method of accounting for oil and natural gas property and equipment costs. Under this method, internal costs incurred that are directly identified with exploration, development, and acquisition activities undertaken by us for our own account, and which are not related to production, general corporate overhead, or similar activities, are capitalized. For the years ended June 30, 2013 and 2012, we capitalized $2.7 million and $6.6 million of such costs respectively. Capitalization of internal costs was discontinued April 1, 2013 when Tullow became the operator. Geological and geophysical costs incurred that are directly associated with specific unproved properties are capitalized in "Unevaluated properties excluded from amortization" and evaluated as part of the total capitalized costs associated with a prospect. The cost of unproved properties not being amortized is assessed to determine whether such properties have been impaired. In determining whether such costs should be impaired, we evaluate current drilling results and available geological and geophysical information. Any impairment assessed to unproved properties is added to the cost of proved properties. The unamortized cost of proved oil and gas properties is limited by the Full-Cost Ceiling Test.

We exclude capitalized costs of unevaluated oil and gas properties from amortization. Geological and geophysical information pertaining to the Guinea concession was collected and evaluated and no reserves have been attributed to the Concession. In February 2012, we completed the drilling of the Sabu-1 well, which was determined to be non-commercial. As a result, we evaluated certain geological and geophysical related costs in unproved properties along with the drilling costs of the Sabu-1 well and moved $116.8 million to proved properties. As we have no proved reserves to include in the Full-Cost Ceiling Test, the entire $116.8 million resulted in the full amortization of our proved oil and gas properties. The net costs associated with properties which remain unevaluated were $21.2 million and $39.3 million, as of June 30, 2013 and 2012, respectively. These costs are excluded from amounts subject to amortization.

The following table provides detail of total capitalized costs for our Guinea Concession as of June 30, 2013 and 2012 (in thousands):

	June 30, 2013			June 30, 2012

Oil and Gas Properties:
Proved oil and gas Properties	$	116,753		$	116,312
Unproved oil and gas Properties		14,365			32,469
Other Equipment Costs		6,809			6,809

Total Oil and Gas Properties		137,927			155,590
Less—Accumulated depreciation, depletion and amortization costs		(116,753	)		(116,312	)

Unevaluated properties not subject to amortization	$	21,174		$	39,278

Evaluation activities of these unproved properties are expected to be completed within the next one to three years. As of June 30, 2012, based on our impairment review, we fully amortized $116.3 million of our proved oil and gas properties as a result of the evaluation of our first well drilled. An additional $0.4 million in Sabu-1 well related costs were recognized during the first quarter of fiscal 2013. These costs were capitalized in proved oil and gas properties and fully amortized.

During the year ended June 30, 2013, we incurred $5.4 million of geological and geophysical costs, primarily related to our 3D seismic acquisition and processing work which commenced in November 2011. During the year ended June 30, 2012, we incurred $28.6 million of geological and geophysical costs, primarily related to our 3D seismic acquisition and processing work which commenced in November 2011, and we incurred $90.8 million of other exploration costs for our Guinea Concession during the year ended June 30, 2012, primarily related to the drilling of our first well which commenced in October 2011.

Write-off of Prospective Investment Deposit

We made payments of $5.0 million each in connection with a prospective oil and gas investment on September 20, 2011 and November 15, 2011. The $10.0 million in deposits were to have been credited on the purchase price of the prospective investment. As negotiations terminated without an agreement, we wrote off this deposit. The $10.0 million write off has been included as an operating expense in our Statement of Operations for the year ended June 30, 2012.