INVESTMENT IN OIL AND GAS PROPERTIES

9 Months Ended

Mar. 31, 2012

INVESTMENT IN OIL AND GAS PROPERTIES

INVESTMENT IN OIL AND GAS PROPERTIES

2. INVESTMENT IN OIL AND GAS PROPERTIES

Investment in oil and gas properties consists entirely of our Guinea Concession in offshore West Africa. We own a 77% participating interest in our Guinea Concession.

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 three and nine month periods ended March 31, 2012, we capitalized $1,969,000 and $5,487,000 of such costs, respectively, as compared to $750,000 and $1,833,000 for the three and nine month periods ended March 31, 2011. Geological and geophysical costs incurred that are directly associated with specific unproved properties are capitalized in “Unproved properties” 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 to the sum of the estimated future net revenues from proved properties (including future development and abandonment costs of wells to be drilled, using period-end prices, discounted at 10%, and the lower of cost or fair value of unproved properties) adjusted for related income tax effects (“Full-Cost Ceiling Test”).

In February 2012, we completed the drilling of the Sabu 1, our first exploratory well in our Guinea Concession, which had hydrocarbon shows and contained indications of trace hydrocarbons, but not in commercial quantities. As a result, we evaluated certain geological and geophysical related costs in unproved properties along with the drilling costs of the Sabu 1 and moved $112,145,000 to proved properties. Since we have no proved reserves to include in the Full-Cost Ceiling Test, the entire $112,145,000 resulted in the full amortization of our proved oil and gas properties.

The following table provides detail of total capitalized costs (in thousands) for our Guinea Concession as of March 31, 2012 and  June 30, 2011:

	March 31, 2012			June 30, 2011
Proved oil and gas Properties	$	112,145		$	—
Unproved oil and gas Properties	37,590			36,200
Geological and geophysical cost	149,735			36,200
Accumulated depreciation, depletion and amortization costs	(112,145		)	—
Unevaluated properties not subject to amortization	$	37,590		$	36,200

We exclude capitalized costs of unevaluated oil and gas properties from amortization. Currently, geological and geophysical information pertaining to the Guinea Concession continues being collected and evaluated and no proved reserves have been attributed to this concession and as a result, net costs associated with such remaining unproved properties of $37,590,000 and $36,200,000 as of March 31, 2012 and June 30, 2011, respectively, are excluded from amounts subject to amortization. Evaluation activities of these unproved properties are expected to be completed within the next one to three years. As of March 31, 2012, based on our impairment review, we fully amortized $112,145,000 of our proved oil and gas properties as a result of the evaluation of our first well drilled.

During the three and nine month periods ended March 31, 2012, we incurred $7,023,000 and $26,731,000 respectively of geological and geophysical costs, primarily related to our second 3-D seismic survey covering approximately 4,000 square kilometers offshore Guinea. The new deep water survey is adjacent to our initial 3,635-square-kilometer 3-D seismic survey (Survey A) acquired in 2010.  We incurred $36,498,000 and $86,803,000 respectively of other exploration costs during the three and nine month periods ended March 31, 2012, primarily related to the drilling of our first well which commenced in October 2011.

Prospective Investment

We made payments of $5,000,000 each in connection with a prospective oil and gas investment on September 20, 2011 and November 15, 2011.  The $10,000,000 in payments were previously classified as a long-term deposit on our balance sheet at December 31, 2011 and were written off during the third quarter as a result of a termination notice by the prospective seller.  The $10,000,000 in deposits were to have been credited on the purchase price of the prospective investment.  As negotiations terminated without an agreement, we have written off this deposit.  The $10,000,000 write off has been included in income from operations within the current period in our Statement of Operations.