INVESTMENT IN OIL AND GAS PROPERTIES

6 Months Ended

Dec. 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 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 .

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 six month periods ended December 31, 2012, we capitalized $1.2 million and $2.3 million of such costs respectively, as compared to $2.0 million and $3.5 million for the three and six month periods ended December 31, 2011 respectively. Geological and geophysical costs incurred that are directly associated with specific unproved properties are capitalized in “Unproved 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. Since 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 $18.9 million and $39.3 million as of December 31, 2012 and June 30, 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 December 31, 2012 and June 30, 2012 (in thousands):  

	December 31, 2012			June 30, 2012
Oil and Gas Properties:
Proved Oil and Gas Properties	$	116,753		$	116,312
Unproved Oil and Gas Properties	12,060			32,469
Other Equipment Costs	6,809			6,809
Total Oil and Gas Properties	135,622			155,590
Less — Accumulated depreciation, depletion and amortization costs	(116,753		)	(116,312		)
Unevaluated properties not subject to amortization	$	18,869		$	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 six month period ended December 31, 2012, we incurred $3.3 million of geological and geophysical costs, primarily related to our most recent 3-D seismic survey covering approximately 4,000 square kilometers offshore Guinea, which is adjacent to a portion of our initial 3,635-square-kilometer 3-D seismic survey (Survey A) acquired in 2010, and to internal costs that are directly identified with exploration, development, and acquisition activities.

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 has 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 sales and purchase 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, 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 has 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 authorizes 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.