2. INVESTMENT IN OIL AND GAS PROPERTIES

Investment in oil and gas properties consists entirely of our Concession in offshore the Republic of Guinea in West Africa. We previously owned a 37% participating interest in our Guinea Concession on June 30, 2016. As part of our settlement with Tullow and Dana, we received their respective 40% and 23% participating interests in the Concession. Following execution of a Second Amendment to the PSC (“Second PSC Amendment”) on September 15, 2016 and receipt of a Presidential Decree on September 21, 2016 we held a 100% ownership of the Concession. On March 30, 2017, we executed a Farmout Agreement with SAPETRO. Under the terms of the Farmout Agreement, upon closing of the transaction SAPETRO will receive a 50% participating interest in the PSC in exchange for its commitment to pay 50% of the expenditures associated with the Concession.

In addition to clarifying certain elements of the PSC, we agreed in the Second PSC Amendment to drill one exploratory well to a minimum depth of 2,500 meters below the seabed within the PSC Extension Period (the “Extension Well”) with the option of drilling additional wells. Fulfillment of the work obligations exempts us from the expenditure obligations during the PSC Extension Period.

In turn, we retained an area equivalent to approximately 5,000 square kilometers in the Guinea offshore waters and are obliged to provide the Government of Guinea: (1) A parent company guarantee for the well obligation, (2) monthly progress reports and a reconciliation of budget to actual expenditures, (failure to provide the reports and assurances on a timely basis could result in a notice of termination with a 30-day period to cure), and (3) certain guarantees.

Additionally, we agreed to limit the cost recovery pool to date to our share of expenditures in the PSC since 2009 (estimated to be approximately $165,000,000 net to our interest) and begin to move into the territory of Guinea the long lead items we received in the Settlement Agreement that are currently stored in Takoradi, Ghana for the drilling of the Extension Well in 2017. The movement of approximately $1.6 million of the $4.1 million of equipment was started on January 29, 2017 and was completed on February 5, 2017.

The balance of the material still in Ghana will be moved at a later date. Finally, we agreed to allocate and administer a training budget during the PSC Extension Period for the benefit of the Guinea National Petroleum Office of $250,000 in addition to any unused portion of the training program under Article 10.3 of the PSC. The unused portion of the training program is now estimated to be approximately $400,000.

The closing of the Farmout Agreement with SAPETRO is subject to several conditions, including, but not limited to: (i) the receipt of the requisite approvals and consents of the government of the Republic of Guinea, (ii) if required by the Government of Guinea, security in respect of each party’s participating share of the drilling costs, and (iii) subject to the satisfaction of SAPETRO acting reasonably, SCS having obtained cash or committed financings in the amount of up to $15 million to enable it to meet its obligations related to the Fatala-1 well. At closing, SAPETRO and SCS will deliver mutual parent guarantees to secure the obligations under the Farmout Agreement and a joint operating agreement governing the conduct of operations. Each party to the Farmout Agreement may waive certain conditions in whole or in part at any time.

The parties have agreed to close on or before May 31, 2017, unless the Farmout Agreement is previously terminated due to parties’ failure to satisfy the closing conditions, by mutual agreement of the parties, or if either party receives final, unappealable written notice from the Government of Guinea stating that it will not approve the transfer of the farm-in interest, or on certain other conditions.

As more fully described in Note 8, on April 12, 2017 SCS, SAPETRO and Guinea executed a Third Amendment to the PSC (the “Third PSC Amendment”) approving the assignment of a 50% interest in the Concession, subject to the receipt of a Presidential Decree as well as the closing of the Farmout Agreement. We received a Presidential Decree on April 21, 2017.

We follow the “Full-Cost” method of accounting for oil and natural gas property and equipment costs. Under this method, internal costs incurred that were directly identified with exploration, development, and acquisition activities undertaken by us for our own account, and which were not related to production, general corporate overhead, or similar activities, are capitalized. Capitalization of internal costs was discontinued on April 1, 2013 when Tullow became the Operator of the Concession. Following receipt of the Presidential Decree after the signing of the Second Amendment of the PSC on September 15, 2016 we resumed the role of Operator of the Concession and thus capitalization of certain internal, project related costs resumed. For the three and nine-month periods ended March 31, 2017, we capitalized $0.5 million and $2.0 million of such costs, respectively.

Capitalized internal costs of approximately $0.2 million from the quarter ended September 30, 2016 were written off and recorded as Full-cost ceiling test write-down expenses, and capitalized internal costs of approximately $ 1.3 million in the quarter ended December 31, 2016 were written off and recorded as General, administrative and other operating costs.

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 plans and drilling results and available geological and geophysical information. No reserves have been attributed to the Concession.

The following table provides detail of total capitalized costs for the Concession which remain unproved and unevaluated and are excluded from amortization as of March 31, 2017 and June 30, 2016 (in thousands):

	March 31, 2017		June 30, 2016
Oil and Gas Properties:
Unproved properties not subject to amortization	$	4,653	$	—

During the nine-month period ended March 31, 2017, our oil and gas property balance increased by $4.7 million as a result of the fair value of the material received in our settlement with Tullow and Dana. The fair value of the material, for the most part well construction material, at the time of the settlement was approximately $4.4 million, of which we reduced by approximately $0.4 million during the second quarter of fiscal year 2017 based on additional information that we determined reduced the original fair market value. We engaged an independent outside party with expertise in valuing oil and gas equipment to conduct an appraisal and provide a fair valuation determination for our initial recording and reporting purposes.

During the quarter ended December 31, 2016 we impaired $0.8 million of unproved oil and gas property costs capitalized during the second quarter ($0.5 million) and first quarter ($0.3 million) and the internal costs described above. That impairment assessment was based on our liquidity position, and the possibility that we may not reach an agreement with the Government of Guinea regarding the requirement under the PSC to provide a mutually acceptable security of $5.0 million, and the possibility that the Government of Guinea may at any time and without prior notice terminate our Concession.

As of June 30, 2016, at the close of our last fiscal year we fully impaired the $14.3 million of previously capitalized unproved oil and gas property costs. That impairment assessment was based on the continued impasse with Tullow and Dana to resume petroleum operations and drill the next exploration obligation well, which needed to be commenced at that time by the end of September 2016, as well as our inability at the time to get interim injunctive relief from the American Arbitration Association requiring Tullow and Dana to join with SCS in the negotiation of an acceptable amendment to the PSC and to agree to a process that would result in the execution of the amendment which we hoped would have led to the resumption of petroleum operations. Thus, we believed all legal measures to require Tullow and Dana to drill the planned exploration well had been exhausted.