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 37% participating interest in our Guinea Concession prior to the relinquishment of a 40% share owned by Tullow and a 23% interest owned by Dana. On June 2, 2017, we completed the sale of a 50% gross interest to SAPETRO. On September 19, 2017, SAPETRO notified us that it did not wish to participate in the application for the two-year appraisal program and formally withdrew from the Joint Operating Agreement (“JOA”) and PSC on September 20, 2017. On the basis of a five-meter calculated hydrocarbon pay zone encountered in the Fatala-1 well, we applied for a two-year appraisal period on a 100% basis on September 19, 2017 and we are awaiting the decision of the Government of Guinea on our appraisal application. If the Government of Guinea does not approve our appraisal period application, the PSC will have terminated by its terms on September 21, 2017.

Guinea Concession

We have been conducting exploration work related to offshore Guinea since 2002. On September 22, 2006, we entered into the PSC with Guinea. Under that agreement, we were granted certain exclusive contractual rights to explore and exploit offshore oil and gas reserves, if any, off the coast of Guinea. We refer to the rights to the offshore area subject to the Concession as the "Contract Area."

On March 25, 2010, we entered into the First PSC Amendment with Guinea. In May 2010, the government of Guinea issued a Presidential Decree approving the PSC, as amended by the First PSC Amendment. The First PSC Amendment clarified that we retained a Contract Area of approximately 25,000 square kilometers or 30% of the original Contract Area under the PSC. The First PSC Amendment required that an additional 25% of the retained Contract Area be relinquished by September 21, 2013 as part of the renewal of the second exploration period. As of June 30, 2016, the Contract Area was 18,750 square kilometers. Under the terms of the First PSC Amendment, the first exploration period ended and the second exploration period began on September 21, 2010. The second exploration period ran until September 2013, at which point it was renewed to September 2016.

The First PSC Amendment required the drilling of an exploration well, which had to be commenced by year-end 2011 and drilled 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. It also required the acquisition of at least 2,000-square kilometers of 3D seismic data which was satisfied by the 3,600-square kilometer seismic acquisition in 2010-2011. To satisfy the September 2013-2016 work requirement, the Consortium is required to commence drilling of an additional exploration well by the end of September 2016, to a minimum depth of 2,500 meters below seabed. We spent approximately $200 million fulfilling work obligations under the PSC through fiscal 2016.

Under the First 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. It also required the establishment of an annual training budget for the benefit of Guinea's oil industry personnel, and obligated the Consortium to pay an annual surface tax of $2.00 per square kilometer on the retained Concession acreage. The First PSC Amendment further provided that should the Guinea government note material differences between provisions of the First PSC Amendment and international standards or the Petroleum Code, the parties will renegotiate the relevant articles.

On September 15, 2016, we executed the Second PSC Amendment in which we received a one (1) year extension to the second exploration period of the PSC to September 21, 2017 and confirmed that we are the holder of a 100% interest in the Concession following the official withdrawal by Tullow and Dana on August 15, 2016. The Second PSC Amendment became effective upon the receipt of a Presidential Decree on September 22, 2016.

We executed a Second Amendment to the PSC ("Second PSC Amendment") on September 15, 2016, and received a Presidential Decree on September 22, 2016 that gave us a one-year extension to the second exploration period of the PSC to September 22, 2017 ("PSC Extension Period") and became the designated Operator of 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 a projected commencement date of May 2017 and 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 were 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 to Guinea.

For the purposes of calculation for this clause (Article 4 of the PSC), however, only costs spent for services and goods provided in Guinea were to be taken into account until the drilling rig to be used in the drilling of the Extension Well is located in the territorial waters of the Republic of Guinea.

Additionally, we agreed to limit the cost recovery pool to that date to our share of expenditures in the PSC since 2009 (estimated to be approximately $165,000,000 net to our interest). 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 $221,000.

We also agreed to allocate up to a maximum total budget of $120,000 for the actual travel and operating expenses incurred by Guinea for its participation in the management and administration of the Concession, subject to our review of receipts and limited to reimbursement of actual costs. The unused portion of this budget is now estimated to be $22,000. Finally, we agreed that we would make available for the benefit of Guinea a virtual data room containing all seismic data in our possession relating to relinquished areas. We would not be agents of or work on behalf of Guinea, but would provide, at the request of Guinea during the PSC Extension Period, access to the virtual data room to interested third parties.

On March 30, 2017, we entered into the Farm-out Agreement with SAPETRO. On April 12, 2017 SCS, SAPETRO and Guinea executed a Third Amendment to the PSC (the "Third PSC Amendment") that was subject to the receipt of a Presidential Decree and the closing of the Farm-out Agreement. The Presidential Decree was signed on April 21, 2017 approving the assignment of 50% of SCS' participating interest in the Guinea concession to SAPETRO, and confirmed the two companies' rights to explore for oil and gas on our 5,000-square-kilometer Concession offshore the Republic of Guinea. The contract required that drilling operations in relation to the obligation well Fatala-1 (the "Extension Well") were to begin no later than May 30, 2017 and provided that additional exploration wells may be drilled within the exploration period at the companies' option.

The Third PSC Amendment further reaffirmed clear title of SAPETRO and SCS to the Concession as well as amended the security instrument requirements under the PSC. SCS and SAPETRO agreed to joint and several liability to the Government of Guinea in respect to the PSC.

SAPETRO and SCS further agreed that if SCS were unable to pay its share of any Fatala-1 well costs, SAPETRO could elect to pay for a portion of SCS's Fatala-1 well costs such amount so long as SCS is not in default of either the PSC or the Farmout Agreement. In case SAPETRO had made such payments for a share of SCS's costs of, SCS would have been obligated to assign to SAPETRO a 2% participating interest in the Concession for each $1 million of SCS's costs paid by SAPETRO.

On May 21, 2017, drilling operations commenced upon the Pacific Scirocco drillship entering Guinean continental shelf waters.

The Farmout Agreement was completed between the SCS and SAPETRO on June 2, 2017. Pursuant to the terms of the Farmout Agreement, SCS assigned and transferred to SAPETRO 50% of its 100% gross participating interest in the PSC and executed a Joint Operating Agreement. Upon closing, SAPETRO (i) reimbursed SCS its proportional share of past costs associated with the preparations for the drilling of the Fatala-1 well which amounted to $4.4 million, and (ii) agreed to pay its participating interest's share of future costs in the Concession.

On June 5, 2017, SCS received $4.1 million from SAPETRO in accordance with a Preliminary Closing Statement delivered by SCS, thus completing closing of the Farm-out Agreement and the assignment to SAPETRO of the 50% participating interest in the PSC, the parties executed a Joint Operating Agreement governing the conduct of operations, and Hyperdynamics executed a parent guaranty of SCS's obligations as required by the Farm-out Agreement. On June 12, 2017, we delivered to SAPETRO a Final Adjustment Statement with the final calculation of past costs incurred by SCS in the amount of $0.7 million. After final review done by SAPETRO the Final Adjustment Statement was submitted to SAPETRO, under which SAPETRO paid to SCS $0.3 million.

On July 12, 2017, we obtained a letter from the Director General of the National Office of Petroleum of Guinea stating that in the event of an oil discovery at the end of the drilling of the Fatala-1 well, the government would have no objection to granting an additional period of two years to enable us to carry out the work of appraisal on the Concession.

On August 11, 2017, the actual drilling of the Fatala well commenced. The drilling operations were completed on September 8, 2017 and the Fatala-1 well was plugged and abandoned.

We applied to the government of Guinea for a two-year appraisal program of the Concession pursuant to Article 3.7 of our PSC on a 100% basis following SAPETRO’s vote by notice not to participate in the appraisal application. SAPETRO formally exited from the JOA and the PSC on September 20, 2017.

We are awaiting the decision of the Government of Guinea on our appraisal application. There can be no assurance that such application will be approved, or if it is, that it will be on terms acceptable to us. If the Government of Guinea does not approve our appraisal period application, the PSC will have terminated by its terms on September 21, 2017.

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


Daily production (b/d)	Guinea Share		Contractor Share
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.

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 were not related to production, general corporate overhead, or similar activities, are capitalized. 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 “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. If petroleum operations are not commenced soon, our ability to obtain additional financing and our financial condition will be adversely affected, which will likely impact our ability to conduct exploration. No reserves have been attributed to the concession.

We exclude capitalized costs of unproved oil and gas properties from amortization until evaluated. 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 totaling $116.8 million and determined that these properties were subject to the Full-Cost Ceiling Test. As we have no proved reserves to include in the Full-Cost Ceiling Test, the entire $116.8 million resulted in a Full-Cost Ceiling Test write-down of our unproved oil and gas properties. At June 30, 2016, based on our impairment assessment, we fully impaired the $14.3 million of unproved oil and gas properties. This impairment assessment was based on the continued impasse by our members of the Consortium to resume petroleum operations and drill the next exploration obligation well, which needed to be commenced by the end of September 2016, and our inability 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. In fiscal year 2017, we impaired unproven oil and gas properties due to uncertainties surrounding the ability of the Company to continue operations and following the determination of non-commerciality of the Fatala-1 well ultimately fully impaired unproven oil and gas properties.

The following table provides detail of total capitalized costs for our Guinea Concession as of June 30, 2017 and 2016 (in thousands):

Oil and Gas Properties:

Unproved oil and gas Properties