-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Kf0BYGQHzXgHCM2zfVmGTIPAdiOljAVGaqZis3ywQR904tzD+fixum2b30HRwX6P O0TVVRnPJeW1jIqGDobG8A== 0000950148-97-000866.txt : 19970410 0000950148-97-000866.hdr.sgml : 19970410 ACCESSION NUMBER: 0000950148-97-000866 CONFORMED SUBMISSION TYPE: 10KSB PUBLIC DOCUMENT COUNT: 20 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970409 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: SABA PETROLEUM CO CENTRAL INDEX KEY: 0000312340 STANDARD INDUSTRIAL CLASSIFICATION: CRUDE PETROLEUM & NATURAL GAS [1311] IRS NUMBER: 470617589 STATE OF INCORPORATION: CO FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10KSB SEC ACT: 1934 Act SEC FILE NUMBER: 001-13880 FILM NUMBER: 97576776 BUSINESS ADDRESS: STREET 1: 17512 VON KARMAN AVE CITY: IRVINE STATE: CA ZIP: 92714 BUSINESS PHONE: 7147241112 MAIL ADDRESS: STREET 1: 17512 VON KARMAN AVE CITY: IRVINE STATE: CA ZIP: 92714 FORMER COMPANY: FORMER CONFORMED NAME: BORDEAUX PETROLEUM CO DATE OF NAME CHANGE: 19910924 FORMER COMPANY: FORMER CONFORMED NAME: BORDEAUX TRADING CO DATE OF NAME CHANGE: 19800716 10KSB 1 FORM 10-KSB 1 U.S. SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D. C. 20549 FORM 10-KSB [ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1996 [ ] TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _____________ to _______________. Commission file number 1-12322 SABA PETROLEUM COMPANY (Name of Small Business Issuer in Its Charter) Colorado 47-0617589 (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 3201 Skyway Drive, Suite 201 Santa Maria, California 93455 (Address of principal executive offices) (Zip Code) ISSUER'S TELEPHONE NUMBER (805) 347-8700 Securities registered under Section 12(b) of the Exchange Act: Title of each class Name of each Exchange on which registered Convertible Senior Subordinated Debentures American Stock Exchange Common Stock, No Par Value American Stock Exchange Securities registered pursuant to Section 12(g) of the Act: None (Title of Class) 1 2 Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. [ X ] YES [ ] NO Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-B is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-KSB or any amendment to this Form 10-KSB. [ ] The Registrant's revenues for its fiscal year ended December 31, 1996 were $33.2 million. At March 25, 1997, 10,625,321 shares of Common stock (the Registrant's only class of voting stock) were outstanding. The aggregate market value of the Common Stock on that date (based upon the closing price on the American Stock Exchange on March 25, 1997 of $18 7/8) held by non-affiliates was approximately $93.7 million. Documents incorporated by reference: Certain portions of the Registrant's definitive proxy statement to be filed with the Commission pursuant to Regulation 14A- Part III, Items 9, 10, 11, and 12. Transitional Small Business Disclosure Format. [ ] YES [ X ] NO 2 3 PART I. ITEM 1. DESCRIPTION OF BUSINESS. General - Development of the Business of Saba Saba Petroleum Company (together with its subsidiaries herein called the "Company" or "Saba") was incorporated in Colorado in 1979 under the name Bordeaux Petroleum Company for the principal purpose of engaging in the energy business. In 1988, Mr. Ilyas Chaudhary (see "Management") acquired approximately 40.7% of the then outstanding stock of Bordeaux. In 1991, Bordeaux acquired Saba Energy of Texas, Incorporated, of which Mr. Chaudhary owned approximately 87%, with the result that Mr. Chaudhary directly and indirectly owned approximately 81.7% of the common stock of Bordeaux, giving Mr. Chaudhary control of Bordeaux. Until the acquisition of Saba Energy of Texas, Bordeaux was essentially a dormant company. After the acquisition of Saba Energy of Texas, the Company grew rapidly to its present configuration, essentially though a series of acquisitions of producing oil and gas properties and the further development of certain of those properties. Prior to the time that Mr. Chaudhary assumed control of Saba, the Company did not make various required filings with the Securities and Exchange Commission (the "Commission"), may not have complied with requisite corporate formalities, in a 1988 amendment to its Articles of Incorporation, may have inadvertently subjected itself to having preemptive rights (the right of an existing shareholder to purchase additional shares to prevent dilution of its ownership percentage), may have not complied with requirements for cumulative voting and may have failed to validly adopt a material amendment to its Articles of Incorporation. The failure to utilize cumulative voting has continued until the 1997 annual meeting. Cumulative voting is essentially the right of a shareholder to multiply the number of shares he possesses by the number of directors to be elected, and cast his votes for one or more directors, thereby affording to the minority shareholders a greater opportunity to elect one or more directors. In addition, the Company has been unable to locate all of its original minutes for meetings of the Board of Directors and shareholders and stock records for much of the time since its incorporation. When these matters were discovered in 1995 (save with respect to cumulative voting, which was discovered in 1997), the Company took certain corrective, ratifying and other actions as described below. In 1995, the Board of Directors ratified and approved all past actions of the Company which may not have complied with all requisite corporate formalities, and the Board and the shareholders of the Company approved a corrective amendment to the Company's Articles of Incorporation restating a provision denying preemptive rights to shareholders, but did not address the issue of cumulative voting. The preemptive rights provision had been inadvertently omitted in a December 1988 amendment to the Articles of Incorporation. The Company has obtained waivers of preemptive rights from the holders of approximately 90% of the affected Common Stock at the time of each issuance. As of the date hereof, no person has asserted a claim against the Company alleging such person has been denied the opportunity to exercise preemptive rights to purchase Common Stock of the Company or to vote cumulatively. The Company believes that the likelihood of a person asserting any such a claim against the Company will diminish with the passage of time. If any person who may have preemptive rights or believing that he or she has been denied the right to cumulative voting, and thereby asserts a claim against the Company with respect to those issues, the Company 3 4 General - Development of the Business of Saba (continued) intends to vigorously defend the matter. If the Company were obligated to issue shares to satisfy the preemptive rights of any person who has not waived his rights, Capco Resources Ltd., ("Capco"), a company controlled by Mr. Chaudhary which, in turn, controls Saba, has agreed to indemnify the Company against any financial impact by either selling or causing to be sold to the Company a like number of shares, at the same price at which the Company is obligated to issue the shares, and has agreed to deliver certificates for 150,000 shares into an escrow to secure its obligation, thereby practically eliminating any potential financial effect on the Company. Since Mr. Chaudhary, either directly or indirectly, would nevertheless been entitled to elect a majority of the Board of Directors of the Company had cumulative voting been implemented in the past, the Company believes that the failure to inform shareholders of the existence of cumulative voting did not have a material effect upon the election of previous Boards. The Company is presenting a proposal to its shareholders at the 1997 Annual Meeting, which if adopted, would result in the change of domicile of the Company from Colorado to Delaware. It is believed that such a change will further reduce the likelihood of any adverse effect from the foregoing. Business of the Company The Company is an independent producer of, and to a lesser extent, explorer for, oil and gas, primarily in the United States, but with significant oil and gas operations in Colombia and Canada. The Company is seeking to acquire exploratory and producing properties in other parts of the world, and is presently in negotiations for the acquisition of a concession in Indonesia. The Company maintains a presence in Indonesia and the Indian subcontinent, and has informal agreements with persons in other countries pursuant to which the Company seeks and evaluates potential oil and gas property acquisitions. The Company also owns an asphalt refinery located in Santa Maria, California, where it currently processes approximately 4,000 BOPD. See "Description of Property - Refining Operations." Incident to its oil and gas operations, the Company has acquired fee interests in real estate. See "Description of Property - Real Estate." Glossary The following are used in this report and the definitions contained herein are provided for the convenience of the reader: Bbl or Barrel - means 42 United States gallons liquid volume, usually used herein in reference to crude oil or other liquid hydrocarbons. BOE or Barrel of Oil Equivalent - converts gas to oil at a ratio of 6,000 cubic feet of gas to one Bbl of oil, usually. Then oil and gas are added together for total BOE. BOPD - means barrels of oil per day. Developed Acreage - means the number of acres of oil and gas leases held or owned, which are allocated or assignable to producing wells or wells capable of production. 4 5 Glossary (continued) Development Well - means a well which is drilled to and completed in a known producing formation adjacent to a producing well in a previously discovered field and in a stratigraphic horizon known to be productive. Exploration - means the search for economic deposits of minerals, petroleum and other natural earth resources by any geological, geophysical, or geochemical technique. Exploratory Well - means a well drilled either in search of a new, as-yet undiscovered oil or gas reservoir or to greatly extend the known limits of a previously discovered reservoir, as indicated by reasonable interpretation of available data, with the objective of completing in that reservoir. Field - means a geographic area in which a number of oil or gas wells produce from a continuous reservoir. MBOE - means one thousand barrels of oil equivalent. MMBOE - means one million barrels of oil equivalent. MBOPD - means one thousand barrels of oil per day. Mcf - means one thousand cubic feet of natural gas. Net Acres or Net Wells - mean the sum of fractional working interests owned in gross acres or gross wells. Operator - means the person or company actually operating an oil or gas well. PV-10 Value - means the present value, employing a 10% discount factor, of the future net revenues computed using current prices from the production of proven reserves. FORWARD LOOKING INFORMATION With the exception of historical information, the matters discussed in this Report contain forward-looking statements that involve risks and uncertainties. Although the Company believes that its expectations are based upon reasonable assumptions, it can give no assurance that its goals will be achieved. Important factors that could cause actual results to differ materially from those in the forward-looking statements contained in this report include the time and extent of changes in commodity prices for oil and gas, increases in the cost of conducting operations, including remedial operations, the extent of the Company's success in discovering, developing and producing reserves, political conditions, including those in Colombia and other areas in which the Company possesses properties, condition of capital and equity markets, changes in environmental laws and other laws affecting the ability of the Company to explore for and produce oil and gas and the cost of so doing and other factors which are described in this report. 5 6 BUSINESS STRATEGY The Company intends to continue to increase its proven reserves, production rates and operating cash flow through a program, which includes the following key elements: Exploitation of existing reserve base. The Company attempts to enhance the reserve potential of its properties through the use of horizontal drilling, 3-D seismic analysis and other modern drilling and recovery technologies. The Company has developed a five-year inventory of potential drilling locations, which includes some 184 locations in California and at least 250 locations in Colombia. From January 1, 1995 through December 31, 1996, the Company completed 20 of 22 development wells. The Company expects that its drilling program will provide it with a cost-effective means to increase proved reserves, production rates and operating cash flow. Acquisition of producing properties with development potential. The Company actively seeks to acquire domestic and international producing properties where it can significantly increase reserves through development drilling and reduce unit of production costs through improved operating controls. The Company believes that its substantial experience and established relationships in the oil and gas industry enable it to identify, evaluate and acquire high potential properties on favorable terms. Selective pursuit of exploration prospects. The Company seeks to significantly expand its reserve base by acquiring high potential exploration prospects. The Company believes opportunities exist outside the United States and Canada to discover significant reserves in known productive regions and to achieve favorable recovery economics. In pursuing exploration opportunities, the Company may seek to limit its direct financial exposure by entering into strategic partnerships. The Company also attempts to reduce its exploration risk by pursuing properties that can be delineated through 3-D seismic surveys. Acquisitions During the period from January 1, 1992 through December 31, 1996, the Company acquired approximately $33.4 million of producing oil and gas properties or properties, which the Company believes, can be restored to production. The properties acquired consisted primarily of leasehold oil and gas interests and in limited instances, both leasehold and fee interests. Amounts expended during 1992 amounted to approximately $6.2 million for properties in Michigan and California; during 1993, approximately $1.2 million for properties in California; in 1994, approximately $800,000 for properties in California, $3.1 for properties in Canada, and $13.0 million for properties in Colombia; during 1995, approximately $2.6 million for properties in Texas and New Mexico; and during 1996, $3.4 million for properties in Louisiana, Texas and Michigan. In addition, during 1994, the Company acquired its refinery property in California at a cost of approximately $1.7 million. See "Description of Property - Refining Operations." The foregoing amounts are gross prices and do not reflect credits (essentially price reductions) for production between the effective date for the acquisition of a property and the closing date. The Company acquired a producing property located in Louisiana in November 1996, at a purchase price of approximately $3.2 million. This property is located in Jefferson Parish, and contains 8 producing oil wells. The Company has no present plans to drill additional wells on the property, but anticipates conducting a 3-D seismic study of the property in the third quarter of 1997, in an attempt 6 7 Acquisitions (continued) to identify additional oil reserves that could be produced from current non-producing wells. In December 1996, the Company entered into an agreement with another oil company granting Saba the right to earn up to a 66.7% interest in 633 gross acres covering a major portion of a field located in Oxnard, California, which the Company believes has significant horizontal drilling potential. The Company will earn this interest if it spends $10 million developing the property over the next two years. The Company has prepared a two-year horizontal well development drilling program for this property, on which it expects to spend $3 million in 1997. There are currently four vertically drilled producing wells in the Oxnard field, which the Company estimates produce approximately 20 BOPD. See "Description of Property - Oxnard Field." In January 1995, the Company acquired a 25% interest in the Velasquez oil field in Colombia, South America at a cost of $1,250,000 from Omimex de Colombia, Ltd. ("Omimex"), a subsidiary of a privately held Fort Worth, Texas company, which, in turn, had acquired a 100% interest from a subsidiary of Texaco, Inc ("Texaco"). In April 1995, the Company and Omimex each acquired one-half of Texaco's (i) 50% interest in the Teca and Nare oil fields, (ii) 100% interest in the Cocorna oil field and (iii)100% interest in the Velasquez-Galan Pipeline (which connects the fields to a refinery). A 50% interest in the Teca and Nare oil fields is owned by Empresa Colombiana de Petroleos ("Ecopetrol"), the Colombian state oil company. All of the above mentioned fields lie in the Middle Magdalena Basin, which is approximately 93 miles northwest of Bogota, Colombia. The Company's net acquisition cost for the Teca and Nare fields and Velasquez-Galan Pipeline was approximately $8.3 million. The Company financed the purchase price in part with loans from affiliates of the Company (see "Certain Relationships and Related Transactions"). The Company's net acquisition cost for the Cocorna field was approximately $533,000. The contract governing the Cocorna field expired in February 1997, and was not renewed. Exploration and Development Activities Prior to 1996 the Company's business strategy dictated the acquisition of producing oil and gas properties which were believed to have potential for increased production through reworking and other remedial operations. In 1996, the Company expanded its strategy to include the exploration and development of oil and gas prospects, including those on leases which the Company had previously acquired. The Company has identified over 430 potential drilling locations on its leases in California and Colombia, which represent an estimated five-year inventory at planned drilling rates. In addition, the Company has identified a number of drilling locations on its domestic properties located outside of California and in Canada. The Company is also pursuing the acquisition of high potential international exploration prospects to enhance its inventory of drilling opportunities. In 1997, the Company expects to spend approximately $43.0 million on selected exploration and development activities, including the drilling of some 36 horizontal wells on its California properties. The Company plans to drill at least one pair (two wells) under the SAGD (steam assisted gravity drainage) process (described two paragraphs later in this section) and more if the results of the process are satisfactory. The success of this process will dictate the 1998 and subsequent years development utilizing SAGD. The Company's exploration and development drilling programs are conducted by its in-house technical staff. These professionals oversee the Company's development strategy, which is designed to maximize the value and productivity of its existing property base through development drilling 7 8 Exploration and Development Activities (continued) and enhanced recovery methods. One of the most important components of the Company's California development program is its use of horizontal drilling technology. In general, a horizontal well is able to encounter a greater portion of a hydrocarbon bearing formation than a comparable vertical well. As a result, in appropriate formations, a horizontal well may generate both higher initial production and greater ultimate recovery of oil and gas than a vertical well. In addition, because a horizontal well can be extended laterally into a reservoir for a significant distance, it can greatly reduce the number of wells required to drain a given formation. The Company believes that the favorable results of its horizontal drilling program are largely attributable to its application of measurement while drilling ("MWD") tools. The use of MWD enables the Company to continuously monitor the location of a drillbit during drilling and guide it into a tightly defined target zone in a particular formation. The Company believes that its MWD enhanced horizontal drilling program will increase reserve recovery and decrease drilling and operating costs. During 1997, the Company intends to employ on a pilot basis initially, a drilling technique known as SAGD, which generally involves drilling two horizontal wells in a parallel configuration, one above the other, and within a short distance of each other. Steam will be injected into the upper wellbore, which creates a steam chamber and heats the oil so that it may flow by gravity to the lower producing wellbore, where it is extracted. This SAGD process has been successfully employed in Canada in thick reservoirs containing viscous oils, similar to those found in certain of the Company's California fields. While this technique is initially more costly than employing a single horizontal well, the Company anticipates that, should the process prove successful in its application to the Company's properties, it will result in increased production rates and recoveries and will result in lower per unit production costs. Should the initial tests of the process prove successful, the Company intends to expand its use of the SAGD process. California Between June 20, 1996 and December 31, 1996, the Company drilled and completed four horizontal wells in the Sisquoc sands of the Cat Canyon field (See "Description of Property - California Properties"). Of the four wells, one has experienced sand intrusion into the wellbore and, if the problem cannot be eliminated, the well will probably be converted to a water injection well. The remaining three wells are producing an average of 500, 350, and 82 BOPD. The Company commenced drilling a fifth horizontal well in December 1996 and completed it in early January 1997. The well is currently producing 52 BOPD. See "Description of Property - Recent Developments". The Company expects to drill an additional 36 horizontal wells (at least one of which will apply the SAGD process, which will include the drilling of an accompanying steam injection well) in California in 1997. These relatively shallow wells are anticipated to cost an average of $500,000 per well and reach an average depth of 2,700 feet with an average lateral extension of approximately 1,400 feet. The Company believes that horizontal drilling will be particularly effective in producing the heavy oil contained in these fields because of the geological formation of the Sisquoc sands. The Company has identified seven distinct horizons in the Sisquoc sands of the Cat Canyon and Gato Ridge fields. To date, the Company has tested only the shallowest horizon to an approximate depth of 2,500 feet. The Company intends to begin selectively exploring additional horizons, the deepest of which is believed to extend to approximately 3,500 feet. The Company has not yet drilled any horizontal wells in its California Central Coast Fields (see "Description of Property" for a description of such fields) outside of Cat Canyon. The Company 8 9 California (continued) believes, however, that horizontal wells drilled in those fields will exhibit similar production characteristics as the horizontal wells it recently drilled in the Cat Canyon field. This view is based upon the Company's analysis of the production histories of existing vertical wells in the Casmalia, Santa Maria, Paris Valley and Oxnard fields and its review of existing geological and geophysical data. Colombia The Company and the operator of the Colombian fields, Omimex, acquired their interests in the Middle Magdelena Basin properties from Texaco in 1995. The Company has a 25% working interest in these properties. Omimex and Ecopetrol, the Colombian state oil company, own the remaining working interests. The exploitation and development of the Teca, Nare, and the adjacent Nare North, Chicala and Moriche fields are governed by association contracts originally entered into between Ecopetrol and Texaco in 1980. Under these contracts, the Company and Omimex each receives 20% of the crude oil produced at these fields, while Ecopetrol receives 40% of production and the Colombian government receives the remaining 20% of production in the form of royalties. Each of the Company and Omimex bears 25% of the production costs at the Teca and Nare fields and Ecopetrol is responsible for the remaining 50% of such costs. The exploitation rights under these contracts governing operations of these five fields expire in 2008 and are not renewable by the Company under their current terms. Depending on future circumstances, the Company may seek an extension of these contracts. All of the Company's crude oil produced at the fields has historically been sold exclusively to Ecopetrol at prices established by Ecopetrol. See "Description of Business -- Marketing of Production." The Company has entered into a joint operating agreement with Omimex under which Omimex operates the Colombia properties. The Company currently anticipates attempting to increase production at the Teca and Nare fields and, in this regard, the assets purchased from Texaco include a drilling rig, tubular goods and related oil field supplies that the Company believes will help facilitate such an increase. Any such increase will require, among other things, the agreement of Omimex and Ecopetrol. The Teca and Nare fields had proved reserves of 7.3 MMBOE of oil at December 31,1996. The Company and Omimex have designed a development program on the Nare North, Chicala and Moriche fields, which includes, pending regulatory approval, the drilling of approximately 250 development wells through the year 2001 at an average depth of 2,900 feet. The Company and Omimex expect to drill the first 35 of these wells in 1997 at a cost to the Company of approximately $2.6 million. This program is based largely on a related 600 well program originally designed and submitted to agencies of the Colombian government by Texaco, the original operator of all of the Company's Middle Magdelena Basin fields. Although the Texaco program was reviewed by Ecopetrol in 1991, it was not implemented due to what the Company believes was Ecopetrol's concern with refinery capacity and oil prices in effect at such time. Advances in drilling technology since 1991 have enabled Omimex and the Company to design a 250 well program which they believe could yield the same ultimate reserve recovery as Texaco's original 600 well program. The ability of Omimex, as operator of the fields, to implement this development program is conditioned upon the prior approval of Ecopetrol and the Colombian Ministry of the Environment. In September 1996, Omimex received the approval of Ecopetrol to initially test production of three 9 10 Colombia (continued) existing wells in the North Nare Field. Prior to commencing such tests, however, Omimex must receive approval from the Colombian Ministry of the Environment. Omimex has submitted its plan to the Ministry of the Environment and is awaiting approval. Once its plan is approved and completed, Omimex will submit the results of such tests to Ecopetrol and the Ministry of the Environment for approval of the 250 well development program. In addition to these development activities, the Company is also pursuing selected exploration opportunities in Colombia. The Company and Omimex are currently seeking to acquire third party 3-D seismic data on the currently producing Velasquez field to determine its exploration potential. Other United States and Canadian Properties On its non-California domestic properties, the Company has working interests in 320 oil wells and 56 gas wells located principally in Alabama, Louisiana, Michigan, New Mexico, Oklahoma and Texas. The Company has successfully completed two of six exploratory and six of six development wells it has drilled on these properties since 1995. The Company plans to increase reserves and production from its non-California domestic properties by performing multiple workovers, 3-D seismic surveys, re-completions and development drilling on selected properties in 1997. The Company has recently completed workovers on two of the wells located in Jefferson Parish that the Company acquired in November, 1996. In Lea County, New Mexico, the Company utilized 3-D seismic surveys to identify the location for a well, which was being drilled at year-end and is currently being completed for production. See "Description of Property - Recent Developments - New Mexico." The Company anticipates spending approximately $5.0 million on the exploration and development of its non-California domestic properties in 1997. The Company's operations in Canada are managed exclusively through Beaver Lake Resources Corporation, in which the Company holds a 74% interest. The Company has focused its exploration and development operations in Canada on low risk oil and gas projects, which are near existing processing and transportation facilities. The Company seeks to reduce drilling risk by utilizing advanced technologies such as 3-D seismic analysis and to increase production and proved reserves through the application of horizontal drilling techniques. Beaver Lake's development activities are currently focused on the Eaglesham area in Northwestern Alberta where it has been acquiring 3-D seismic data in order to confirm the presence of viable drilling locations. The Company has identified four drilling locations on Company-owned lands in addition to three locations on offsetting lands. Beaver Lake has a 100% interest in the Eaglesham area and intends to drill a horizontal oil well in the first half of 1997 and a sour gas well in the second half of 1997. Beaver Lake is also pursuing several other programs including infill drilling to exploit its currently producing fields. The Company plans to spend approximately $5 million on drilling activities on its Canadian properties in 1997. Beaver Lake has a credit facility of $2.6 million separate from that of the Company, on which approximately $1.6 million was outstanding at December 31, 1996. From time to time, the Company and Beaver Lake have discussed the possibility of the Company acquiring all of the shares of Beaver Lake not held by the Company. It is expected that further discussions will occur during 1997. 10 11 GOVERNMENTAL REGULATION AND ENVIRONMENTAL MATTERS United States and Canada - General The production of oil and natural gas is subject to regulation under a wide range of federal, state and local statutes, rules, orders and regulations. Such statutes and regulations require drilling bonds, reports concerning operations and permits for drilling, reworking and re- completion operations. Most areas in which the Company owns and operates properties have regulations governing conservation matters, including provisions for the unitization or pooling of oil and natural gas properties, the establishment of maximum rates of production from oil and natural gas wells and the regulation of the spacing. Many jurisdictions also restrict production to the market demand for oil and natural gas and several states have indicated interest in revising applicable regulations. These regulations may limit the rate at which oil and natural gas could otherwise be produced from the Company's properties. Some jurisdictions have also enacted statutes prescribing ceiling prices for natural gas sold from such jurisdictions. Environmental Regulation and Concerns Various federal, state and local laws and regulations relating to the protection of the environment affect the Company's operations and costs. In particular, the Company's production operations and its use of facilities for treating, processing or otherwise handling hydrocarbons and wastes therefrom are subject to stringent environmental regulation. Compliance with these regulations increases the cost of Company operations. Environmental regulations have historically been subject to frequent change by regulatory authorities and the Company is unable to predict the ongoing cost of complying with these laws and regulations or the future impact of such regulations on its operations. The oil and gas industry is also subject to environmental hazards, such as oil spills, oil and gas leaks, ruptures and discharges of oil and toxic gases, which could expose the Company to substantial liability for remediation costs, environmental damages, and claims by third parties for personal injury and property damage. The Company has not obtained environmental surveys, such as Phase I reports, which would disclose matters of public record and could disclose evidence of environmental contamination requiring remediation, on producing properties outside of Michigan or California in which it holds an interest. The Company has had Phase I or more limited environmental assessments done for substantially all of its California and Michigan oil and gas properties. These assessments disclose environmental impacts typical of oil field operations and certain areas of potentially greater environmental concern, including possible groundwater impact at certain properties in which the Company has up to a 25% working interest and as to which the seller has assumed responsibility for remediation costs in excess of $2 million (up to $500,000 to the Company) that have not been resolved or further investigated. Generally, the assessments are four or five years old and do not disclose any more recent environmental matters. The Company's oil and gas properties as to which environmental assessments have not been performed should also be expected to have environmental concerns typical of oil field operations generally, and may contain other areas of greater environmental concern. See "Description of Business - Governmental Regulation and Environmental Matters - Property Matters." 11 12 OPERATIONAL HAZARDS AND UNINSURED RISKS Oil and gas drilling and producing activities involve hazards such as fire, explosions, blow-outs, pipe failures, casing collapses, unusual or unexpected formations and pressures and environmental hazards such as oil spills, gas leaks, ruptures and discharges of toxic gases, any one of which may result in environmental damage, personal injury and other harm that could result in substantial liabilities to third parties and losses to the Company. The Company maintains insurance against certain risks, which it believes are customarily insured against in the oil and gas industry by companies of comparable size and scope of operations. The insurance that the Company maintains does not cover all of the risks involved in oil exploration, drilling and production and if coverage does exist may not be sufficient to pay the full amount of such liabilities. The Company may not be insured against all losses or liabilities which may arise from all hazards because such insurance is unavailable at economic rates, because of limitations in the Company's insurance policies or because of other factors. Any uninsured loss could have a material and adverse effect on the Company. The Company maintains insurance which covers, among other things, environmental risks; however, there can be no assurance that the insurance the Company carries will be adequate to cover any loss or exposure to liability, or that such insurance will continue to be available on terms acceptable to the Company. REFINERY MATTERS Pursuant to the purchase and sale agreement of the asphalt refinery in Santa Maria, California, the sellers agreed to perform certain remediation and other environmental activities on portions of the refinery property through June 1999. Because the purchase and sale agreement contemplates that the Company might also incur remediation obligations with respect to the refinery, the Company engaged an independent consultant to perform an environmental compliance survey for the refinery. The survey did not disclose required remediation in areas other than those where the seller is responsible for remediation, but did disclose that it was possible that all of the required remediation may not be completed in the five-year period. The Company, however, believes that all required remediation will be completed by the seller within the five year period. Environmental compliance surveys such as those the Company has had performed are limited in their scope and should not be expected to disclose all environmental contamination as may exist. PROPERTY MATTERS In 1993, the Company acquired a producing mineral interest from a major oil company. At the time of acquisition, the Company's investigation revealed that the major oil company had suffered a discharge of diluent (a light oil based fluid which is often mixed with heavier grade crudes). The purchase agreement required the major company to remediate the area of the diluent spill. After the Company assumed operation of the property, the Company became aware of the fact that diluent was seeping into a drainage area, which traverses the property. The Company took action to arrest the contamination and requested that the major company bear the cost of remediation. The major company has taken the position that its obligation is limited to the specified contaminated area and that the source of the contamination is not within the area that the major company has agreed to remediate. The Company has commenced an investigation into the source of the contamination to ascertain whether it is physically part of the area, which the major company agreed to remediate, or is a separate spill area. Investigation and discussions with the major company are ongoing. Should the Company be required to remediate the area itself, the cost to the Company could be significant. The Company has spent approximately $150,000 to date in remediation activities, and present 12 13 PROPERTY MATTERS (CONTINUED) estimates are that the cost of complete remediation could approach $1 million. Since the investigation is not complete, an accurate estimate of cost to be ultimately borne by the Company cannot be made. In 1995, the Company agreed to acquire, for less than $50,000, an oil and gas interest on which a number of oil wells had been drilled by the seller. None of the wells were in production at the time of acquisition. The acquisition agreement required that the Company assume the obligation to abandon any wells that the Company did not return to production, irrespective of whether certain consents of third parties necessary to transfer the property to the Company would be obtained. The Company has been unable to secure all of the requisite consents to transfer the property but nevertheless may have the obligation to abandon the wells. The Company is evaluating its drilling options and is considering whether to continue to attempt to secure the transfer consents. A preliminary estimate of the cost of abandoning the wells and restoring the well sites is approximately $800,000. The Company is currently unable to assess its exposure to third parties if the Company elects to plug such wells without first obtaining necessary consent. The Company, as is customary in the industry, is required to plug and abandon wells and remediate facility sites on its properties after production operations are completed. The cost of such operation will be significant and will occur, from time to time, as properties are abandoned. There can be no assurance that material costs for remediation or other environmental compliance will not be incurred in the future. The incurrence of such environmental compliance costs could be materially adverse to the Company. No assurance can be given that the costs of closure of any of the Company's other oil and gas properties would not have a material adverse effect on the Company. COSTS AND EFFECT OF COMPLIANCE WITH ENVIRONMENTAL LAWS The Company's activities are subject to numerous foreign, United States federal and state laws and regulations concerning the storage, use and discharge of materials into the environment, the remediation of environmental impacts and other matters relating to environmental protection, all of which may adversely affect the Company's operations and the costs of doing business. The operation of the Company's domestic properties and the Company's Colombian fields have been affected by environmental concerns in the past and may be so in the future. The Company believes that the cost of environmental compliance has increased its costs of operations, but cannot quantify the amount of the increase. There can be no assurance that future legislation or administrative regulations or interpretations will not impose stricter requirements that could have an adverse impact on the operating costs of the Company and the oil and gas industry in general. Factors Relating to Colombian Operations and Other Foreign Countries Foreign operations generally involve risks of local currency instability, inflation, the risk of realizing economic currency exchange losses when transactions are completed in currencies other than United States dollars, and the ability to repatriate earnings under existing exchange control laws. Changes in domestic and foreign import and export laws and tariffs can also materially impact foreign operations. The Company's Colombian investment involves the risks of loss of revenue, property and equipment from such hazards as expropriation, nationalization, war, insurrection and other political risks; risks of increases in taxes and governmental royalties; renegotiations of contracts with 13 14 Factors Relating to Colombian Operations and Other Foreign Countries (continued) governmental and quasi-governmental entities; and abrupt changes in governments and in laws and policies governing foreign operations. In addition, Colombia, which has a history of political instability, is currently experiencing such instability due to, among other factors: insurgent guerilla activity, which has affected other oil production and pipeline operations; drug-related violence and actual and alleged drug-related political payments; kidnapping of political and business personnel; the potential change of the national government by means other than a recognized democratic election, labor unrest including strikes and civil disobedience; and a substantial downturn in the overall rate of economic growth. There can be no assurance that such matters, individually or cumulatively, will not materially affect the Company's Colombian properties and operations or by affecting Colombian governmental policy, have an impact on the Company's Colombian properties and operations. UNCERTAINTIES IN UNITED STATES -- COLOMBIA BILATERAL POLITICAL, TRADE AND INVESTMENT RELATIONS Pursuant to the International Narcotics Control Act of 1990, the President of the United States is required to determine whether to certify that Colombia has cooperated with the United States, or taken adequate steps on its own, to achieve the goals of the United Nations Convention Against Illicit Traffic in Narcotic Drugs and Psychotropic Substances. In 1995, 1996 and 1997 the President did not certify Colombia. The 1995 de-certification was later subject to a so-called "national interest" waiver, effectively nullifying its statutory effects. Based on the 1996 Presidential de-certification, the United States imposed substantial economic sanctions on Colombia, including the withholding of bilateral economic assistance, the blocking of Export-Import Bank and Overseas Private Investment Corporation loans and political risk insurance, and the entry of United States votes against multilateral assistance to Colombia in the World Bank, and the Inter-American Development Bank. It is likely the United States will continue to not certify Colombia for so long as the current Colombian government remains in power. The consequences of continued and successive United States de-certifications of Colombian activities are not fully known, but may include the imposition of additional economic sanctions on Colombia in 1997 and succeeding years. The President also has authority to impose far-reaching economic, trade and investment sanctions on Colombia pursuant to the International Emergency Economic Powers Act of 1978, which powers were exercised against Panama in a dispute over narcotics trafficking activities by the Panamanian government in 1987. Additionally, legislation is now pending before the United States Congress, which would force the President to impose additional, substantial economic and trade sanctions on Colombia in 1997. The Colombian government's reaction to United States sanctions could potentially include, among other things, restrictions on the repatriation of profits and the nationalization of Colombian assets owned by United States entities. Accordingly, imposition of the economic and trade sanctions on Colombia could materially affect the Company. Dependence on Approval by Governmental Agencies The Company, together with Omimex de Colombia, Ltd., an affiliate of Omimex, the operator of the Colombian fields, is seeking to drill up to approximately 250 development wells on its Colombian fields through the year 2001. The ability of the Company to implement this plan is conditioned upon the prior approval of Ecopetrol and the Colombian Ministry of the Environment. Omimex has received the approval of Ecopetrol to initially test production of three existing wells. Prior to 14 15 Dependence on Approval by Governmental Agencies (continued) commencing such tests, however, Omimex must receive approval of the Colombian Ministry of the Environment. Application to approve the three well testing plan was submitted to the Colombian Ministry of the Environment in the Summer of 1996, and approval of the plan was initially anticipated to be received in the Fall of 1996. To date, this Ministry has not approved the plan. There can be no assurance that the Ministry of the Environment will approve the three well testing programs. If the three well testing plan is approved and ultimately successful, approvals from both Ecopetrol and the Colombian Ministry of the Environment must then be obtained for the 250 well drilling program. There can be no assurance that such approvals will be obtained. In addition, the Company plans to drill six additional wells in 1997 in the developed acreage in Colombia in an effort to reduce an otherwise anticipated annual 12% production decline rate. Ministry of the Environment approval to commence such drilling was received in March 1997. Failure to obtain such approvals on a timely basis could have a material impact on the Company. See "Description of Property - Recent Developments" for information concerning recent drilling activity. COLOMBIAN OPERATIONS The operation of the Company's properties in Colombia has been affected by environmental concerns in the past and may be so affected in the future. The Colombian Ministry of the Environment issued a resolution (the "Resolution") in June 1995 directing Texaco to correct certain environmental deficiencies allegedly found at the Nare oil field which is now part of the Company's holdings. The Resolution ordered Texaco to temporarily close one of its five production modules (surface vessels through which crude is treated to separate gas and water from oil) and any wells whose crude oil which required processing in that module until Texaco provided the Ministry of the Environment a written timetable setting forth Texaco's scheduled implementation of requisite corrective measures. The temporary closing of the module, which was reopened in the second half of 1996, did not have a substantial effect on total production because substantially all of the crude oil which would otherwise have been processed in the closed module was diverted to other production modules. The Resolution also ordered the opening of an environmental investigation of Texaco's operation in the area. The Company engaged an independent consultant to perform an environmental compliance survey of the Nare oil field. The consultant estimated that the costs of environmental compliance attributable to the Company's interest would not exceed $375,000. Under the terms of the Company's agreement with Texaco, the Company acquired Texaco's interests "as is" and could be subject to liability materially greater than $375,000. In addition, consistent with the independent consultant's survey, Omimex estimates that as much as $250,000 may be expended by the Company to upgrade waste water disposal capabilities, including currently anticipated reinjection of certain produced water. Labor Disturbances All of the workers employed at the Company's Colombian fields belong to one of two unions. Omimex is currently in contract negotiations with one of these unions and has experienced mild organized work disruptions, including insignificant intermittent disruption of production during the course of such discussions. While to date there have been no major union disturbances, there can be no assurance that the Company will not experience such disturbances, including significant production interruption due to sabotage, work slowdowns or work stoppages. 15 16 PRINCIPAL PURCHASERS - MARKETING OF PRODUCTION Volatility of Commodity Prices and Markets Oil and gas prices have been and are likely to continue to be volatile and subject to wide fluctuations in response to any of the following factors: relatively minor changes in the supply of and demand for oil and gas; market uncertainty; political conditions in international oil producing regions; the extent of domestic production and importation of oil in certain relevant markets; the level of consumer demand; weather conditions; the competitive position of oil or gas as a source of energy as compared with other energy sources; the refining capacity of oil purchasers, the effect of regulation on the production, transportation and sale of oil and natural gas, and other factors beyond the control of the Company. MARKETING OF PRODUCTION North America Production Substantially all of the Company's North American crude oil production is sold at the wellhead at posted prices under short-term contracts, as is customary in the industry. In 1996, approximately 21.7% and 11.1% of the Company's North American oil and gas revenues were derived from sales to two purchasers, Petro Source Corporation and Texaco Inc., respectively. The Company believes that the loss of any purchaser would not be material to its operations and that alternative purchasers of production may be readily found. Colombian Production Oil produced from the Company's Middle Magdelena Basin fields, after being sold to Ecopetrol, is processed in a 180 MBOPD government owned refinery in Barrancabermeja, Colombia. The Company believes that the refinery has sufficient unused throughput capacity to satisfy any increase in production, which might be achieved from the Company's Colombian exploration and development program. The refinery is connected to the Company's Colombian fields through the 118 mile Velasquez-Galan Pipeline. The pipeline is currently operating at approximately 12,000 BOPD (together with 18,000 Bbls of diluent per day) and has the capacity to carry approximately 20,000 BOPD (together with 30,000 Bbls of diluent per day). Accordingly, significant capacity exists for additional throughput. The Company owns a 50% interest in the Velasquez-Galan Pipeline and is working with Omimex, the owner of the remaining 50% interest, to explore the feasibility of extending it to an export terminal on the Colombian coast. The pipeline currently generates approximately $65,000 in monthly net revenues to the Company, and the Company expects the pipeline to generate similar revenues in 1997. LIMITED MARKET FOR SALE OF COLOMBIAN PRODUCTION All of the Company's oil production in Colombia is, and, as a practical matter, can be, sold only to Ecopetrol, which also owns a 50% working interest in the Teca and Nare fields. The Company's Colombian oil production accounted for 40.9% of total oil and gas revenues for the year ended December 31, 1996 and 24.2% of total oil and gas revenues in 1995. Ecopetrol has the power to determine the prices that the Company will receive for all oil produced in Colombia. Prices received from the sale of oil and gas produced at the Company's Colombian properties are determined by formulas set by Ecopetrol. The formula for determining the price paid for crude oil produced at the 16 17 LIMITED MARKET FOR SALE OF COLOMBIAN PRODUCTION (CONTINUED) Company's Teca and Nare fields is based upon the average of specified fuel oil and international crude oil prices, which average is then discounted relative to the price of West Texas Intermediate crude oil. The formula is expected to be adjusted again in February 1999. There can be no assurance that Ecopetrol will not decrease the prices it pays for the Company's oil in the future. A material decrease in the price paid by Ecopetrol would have a material adverse effect on the Company's future operations. COMPETITION The oil and gas industry is highly competitive. Many of the Company's current and potential competitors have greater financial resources and a greater number of experienced and trained managerial and technical personnel than the Company. There can be no assurance that the Company will be able to compete effectively with such firms. Saba's operations are largely dependent upon its ability to acquire reserves of oil and gas in commercial quantities. The general competitive conditions in the oil and gas industry in which the Company operates have been and are expected to continue to be intense. Saba has experienced, and will continue to encounter, strong competition from other parties attempting to acquire oil and gas properties, either directly or through the acquisition of entities owning mineral resources. EMPLOYEES As of December 31, 1996, the Company employed 94 persons in the operation of its business, 44 of who were administrative employees. The Company has not entered into any collective bargaining agreements with any unions and believes that its overall relations with its employees are good. Omimex, the operator of the Company's Colombian fields, has experienced minor organized work disruptions from its union employees. See "Description of Business -- Colombian Operations -- Labor Disturbances." ITEM 2. DESCRIPTION OF PROPERTY The proved developed and undeveloped oil and gas reserve figures presented in this report are estimates based on reserve reports prepared by independent petroleum engineers. The estimation of reserves requires substantial judgment on the part of the petroleum engineers, resulting in imprecise determinations, particularly with respect to new discoveries. Estimates of reserves and of future net revenues prepared by different petroleum engineers may vary substantially, depending, in part, on the assumptions made, and may be subject to material adjustment. Estimates of proved undeveloped reserves, which comprise a substantial portion of the Company's reserves, are, by their nature, much less certain than proved developed reserves. The accuracy of any reserve estimate depends on the quality of available data as well as engineering and geological interpretation and judgment. Results of drilling, testing and production or price changes subsequent to the date of the estimate may result in changes to such estimates. The estimates of future net revenues in this report reflect oil and gas prices and production costs as of the date of estimation, without escalation, except where changes in prices were fixed under existing contracts. There can be no assurance that such prices will be realized or that the estimated production volumes will be produced during the periods specified in such reports. Since December 31, 1996 (the date of the estimates) and the date of this report, oil and gas prices have generally declined. At December 31, 1996, the price of West Texas Sweet Intermediate Crude (a benchmark crude) as quoted on the New York Mercantile Exchange, was 17 18 ITEM 2. DESCRIPTION OF PROPERTY (CONTINUED) $25.92 per barrel and the comparable price at March 14, 1997 was $21.28 per barrel. Quotations for the comparable periods for natural gas were $4.22 per Mcf and $2.14 per Mcf, respectively. The prices received by the Company for its crude oil and natural gas have also declined. At such dates, the estimated reserves and future net revenues may be subject to material downward or upward revision based upon production history, results of future development, prevailing oil and gas prices and other factors. A material decrease in estimated reserves or future net revenues could have a material adverse effect on the Company and its operations. Principal Properties The Company's properties are focused on four primary regions: Colombia, California, and the remainder of the United States and Canada. The following describes the material properties of the Company at December 31, 1996. California Properties The Company's operations in California are focused on the California Central Coast Fields which consist of six onshore fields that collectively comprise 4,405 gross (4,367 net) developed acres and 2,974 gross (1,915 net) undeveloped acres. The Company intends to capitalize on the potential of these properties through a drilling program, which includes the drilling of as many as 184 wells. The Company operates all of its wells in the California Central Coast Fields and maintains an average working interest in these wells of 98.8%, and an average net revenue interest of 89.4%. The Company's California Central Coast Fields consist of the Cat Canyon, Gato Ridge, Santa Maria, Casmalia, Paris Valley and Oxnard fields. The Company also has producing properties located in Solano, Kern and Orange counties, California. Cat Canyon Field: The Cat Canyon field, which represented approximately 26.1% of the Company's PV-10 Value at December 31, 1996, is located in Santa Barbara County, California, and covers approximately 1,775 acres. The Company owns a 100% working interest and a 99.7% net revenue interest in 40 producing wells in the Cat Canyon field, which primarily produce heavy grade oil (from 8# to 19#). The Company acquired this property in 1993, at which time the property contained 89 producing and 74 suspended wells. Such wells were drilled vertically to either the Sisquoc or Monterey formations (lying between approximately 2,400 feet and 3,400 feet and 4,000 feet and 6,600 feet, respectively) and were producing approximately 425 BOPD. In 1996, the Company drilled, completed and tested 4 horizontal wells in the Sisquoc formation of the Cat Canyon field, which have reached an average depth of 2,300 feet with a lateral length of approximately 1,400 feet. These wells cost approximately $500,000 as completed wells. Of the four wells drilled and completed by the Company in 1996, three are considered to be commercial producers, producing approximately 500, 350 and 82 gross BOPD; the fourth well has experienced formation difficulties (See "Description of Business - Exploration and Development Activities - California") and, if not placed on production will be converted to a water injection well. The Company commenced drilling a fifth horizontal well in December 1996 and completed it in early January 1997. The well is currently producing 52 BOPD. See "Description of Property - Recent Developments." The Company anticipates drilling 19 horizontal wells to the Sisquoc formation in 1997 at an average cost of $400,000 for a completed well ($300,000 for a dry hole). Since acquiring the property, the company has increased average daily production from 425 BOPD to 1,125 BOPD. 18 19 California Properties (continued) Gato Ridge Field: The Gato Ridge field, which is proximate to Cat Canyon and represented .2% of the Company's PV-10 Value at December 31, 1996, is located in the Santa Maria Basin and covers approximately 405 acres. The Company owns a 100% working interest and net revenue interests ranging from 83.0% to 100% in seven producing wells in the Gato Ridge field which primarily produce a heavy oil (11#) from the same formations underlying the Cat Canyon field. The existing wells are vertically drilled. The Company anticipates drilling five horizontal wells to the Sisquoc and Monterey formations on this property at an average cost per well of $400,000 ($300,000 for a dry hole) in 1997. Casmalia Field: The Casmalia field, which represented approximately 3.0% of the Company's PV-10 Value at December 31, 1996, is located in the Santa Maria Basin and covers approximately 1,390 acres. The Company owns a 100% working interest and a net revenue interest of 83.0% in 36 producing wells in the Casmalia field which primarily produce a heavy oil (13#) from the Monterey formation. The Company anticipates drilling three horizontal wells at an average cost of $550,000 for a completed well ($450,000 for a dry hole) in 1997. Santa Maria Field: The Santa Maria field, which represented approximately 1.9% of the Company's PV-10 Value at December 31, 1996, is located in the Santa Maria Basin and covers approximately 836 acres. The Company owns working interests ranging from 90.0% to 100.0% and net revenue interests ranging from 75.0% to 96.7% in 13 wells in the Santa Maria field which primarily produce heavy oil (13#). Wells in this field produce from the Pt. Sal, Monterey and Franciscan formations, which generally lie between 1,700 and 6,000 feet. The Company anticipates drilling two horizontal wells at an average cost per well of $400,000 ($300,000 for a dry hole) in 1997. Paris Valley Field: The Paris Valley field is located in Monterey County, California. The property, which was leased by the Company in 1996, covers approximately 1,200 undeveloped acres. The Company owns a 100% working interest and a net revenue interest of 87.5% in this property. There are currently no producing wells in the Paris Valley field. The Company anticipates drilling four horizontal wells at an average cost of $400,000 for a completed well ($300,000 for a dry hole) in 1997. Oxnard Field: The Oxnard field, which represented approximately 4.0% of the Company's PV-10 value at December 31, 1996, is located in Ventura County, California. This field produces a highly viscous oil from the Vaca Tar Sands, which is a formation in excess of two hundred feet thick and is found at depths of between 1,950 and 2,400 feet. The reservoir is highly porous (35%) and permeable (1,800 md.). The oil is heavy (6# - 8#) and is highly viscous. Consequently, steam injection is necessary to heat the oil and reduce its viscosity, permitting it to flow readily through the well bores. In existing operations, the former operator generates steam at the surface and injects it into the producing formation. The heat permeates the formation, and the operator then pumps the oil in a conventional manner. Because of the use of steam, operations are comparatively expensive while the price received for the oil is relatively low. Produced water is disposed of in wells on-site and operated by the operator. The field is equipped with two steam generators, a large capacity (9,300 barrels) tank farm, disposal wells, fresh water source wells and all other equipment needed for steam operations on this property. There are currently four producing wells in the Oxnard field. The Company is currently developing a comprehensive horizontal drilling program to expand the current production base. The Company anticipates drilling one pair of SAGD wells, consisting of two horizontal wells, in addition to other vertical and horizontal wells, at a total cost 19 20 California Properties (continued) of approximately $3 million in 1997. Richfield East Dome Unit (REDU): The REDU unit, which represented approximately 3.4% of the Company's PV-10 value at December 31, 1996, is located in Orange County, California and covers approximately 420 acres. The Company is operator of this unit and owns a working interest of 50.6% and a net revenue interest of 40.8%. The unit is under waterflood and contains approximately 68 producers, 39 shut-in wells and 54 water injection wells. The Company has no plans to drill wells on this property in 1997. North Belridge Field: The North Belridge field, which represented approximately 1.7% of the Company's PV-10 value at December 31, 1996 is located in Kern County, California and is operated by another oil company. The Company owns 270 gross (135 net) acres of oil and gas leases in the North Belridge field, on which there are located 40 gross (20 net) producing oil wells. The Company owns a 50.0% working interest and net revenue interests ranging from 38.1% to 43.8% in the wells. The Company has no plans to drill wells on this property during 1997. Other: The Company owns other producing properties located principally in Solano and Orange counties, California, which in the aggregate, represented approximately 4.5% of the Company's PV-10 Value at December 31, 1996. Colombia Properties The Company's Colombian operations are concentrated on six fields, covering 6,769 gross (1785 net) developed acres and 5,719 gross (1,430 net) undeveloped acres, in the Middle Magdelena Basin region of central Colombia, approximately 93 miles northwest of Bogota. Daily production from the three producing fields attributable to the Company's interest averaged 2.7 MBOE for the quarter ended December 31, 1996 and proved reserves attributable to the Company's interests in Colombia at December 31, 1996 were 9.6 MMBOE. The Company's Teca and Nare fields represented approximately 27.2% of the Company's PV-10 Value at December 31, 1996 and produced an average of 1.9 MBOPD for the quarter ended December 31, 1996 from 309 wells covering 2,598 gross (649 net) developed acres. The Company also has an interest in the Velasquez field that accounted for approximately 0.6% of the Company's PV-10 Value at December 31, 1996 and produced an average of 425 BOPD for the quarter ended December 31, 1996 from 66 wells covering 3,800 gross (950 net) developed acres. The Company's interest in the Cocorna field, located adjacent to the Teca and Nare fields, represented approximately 0.03% of the Company's PV-10 Value at December 31, 1996 and produced an average of 330 BOPD for the quarter ended December 31, 1996 from 28 wells covering 371 gross (186 net) developed acres. Wells in these fields produce from the Upper and Lower Miocene age group, which lies between 1,500 and 2,000 feet. Wells generally cost approximately $300,000 as completed wells ($100,000 as dry holes). In conjunction with its purchase of interests in the Teca and Nare fields, the Company also purchased a 50% interest in the 118 mile Velasquez-Galan pipeline, which connects the Teca, Nare, Velasquez, and Cocorna fields to the 180 MBOPD Colombian government-owned refinery at Barrancabermeja. The pipeline transports Company produced oil as well as oil of the Company's working interest partners, and a lighter crude oil supplied by Ecopetrol which acts as a diluent to the heavier crude provided by the Company and its working interest partners. The pipeline generates revenues through collection of tariffs for use of the pipeline. Throughput in December 1996 20 21 Colombia Properties (continued) averaged 31,816 BOPD, of which the Company's share was approximately 2,500 BOPD. Other United States Properties In addition to properties in California, the Company owns producing properties in numerous states, including Alabama, Louisiana, Michigan, New Mexico, Oklahoma, and Texas that collectively represented 16.1% of the Company's PV-10 Value at December 31, 1996. These properties had proved reserves of 2.9 MMBOE at December 31, 1996 and an average daily production of 962 BOE for the three months ended December 31, 1996. Canada Properties The Company's Canadian properties represented approximately 10.3% of the Company's PV-10 Value at December 31, 1996. These Canadian properties produced an average of 573 BOPD for the quarter ended December 31, 1996 from 147 wells covering 57,436 gross (12,943 net) developed acres, most of which are located in the province of Alberta and had proved reserves of 2.7 MMBOE at December 31, 1996. RECENT DEVELOPMENTS California In 1996, the Company commenced the drilling of a fifth horizontal well on its Cat Canyon property. Subsequent to year-end, such well was completed as a commercial producer at a rate of approximately 52 BOPD. New Mexico In December, 1996 the Company commenced drilling of an exploratory well on its Lea County, New Mexico property. The well was completed in the Devonian formation at approximately 14,000 feet in March 1997. During a four-hour test period the oil recovery rate increased from 25 barrels per hour to 100 barrels per hour of 59.7 degree gravity oil with no water and a marginal amount of gas production. The rate at which the well will be produced will be determined on the basis of several other factors and will be significantly lower than the test results. The Company has a 50% working interest and a 37% net revenue interest in this well. The Company has interests in some 2,000 gross acres in the prospect area. Colombia In March 1997, Ministry of the Environment approval was obtained for the drilling of six wells at the Nare field. The operator expects to commence drilling the first well in April 1997. In February 1997, the Articles of Association covering the Cocorna field expired according to its terms and the property interest reverted to Ecopetrol. At such date, the Cocorna field was producing approximately 660 BOPD, of which the Company's share was 330 BOPD. 21 22 Oil and Gas Reserves The Company's proved reserves and PV-10 Value from proved developed and undeveloped oil and gas properties have been estimated by the following independent petroleum engineers: In 1996 and 1995, Netherland, Sewell & Associates, Inc. prepared reports on the Company's reserves in the United States and Colombia and Sproule Associates Limited prepared a report on the Company's Canadian reserves. The estimates of these independent petroleum engineers were based upon review of production histories and other geological, economic, ownership and engineering data provided by the Company. In accordance with SEC guidelines, the Company's estimates of future net revenues from the Company's proved reserves and the present value thereof are made using oil and gas sales prices in effect as of the dates of such estimates and are held constant throughout the life of the properties, except where such guidelines permit alternate treatment, including, in the case of gas contracts, the use of fixed and determinable contractual price escalations. Future net revenues at December 31, 1996 reflect a weighted average price of $17.05 per BOE compared to $11.30 per BOE at December 31, 1995. There have been no reserve estimates filed with any United States federal authority or agency, except that the Company participates in a Department of Energy annual survey, which includes furnishing reserve estimates of certain of the Company's properties. The estimates furnished are identical to those included herein with respect to the properties covered by the survey. The following tables present total proved developed and proved undeveloped reserve volumes as of December 31, 1996 and 1995 and estimates of the future net revenues and PV-10 Value therefrom. There can be no assurance that these estimates are accurate predictions of future net revenues from oil and gas reserves or their present value. Pursuant to industry standards, the Company's proved reserves include all of the proved reserves of Beaver Lake Resources Corporation, a 74% owned subsidiary of the Company. 22 23 Estimated Proved Oil and Gas Reserves
Reserve Category ----------------------------------------------------------------------- Proved Developed Proved Undeveloped Total ----------------------------- -------------------------- ----------------------------------------- 1996 Oil (MBbls) Gas (MMcf) Oil (MBbls) Gas (MMcf) Oil (MBbls) Gas (MMcf) ---- ----------- ---------- ----------- ---------- ----------- ---------- < United States 7,994 11,521 8,157 1,593 16,151 13,114 Canada 710 2,654 211 7,897 921 10,551 Colombia 4,692 - 4,915 - 9,607 - ------- ------- ------- ------ ------- ------- Total 13,396 14,175 13,283 9,490 26,679 23,665 ======= ======= ======= ====== ======= =======
1995 Oil (MBbls) Gas (MMcf) Oil (MBbls) Gas (MMcf) Oil (MBbls) Gas (MMcf) ---- ----------- ----------- ----------- ----------- ----------- ---------- < United States 5,386 8,191 1,177 912 6,563 9,103 Canada 750 2,051 176 8,325 926 10,376 Colombia 4,732 - 311 - 5,043 - ------- ------- ------- ------ ------- ------- Total 10,868 10,242 1,664 9,237 12,532 19,479 ======= ======= ======= ====== ======= =======
The estimated future net revenues (using current prices and costs at the respective years end) and the present value of future net revenues (using a discount factor of 10 percent per annum) before income taxes for Saba's proved developed and proved undeveloped oil and gas reserves as of December 31, 1996 and 1995 are as follows:
Reserve Category ---------------------------------------------------------------------------- Proved Developed Proved Undeveloped Total ----------------------------- ------------------------ ------------------------------------- Present Present Present value of value of value of (Dollars in Future net future net Future net future net Future net future net thousands) revenue revenue revenue revenue revenue revenue ------- ------- ------- ------- ------- ------- 1996 ---- United States $ 89,456 $60,650 $ 66,354 $34,502 $155,810 $ 95,152 Canada 14,136 9,235 12,015 6,843 26,151 16,078 Colombia 31,020 24,258 40,921 20,451 71,941 44,709 -------- ------- -------- ------- -------- -------- Total $134,612 $94,143 $119,290 $61,796 $253,902 $155,939 ======== ======= ======== ======= ======== ======== 1995 ---- United Canada 7,905 5,259 5,463 2,213 13,368 7,472 Colombia 18,695 15,101 1,771 910 20,466 16,011 -------- ------- -------- ------- -------- -------- Total $ 58,294 $41,662 $ 15,231 $ 6,493 $ 73,525 $ 48,155 ======== ======= ======== ======= ======== ========
"Proved developed" oil and gas reserves are reserves that can be expected to be recovered from existing wells with existing equipment and operating methods. "Proved undeveloped" oil and gas reserves are reserves that are expected to be recovered from new wells on undrilled acreage, or from existing wells where a relatively major expenditure is required for recompletion. In recent years, the 23 24 Estimated Proved Oil and Gas Reserves (continued) market for oil and gas has experienced substantial fluctuations, which have resulted in significant swings in the prices for oil and gas. The Company cannot predict the future of oil and gas prices or whether future declines in prices will occur. Any such decline would have an adverse effect on the Company. Net Quantities of Oil and Gas Produced The net quantities of oil and gas produced by the Company during 1996 and 1995 are as follows:
Oil (Bbls) Gas (Mcf) BOE ---------- --------- --- 1996 - ---- United States 803,070 1,089,576 984,666 Canada (1) 134,008 561,042 227,515 Colombia 1,031,207 - 1,031,207 --------- --------- --------- Total 1,968,285 1,650,618 2,243,388 ========= ========= ========= 1995 - ---- United States 710,271 938,577 866,701 Canada (1) 85,800 398,616 152,236 Colombia 430,808 - 430,808 --------- --------- --------- Total 1,226,879 1,337,193 1,449,745 ========= ========= =========
(1) No reduction is made for the minority interest in Beaver Lake Resources Corporation. Average Sales Price and Production Cost The following table sets forth information concerning average per unit sales price and production cost for the Company's oil and gas production for the periods indicated:
Year ended December 31, ----------------------- 1996 1995 ---- ---- Average sales price per barrel of oil equivalent United States $ 15.87 $ 13.04 Canada $ 13.26 $ 10.32 Colombia $ 12.49 $ 9.44 Combined $ 14.05 $ 11.69 Average production cost per barrel of oil equivalent United States $ 8.29 $ 8.57 Canada $ 5.15 $ 5.92 Colombia $ 5.11 $ 5.17 Combined $ 6.51 $ 7.29
24 25 Productive Oil and Gas Wells The following table sets forth certain information at December 31, 1996 relating to the number of productive oil and gas wells (producing wells and wells capable of production, including wells that are shut in) in which the Company owned a working interest:
Oil Gas Total Gross Net Gross Net Gross Net ----- --- ----- --- ----- --- United States 512 195.3 102 52.5 614 247.8 Canada (1) 85 22.6 39 9.0 124 31.6 Colombia 413 112.3 - - 413 112.3 ----- ----- --- ---- ----- ----- 1,010 330.2 141 61.5 1,151 391.7 ===== ===== === ==== ===== =====
(1) No reduction is made for the minority interest in Beaver Lake Resources Corporation. In addition to its working interest, the Company held royalty interests in 86 productive wells in the United States and Canada at December 31, 1996. The Company does not own any royalty interests in Colombia. Oil and Gas Acreage The following table sets forth certain information at December 31, 1996 relating to oil and gas acreage in which the Company owned a working interest:
Developed (1) Undeveloped ------------- ----------- Country Gross Net Gross Net ------- ----- --- ----- --- United States 51,567 14,629 17,034 11,029 Canada (2) 57,436 12,943 48,724 18,935 Colombia 6,769 1,785 5,719 1,430 ------- ------ ------ ------ Total 115,772 29,357 71,477 31,394 ======= ====== ====== ======
(1) Developed acreage is acreage assigned to productive wells. (2) No reduction is made for the minority interest in Beaver Lake Resources Corporation. Title to Properties Many of the Company's oil and gas properties are held in the form of mineral leases. As is customary in the oil and gas industry, a preliminary investigation of title is made at the time of acquisition of undeveloped properties. Title investigations covering the drillsite are generally completed, however, before commencement of drilling operations or the acquisition of producing properties. Generally, the Company's working interest are subject to customary royalty and overriding royalty interests, liens for current taxes and operating agreements and other customary imperfections of title which do not immediately affect operations. Properties acquired by purchases are also often subject to environmental covenants designed to protect the seller from liability for environmental damage. The Company believes that its methods of investigating title to, and acquisition of, its oil and gas properties are consistent with practices customary in the industry and that it has generally satisfactory title to the leases covering its proved reserves. 25 26 Drilling Activity The following table sets forth certain information for each of the years in the two-year period ended December 31, 1996 relating to the Company's participation in the drilling of exploratory and development wells.
1996 1995 -------------------- --------------------- Gross(1) Net(2) Gross(1) Net(2) ----- --- ----- --- Exploratory Oil - - - - Gas 3 1.35 - - Dry (3) 4 1.29 3 0.46 Development Oil 11 7.59 4 1.51 Gas (4) 3 .64 2 0.19 Dry (3) 1 .35 1 0.04 Total Oil 11 7.59 4 1.51 Gas (4) 6 1.99 2 0.19 Dry (3) 5 1.64 4 0.50
(1) A gross well is a well in which a working interest is owned. The number of gross wells is the total number of wells in which a working interest is owned. (2) A net well is deemed to exist when the sum of fractional working interest ownership in gross wells equals one. The number of net wells is the sum of fractional working interests owned in gross wells expressed as whole numbers and fractions thereof. No reduction is made for the minority interest in Beaver Lake Resources Corporation. (3) A dry hole is an exploratory or development well that is not a producing well. (4) Includes two gross (1.01 net) wells and one gross (0.09 net) well drilled in Canada in 1996 and 1995, respectively; all other drilling activity was conducted in the United States. Refining Operations The Company owns an asphalt refinery located in Santa Barbara County, California, which has the capacity to process approximately 8,000 BOPD. Current throughput is approximately 4,000 BOPD. The refinery is located on approximately 389 acres of land held in fee by the Company. Approximately 30 acres of the land are currently used by the refinery and the balance is being held for future expansion or sale. In 1995, the Company entered into a processing agreement with an unaffiliated company pursuant to which the latter company purchases crude (including that produced by the Company), delivers the crude to the refinery, reimburses the Company's out of pocket costs for refining, then markets the asphalt and other refinery products. Profits from the refinery operations (computed after recovery of crude costs and other costs of operations) are generally shared equally by the Company and the unaffiliated company. The processing agreement has a term which ends December 31, 1998. The Company is considering not renewing the processing agreement and assuming the purchasing and marketing operations itself. 26 27 Real Estate The Company from time to time has purchased real estate in conjunction with its acquisition of oil and gas properties in California and plans to continue this practice. In connection with the acquisition of oil and gas producing properties in Santa Maria, California in June 1993, the Company purchased 247 acres in Santa Barbara County for an aggregate purchase price of $65,000 and also agreed to acquire an additional 1,460 acres in Santa Maria for an aggregate purchase price of $400,000, the closing of which was subject to certain conditions and approval of a subdivision map. The closing took place in March 1997. In addition, the Company entered into an agreement to acquire 385 fee acres in Santa Barbara County in 1995 in connection with an acquisition of producing oil and gas properties at a contract purchase price of $400,000, the closing of which took place in June 1995. In addition, the Company acquired approximately 360 acres of undeveloped land in Santa Maria, California in June 1994 in connection with the acquisition of its Santa Maria refinery. The Company plans to retain these real estate holdings for asset appreciation which may include developmental activities at a future date. Office Facilities The Company's executive and California operations offices are located in Santa Maria, California and its accounting offices are located in Irvine, California. The Company maintains regional operating offices in Edmond, Oklahoma, Calgary, Canada and Bogota, Colombia. These offices, consisting of approximately 16,000 square feet, are leased with varying expiration dates to March, 2002, at an aggregate rate of $13,302 per month. The Company owns its office facilities at the asphalt refinery in Santa Maria, which occupy approximately 1,500 square feet of space. ITEM 3. LEGAL PROCEEDINGS The Company is a party to certain litigation that has arisen in the normal course of its business and that of its subsidiaries. In the opinion of management, none of this litigation is likely to have a material effect on the Company's financial statements or operations. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of security holders during the quarter ended December 31, 1996. 27 28 PART II. ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS Price Range of Common Stock and Number of Holders The Common Stock trades on the American Stock Exchange under the symbol "SAB." At March 25, 1997, the Company had 2,877 shareholders of record. The following table sets forth the high and low quarterly closing sales prices of the Common Stock as reported on the American Stock Exchange for the periods indicated. The sales prices set forth below have been adjusted to reflect a two-for-one stock split in the form of a stock dividend paid in December 1996. Prior to May 22, 1995, the Common Stock was traded on the Emerging Company Marketplace of the American Stock Exchange.
LOW HIGH ---------- --------- 1997 First Quarter (through March 25, 1997) . . . . . . . . . . . . . . . . . $12 3/4 $25 1/4 1996 Fourth Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 9 3/8 $27 1/8 Third Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 3/16 9 15/16 Second Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 7/8 8 First Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 9/16 4 3/4 1995 Fourth Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 3 7/16 $ 4 Third Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 3/4 4 1/8 Second Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 1/2 4 1/8 First Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 1/16 2 5/8
On March 25, 1997, the last reported sales price of the Common Stock on the American Stock Exchange was $18 7/8. The Company has never paid cash dividends on its Common Stock and does not anticipate doing so in the foreseeable future. The indenture for the Company's Senior Subordinated Debentures due 2005 (the "Debentures") and the Company's principal revolving credit agreement include provisions which restrict the payment of dividends by the Company. See Note 8 of Notes to Consolidated Financial Statements of the Company. 28 29 ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS The following discussion and analysis should be read in conjunction with the Consolidated Financial Statement of the Company and the Notes thereto and the Selected Financial Data included elsewhere in this statement. General The Company is an independent energy company engaged in the acquisition, exploration and development of oil and gas properties. To date, the Company has grown primarily through the acquisition of producing properties with significant exploration and development potential in the United States, Colombia and Canada. This strategy has enabled the Company to assemble a significant inventory of properties over the past five years. From January 1, 1992 through December 31, 1996, the Company completed 22 property acquisitions which, when measured with associated drilling activities, have added approximately 35.5 MMBOE of proved reserves at an average finding cost of $2.53 per BOE. Between 1992 and 1996, the Company's proved reserve base, production and operating cash flow have increased at compound annual growth rates of 165.8%, 154.8% and 158.6%, respectively. The Company's strategy has expanded to emphasize growth through exploration and development drilling. The Company's revenues are primarily comprised of oil and gas sales attributable to properties in which the Company owns a majority or substantial interest. The Company accounts for its oil and gas producing activities under the full cost method of accounting. Accordingly, the Company capitalizes, in separate cost centers, all costs incurred in connection with the acquisition of oil and gas properties and the exploration for and development of oil and gas reserves. Proceeds from the disposition of oil and gas properties are accounted for as a reduction in capitalized costs, with no gain or loss recognized unless such disposition involves a significant change in reserves. The Company's financial statements have been consolidated to reflect the operations of its subsidiaries, including the Company's approximate 74% ownership interest in Beaver Lake Resources Corporation, a Canadian public company. CRUDE OIL PRICES The price received by the Company for its oil produced in North America is influenced by the world price for crude oil, as adjusted for the particular grade of oil. The oil produced from the Company's California properties is predominantly a heavy grade of oil, which is typically sold at a discount to lighter oil. Heavy oil producers, however, have benefited recently from a decline in the price differential between light and heavy oil and the rise in oil prices generally. The oil produced from the Company's Colombian properties is predominantly a heavy grade of oil. The prices received by the Company for its Colombian produced oil are determined based on formulas set by Ecopetrol. See "Description of Business - "Principal Purchasers - Marketing of Production" and "Limited Market for Sale of Colombian Production." 29 30 RESULTS OF OPERATIONS Results of the Company's oil and gas activities for the years ended December 31, 1996 and 1995 were as follows: Year Ended December 31, 1996
United Total States Canada Colombia ------------ ---------- ----------- ------------ Oil and gas sales $31,520,757 $15,626,884 $3,016,803 $12,877,070 Production costs $14,604,291 $ 8,160,641 $1,171,944 $ 5,271,706 Depletion $ 4,979,361 $ 2,499,423 $ 339,054 $ 2,140,884 General and administrative expenses $ 3,919,435 $ 3,170,240 $ 536,186 $ 213,009 Production: Oil volume (Bbls) 1,968,285 803,070 134,008 1,031,207 Gas Volume (Mcf) 1,650,618 1,089,576 561,042 - Barrels of oil equivalent (BOE) 2,243,388 984,666 227,515 1,031,207 Average per BOE: Sales price $ 14.05 $15.87 $13.26 $ 12.49 Production $ 6.51 $ 8.29 $ 5.15 $ 5.11 Depletion $ 2.22 $ 2.54 $ 1.49 $ 2.08 Proved Reserves: Oil (Bbls) 26,678,925 16,151,058 920,800 9,607,067 Gas (Mcf) 23,664,965 13,113,965 10,551,000 - Barrels of oil equivalent (BOE) 30,623,086 18,336,719 2,679,300 9,607,067
30 31 RESULTS OF OPERATIONS (CONTINUED)
Year Ended December 31, 1995 - ---------------------------- United Total States Canada Colombia ----------- ----------- ---------- ----------- Oil and gas sales $16,941,247 $11,304,023 $1,571,380 $4,065,844 Production costs $10,561,552 $ 7,431,057 $ 901,198 $2,229,297 Depletion $ 2,605,419 $ 1,680,765 $ 143,979 $ 780,675 General and administrative expenses $ 2,005,192 $ 1,711,008 $ 243,386 $ 50,798 Production: Oil volume (Bbls) 1,226,879 710,271 85,800 430,808 Gas volume (Mcf) 1,337,193 938,577 398,616 - Barrels of oil equivalent (BOE) 1,449,745 866,701 152,236 430,808 Average per BOE: Sales price $11.69 $13.04 $10.32 $ 9.44 Production costs $ 7.29 $ 8.57 $ 5.92 $ 5.17 Depletion $ 1.80 $ 1.94 $ 0.95 $ 1.81 Proved Reserves: Oil (Bbls) 12,531,297 6,562,595 926,200 5,042,502 Gas (Mcf) 19,479,049 9,103,049 10,376,000 - Barrels of oil equivalent (BOE) 15,777,805 8,079,770 2,655,533 5,042,502 Year Ended December 31, 1994 - ----------------------------
United Total States Canada ----------- ----------- ------------ Oil and gas sales $12,170,203 $10,403,835 $1,766,368 Production costs $ 7,547,479 $ 6,722,813 $ 824,666 Depletion $ 1,906,203 $ 1,451,265 $ 454,938 General and administrative expenses $ 1,881,852 $ 1,705,699 $ 176,153 Production: Oil volume (Bbls) 737,963 658,016 79,947 Gas volume (Mcf) 1,453,045 979,893 473,152 Barrels of oil equivalent (BOE) 980,137 821,331 158,806 Average per BOE: Sales price $12.42 $12.67 $11.12 Production costs $ 7.70 $ 8.19 $ 5.19 Depletion $ 1.94 $ 1.77 $ 2.86 Proved Reserves: Oil (Bbls) 7,135,731 6,671,341 464,390 Gas (Mcf) 9,791,773 7,225,973 2,565,800 Barrels of oil equivalent (BOE) 8,767,693 7,875,670 892,023
31 32 COMPARISON OF YEARS ENDED DECEMBER 31, 1996 AND 1995 OIL AND GAS SALES Oil and gas sales increased approximately 86.4% to $31.5 million during 1996 from $16.9 million for 1995. Excluding the financial impact of the Colombian properties, which were principally acquired in September 1995, oil and gas sales increased 44.2% during 1996 to $18.6 million from $12.9 million for 1995. Average sales price per BOE for 1996 increased 20.2% to $14.05 from $11.69 per BOE for 1995. Total production increased 46.7% to 2.2 MMBOE in 1996 as compared to 1.5 MMBOE for 1995. The increase in oil and gas production was primarily attributable to the acquisitions of the Company's Colombian properties, which were completed in the second half of 1995, and the Company's drilling and rework activities performed in 1996. OTHER REVENUES Other revenues increased to $1.7 million for 1996 as compared to $753,000 for 1995. This increase was due primarily to net tariffs of $717,000 for use of the Velasquez-Galan Pipeline in Colombia, which the Company acquired in September 1995. In addition, the Company's asphalt refining operation reported processing fee income of $514,000 for 1996 as compared to no processing fee income in 1995. PRODUCTION COSTS Oil and gas production costs increased 37.7% to $14.6 million for 1996 as compared to $10.6 million for 1995, due primarily to the increase in production volumes. Excluding the financial impact of the Colombian properties, the Company's average production costs per BOE decreased 5.9% to $7.70 for 1996 from $8.18 for 1995. For 1996, production costs for the Colombian properties were $5.3 million, or $5.11 per BOE. GENERAL AND ADMINISTRATIVE EXPENSES General and administrative expenses increased to $3.9 million in 1996 from $2.0 million for 1995. The Company's general and administrative expenses per BOE increased 26.8% to $1.75 per BOE for 1996 from $1.38 per BOE in 1995. The overall increase in general and administrative expenses was due principally to the Company's expanded international operations in Canada and Colombia in the third and fourth quarters of 1995, and an increase in employment in its domestic offices to support anticipated future growth. DEPLETION, DEPRECIATION AND AMORTIZATION EXPENSES Depletion, depreciation and amortization expenses increased 96.4% to $5.5 million for 1996 from $2.8 million for 1995. Depletion, depreciation and amortization expenses per BOE increased 26.8% to $2.46 per BOE for 1996 from $1.94 per BOE for 1995. This increase was primarily attributable to the capital costs recorded by the Company in its full cost pools during 1996 and the anticipated future development and abandonment costs to be incurred in connection with the management of its oil and gas properties. 32 33 INTEREST EXPENSE Interest expense increased to $2.4 million in 1996 from $1.4 million for 1995. This increase was due primarily to interest expense totaling $998,000 attributable to the Debentures, which were issued in December 1995. The average debt balance outstanding under the Company's revolving line of credit in 1996 increased 7.0% to $9.2 million from $8.6 million for 1995, due principally to the use of loan proceeds to fund the Company's acquisition and development program in 1996. The weighted average interest rate for the Company's revolving line of credit decreased to 9.0% in 1996 from 9.8% for 1995. OTHER INCOME (EXPENSE) Other income increased approximately 87.0% to $215,000 in 1996 as compared to $115,000 for 1995. The change was due primarily to foreign currency transaction gains of $41,000 and additional interest income of $97,000 realized in 1996. INCOME TAX Income taxes increased 557.3% in 1996 to $2,958,000, compared to $450,000 in 1995. The Company's effective tax rate for 1996 was 44.0%, a decrease from 45.1% in 1995 due to the impact of foreign tax credits. NET INCOME Net income was significantly higher in 1996, increasing 594.7% to $3.8 million from $547,000 for 1995. The increase in net income reflects the effects of increases in oil and gas sales, other revenues, production costs, general and administrative expenses, depletion, depreciation and amortization and interest expense, discussed above. COMPARISON OF YEARS ENDED DECEMBER 31, 1995 AND 1994 OIL AND GAS SALES The Company's total oil and gas sales increased 38.5% to $16.9 million during 1995 from $12.2 million for 1994. The increase was primarily attributable to property acquisitions in Colombia during 1995. The average sales price per BOE decreased 5.9% to $11.69 in 1995 from $12.42 in 1994, due to sales from the Colombian properties, which were acquired in 1995. The average sales price per BOE for United States and Canadian operations was $13.04 and $10.32, respectively, in 1995, an increase of 2.9% and a decrease of 7.2%, respectively, from the comparable 1994 averages. Oil and gas production increased 53.1% to 1.5 MMBOE in 1995 from 980 MBOE for 1994. This increase was due primarily to production from properties acquired during 1995. 33 34 OTHER REVENUES Other revenues decreased 4.0% to $753,000 in 1995 from $784,000 in 1994. This decrease was primarily attributable to a decline in operator fee income of 35.6% to $219,000 in 1995 as compared to $340,000 in 1994, as a result of property dispositions and reduced expenditures on Company-operated properties. Pipeline tariffs received by the Company as a result of its 50% ownership of the Velasquez-Galan Pipeline, which was acquired in September 1995, generated revenue of $439,000 in 1995. A gain on sale of real estate in 1994 provided revenue of $428,000. Rental of facilities and agricultural land at the Company's asphalt refinery produced revenue of $74,000 in 1995 as compared to no revenue in 1994. PRODUCTION COSTS Production costs increased 39.5% to $10.6 million in 1995 from $7.6 million in 1994. This increase was due primarily to increased production volume resulting from the Company's acquisition of its Colombian properties in 1995. From the acquisition dates of the Velasquez field (January 1995) and the Teca and Nare fields (September 1995), the Company incurred production costs of $2.2 million in 1995 in such fields. The Company's production costs per BOE decreased 5.3% to $7.29 in 1995 from $7.70 in 1994. GENERAL AND ADMINISTRATIVE EXPENSES General and administrative expenses increased 5.3% to $2.0 million in 1995 from $1.9 million in 1994. The increase was due principally to expenses incurred in connection with the Company's refinery operations which began in the second quarter of 1995, the Company's Colombian operations, which began in the first quarter of 1995, and hiring of additional personnel in the fourth quarter of 1995 for the Company's Canadian operations. The Company's general and administrative expenses per BOE decreased 27.7% to $1.38 in 1995 from $1.91 in 1994. DEPLETION, DEPRECIATION AND AMORTIZATION EXPENSES Depletion, depreciation and amortization expenses increased 40.0% to $2.8 million in 1995 as compared to $2.0 million in 1994. This increase was primarily attributable to producing property acquisitions in Colombia in 1995. Depletion, depreciation and amortization expenses per BOE decreased 6.7% to $1.94 per BOE for 1995 from $2.08 per BOE for 1994. INTEREST EXPENSE Interest expense increased 120.8% to $1.4 million in 1995 from $634,000 in 1994, due principally to the Company's increased bank borrowings under its revolving credit facility. The average debt balance outstanding under the Company's revolving credit facility in 1995 increased 50.9% to $8.6 million as compared to an average debt balance of $5.7 million in 1994. This increase was due principally to loan proceeds used to fund producing oil and gas property acquisitions, which closed during 1995. The weighted average interest rate for the Company's revolving credit facility increased to 9.8% in 1995 from 8.1% in 1994. 34 35 OTHER INCOME (EXPENSE) Other income increased $72,000 to $115,000 in 1995 from income of $43,000 in 1994. In 1995, the Company realized a gain of $125,000 as a result of the issuance of common stock by a subsidiary. In 1994, the Company realized $198,000 in the settlement of litigation, while non-recurring expenses declined to $23,000 in 1995 from $199,000 in 1994. INCOME TAX Income taxes increased 17.2% in 1995 to $450,000, compared to $384,000 in 1994. The Company's effective tax rate for 1995 was 45.1%, up from 43.0% in 1994 due to higher tax rates applicable to the Company's foreign operations. NET INCOME Net income increased 7.5% to $547,000 in 1995 from $509,000 in 1994. This increase reflected the effects of increases in oil and gas sales, production costs, general and administrative expenses, depletion, and depreciation and amortization and interest expense as discussed above. LIQUIDITY AND CAPITAL RESOURCES Since 1991, the Company's strategy has emphasized growth through the acquisition of producing properties with significant exploration and development potential. The Company recently expanded its focus to emphasize drilling, enhanced recovery methods and increased production efficiencies. During the past five years, the Company financed its acquisitions and other capital expenditures primarily though secured bank financing, the creation of joint interest operations and production payment obligations, and sales of Common Stock and the Debentures. Supplemental cash and working capital are provided through internally generated cash flows, secured bank financing and debt and equity financing. During 1995 and 1996, the Company used a combination of secured bank financing, the proceeds from the sale of the Debentures and internally generated cash flow to fund its acquisitions and other capital expenditures, which included $16.3 million for acquisitions of producing properties in California, Colombia, Canada, New Mexico, Texas and Louisiana. In December 1995 and February 1996, the Company realized $9.2 million and $1.4 million, respectively, in net proceeds from the sale of the Debentures. Working Capital. The Company's working capital decreased in 1996 from $2.5 million at December 31, 1995 to $2.4 million at December 31, 1996. This decrease was primarily due to an increase of $2.9 million in accounts receivable, reduced by increases of $1.4 million in income taxes payable and $1.3 million in the current portion of long-term debt, and a net decrease in other current assets and liabilities of $231,000. Operating Activities. The Company's operating activities during 1996 provided net cash flow of $6.9 million. Working capital requirements were responsible for cash outflows of $3.1 million. Cash flows from operating activities provided net cash flow of $1.7 million in 1995. 35 36 LIQUIDITY AND CAPITAL RESOURCES (CONTINUED) Investing Activities. Investing activities during 1996 resulted in a net cash outflow of $10.7 million. Of this amount, oil and gas property acquisition, development and exploration expenditures totaled $12.2 million. An additional $586,000 was expended for other assets. Reimbursement of a restricted certificate of deposit provided proceeds of $1.8 million. Investing activities during 1995 resulted in a net cash outflow of $17.1 million. Of this amount, oil and gas property acquisition, development and exploration expenditures totaled $12.8 million. An additional $2.7 million was expended for other assets, consisting principally of an oil transmission pipeline and related oil field equipment, which were acquired in connection with a property acquisition in Colombia. Financing Activities. Financing activities during 1996, which provided net cash flow of $3.9 million, consisted principally of activity on the Company's revolving credit facility and proceeds from the sale of the Debentures, net of related financing costs. Proceeds from the exercise of options, sale of stock and contributed capital provided cash inflows in the amount of $435,000 during 1996. Financing activities during 1995, which provided net cash flow of $15.2 million, consisted principally of activity on the Company's revolving line of credit, proceeds from the sale of the Debentures, net of related costs, in the amount of $9.2 million, a loan from the Company's parent company of $1.6 million, and retirement of a $606,000 note payable that was outstanding at December 31, 1994. Advances from affiliated companies in the amount of $204,000 were used to partially fund the note payable payoff. Proceeds from the exercise of options, sale of stock and contributed capital provided cash inflows in the total amount of $1.1 million in 1995. Credit Facilities. In September 1993, the Company established a reducing, revolving line of credit with Bank One, Texas, N.A. to provide funds for the retirement of a production note payable, the retirement of other short-term fixed rate indebtedness and for working capital. At December 31, 1996, the borrowing base under the credit agreement was $13.8 million, subject to a monthly reduction of $250,000, of which $12.1 million was outstanding. The Company also has available from Bank One, Texas, N.A. a commitment for a term credit facility of as much as $4.0 million to fund development projects in the United States, of which $450,000 was outstanding as of December 31, 1996. On February 7, 1996, underwriters for the Company's Debenture offering exercised their overallotment option, resulting in net proceeds to the Company of $1.4 million, a portion of which was utilized to reduce the outstanding balance under the Company's revolving line of credit. Effective March 6, 1996, the Company's Canadian subsidiary converted its term loan to a demand revolving reducing loan. Outstanding debt at December 31, 1996 for this credit facility was $1.6 million. Effective February 13, 1997, the borrowing base of this facility was increased to $2.6 million. Reductions to the maximum principal amount available under the loan will be reviewed on or before July 1, 1997. The Company's budget for capital expenditures for 1997 is $53.9 million. The expenditures will be made primarily for the development of existing properties. Additional capital expenditures may be made for acquisitions of producing properties, both domestically and internationally. The Company is currently in negotiation with Pertamina, the Indonesia state-owned oil company regarding an exploration block on the island of Java. The initial commitment including cash bonus, seismic and drilling costs for a period of up to three years, is $19 million. At this time, the Company has no 36 37 LIQUIDITY AND CAPITAL RESOURCES (CONTINUED) agreements regarding any other significant acquisitions. The amount of capital expenditures will change during future periods depending on market conditions, results of the Company's development drilling program and other related economic factors, including the price of oil and natural gas. The funds available (including those from credit lines) for anticipated capital expenditures will be affected by prices for oil and natural gas, results of the Company's development drilling program and other factors beyond the control of the Company. IMPACT OF INFLATION The price the Company receives for its oil and gas has been impacted primarily by the world oil market and the domestic market for natural gas, respectively, rather than by any measure of general inflation. Because of the relatively low rates of inflation experienced in the United States in recent years, the Company's production costs and general and administrative expenses have not been impacted significantly by inflation. NEW ACCOUNTING STANDARDS In 1997, the Company will adopt SFAS No. 125, "Accounting for Transfers and Servicing Financial Assets and Extinguishment of Liabilities." Management does not believe that the adoption of this accounting standard will have a material impact on the financial statements of the Company. In 1997, the Company will adopt Statement of Position ("SOP") 96-1, "Environmental Remediation Liabilities." Management does not believe that the adoption of the provisions of this SOP will have a material impact on the financial statements of the Company. ITEM 7. FINANCIAL STATEMENTS The following financial statements and supplementary data of the Company are included as part of this Form 10-KSB following the signature page:
Page ---- Report of Independent Accountants F-1 Consolidated Balance Sheets as of December 31, 1996 and 1995 F-2 Consolidated Statements of Income, years ended December 31, 1996 and 1995 F-3 Consolidated Statements of Stockholders' Equity, years ended December 31, 1996 and 1995 F-4 Consolidated Statements of Cash Flows, years ended December 31, 1996 and 1995 F-5 Notes to Consolidated Financial Statements F-6 - F-24
37 38 ITEM 7. FINANCIAL STATEMENTS (CONTINUED)
Page ---- Supplemental Information About Oil and Gas Producing Activities (Unaudited) F-25 - F-29
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS: COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT Incorporated by reference to the Company's Proxy Statement to be filed with the Securities and Exchange Commission in connection with the Company's 1997 annual meeting. ITEM 10. EXECUTIVE COMPENSATION Incorporated by reference to the Company's Proxy Statement to be filed with the Securities and Exchange Commission in connection with the Company's 1997 annual meeting. ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Incorporated by reference to the Company's Proxy Statement to be filed with the Securities and Exchange Commission in connection with the Company's 1997 annual meeting. ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Incorporated by reference to the Company's Proxy Statement to be filed with the Securities and Exchange Commission in connection with the Company's 1997 annual meeting. 38 39 ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
EXHIBIT NO. DESCRIPTION OF ITEM - ---------------- -------------------- 3(i).1 Articles of Incorporation of the Company (filed as exhibit 3(i).1 to the Company's Annual Report on Form 10-KSB for the year ended December 31, 1995 and incorporated herein by reference) 3(ii).1 By-Laws of the Company (filed as an exhibit to the Company's Annual Report on Form 10-K for the year ended December 31, 1982 and incorporated herein by reference) 4.1 Form of Indenture (including form of Debenture) (filed as Exhibit 4.1 to the Company's Registration Statement on Form SB-2 (File No. 33-94678) and incorporated herein by reference) 10.1 Form of Indemnification Agreement entered into with officers and directors of the Company (filed as Exhibit 10.1 to the Company's Registration Statement on Form SB-2 (File No. 33-94678) and incorporated herein by reference) 10.2 Benefit Plans (filed as Exhibit 10.1 to the Company's Quarterly Report on Form 10-QSB for the quarter ended June 30, 1996 and incorporated herein by reference) 10.3 Employment Agreement with Ilyas Chaudhary (filed as Exhibit 10.3 to the Company's Registration Statement on Form SB-2 (File No. 33-94678) and incorporated herein by reference) 10.4 First Amended and Restated Loan Agreement between the Company and Bank One, Texas, N.A. (filed as Exhibit 10.1 to the Company's Quarterly Report Form 10-QSB for the quarter ended September 30, 1996, and incorporated herein by reference) 10.5 Stock Purchase Agreement (filed as an exhibit to the Company's Current Report on Form 8-K dated January 10, 1995 and incorporated herein by reference) 10.6 Processing Agreement between Santa Maria Refining Company and Petro Source Refining Corporation (filed as Exhibit 10.6 to the Company's Registration Statement on Form SB-2 (File No. 33-94678) and incorporated herein by reference) 10.7 Agreement among Saba Petroleum Company, Omimex de Colombia, Ltd. and Texas Petroleum Company to acquire Teca and Nare fields (filed as Exhibit 10.7 to the Company's Registration Statement on Form SB-2 (File No. 33-94678) and incorporated herein by reference) 10.8 Agreement among Saba Petroleum Company, Omimex de Colombia, Ltd. and Texas Petroleum Company to acquire Cocorna Field (filed as Exhibit 10.8 to the Company's Registration Statement on Form SB-2 (File No. 33-94678) and incorporated herein by reference) 10.9 Agreement among Saba Petroleum Company and Cabot Oil and Gas Corporation to acquire Cabot Properties (filed as Exhibit 10.9 to the Company's Registration Statement on Form SB-2 (File No. 33-94678) and incorporated herein by reference) 10.10 Agreement among Saba Petroleum Company, Beaver Lake Resources Corporation and Capco Resource Properties Ltd. (filed as Exhibit 10.10 to the Company's Registration Statement on Form SB-2 (File No. 33-94678) and incorporated herein by reference) 10.11 Amendment to Agreement among the Company, Omimex de Colombia, Ltd. and Texas Petroleum Company to acquire the Teca and Nare fields (filed as Exhibit 2.2 to the Company's Current Report on Form 8-K dated September 14, 1995 and incorporated herein by reference) 10.12 Promissory Notes of the Company (filed as Exhibit 10.13 to the Company's Registration Statement on Form SB-2 (file No. 33-94678) and incorporated herein by reference) 10.13 CRI Stock Purchase Termination Agreement (filed as Exhibit 10.14 to the Company's Registration Statement on Form SB-2 (file No. 33-94678) and incorporated herein by reference) 10.14 Form of Common Stock Conversion Agreement between Capco and the Company (filed as Exhibit 10.15 to the Company's Registration Statement on Form SB-2 (file No. 33-94678) and incorporated herein by reference). 10.15 Form of Agreement regarding exercise of preemptive rights between Capco and the Company (filed as Exhibit 10.16 to the Company's Registration Statement on Form SB-2 (File No. 33-94678) and incorporated herein by reference) 10.16 Letter Agreement, as amended, between Omimex de Colombia, Ltd. and the Company (filed as Exhibit 10.17 to the Company's Registration Statement on Form SB-2 (File No. 33-94678) and incorporated herein by reference) 10.17 Promissory Note of Mr. Chaudhary (filed as Exhibit 10.2 to the Company's quarterly report on Form 10-QSB for the quarter ended June 30, 1996 and incorporated herein by reference)
39 40 ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K (CONTINUED)
EXHIBIT NO. DESCRIPTION OF ITEM - ---------------- -------------------- 10.18 Form of Stock Option Agreements between Mr. Chaudhary and Messrs. Hickey and Barker (filed as Exhibit 10.3 to the Company's quarterly report on Form 10-QSB for the quarter ended June 30, 1996 and incorporated herein by reference) 10.19 Form of Stock Option Termination Agreements between the Company and Messrs. Hagler and Richards (filed as Exhibit 10.4 to the Company's quarterly report on Form 10-QSB for the quarter ended June 30, 1996 and incorporated by reference) 10.20 Amendment Number One to First Amended and Restated Loan Agreement between the Company and Bank One, Texas, N.A.* 10.21 Agreement Minutes concerning Colombia oil sales Contract between Omimex as operator and Ecopetrol* 10.22 Operating Agreement between Omimex and Sabacol-Velasquez property* 10.23 Operating Agreement between Omimex and Sabacol-Cocorna and Nare properties* 10.24 Operating Agreement between Omimex and Sabacol-Velasquez-Galan Pipeline* 10.25 Operating Agreement between Omimex and Sabacol-Cocorna Concession property* 10.26 Life insurance contract on life of Ilyas Chaudhary* 10.27 Life insurance contract on life of Ilyas Chaudhary* 10.28 Agreement for Assignment of Leases** 10.29 Agreement to Provide Collateral between Capco and Saba Petroleum Company* 10.30 Purchase and Sale Agreement between DuBose Ventures, Inc., Rockbridge Oil & Gas, Inc., Saba Energy of Texas, Incorporated and Energy Asset Management Corporation to acquire properties in Jefferson Parish, LA* 10.31 Employment Agreement with Walton C. Vance* 10.32 Amended Employment Agreement with Larry R. Burroughs* 10.33 First Amendment, Letter Agreement with Bradley T. Katzung* 10.34 Consultant Agreement with Burt Cormany* 11.1 Computation of Earnings per Common Share* 21.1 Subsidiaries of the Company (filed as an exhibit to the Company's Annual Report on Form 10-KSB for the year ended December 31, 1995 and incorporated herein by reference) 23.1 Consent of Coopers & Lybrand L.L.P. (Los Angeles, California)* 23.2 Consent of Netherland, Sewell & Associates, Inc.* 23.3 Consent of Sproule Associates Limited* 27.1 Financial Data Schedule*
______________________ * Filed herewith ** Omitted and filed separately, and confidentially, with the Securities and Exchange Commission. No reports were filed under Form 8-K during the quarter ended December 31, 1996. 40 41 SIGNATURES In accordance with Section 13 or 15(d) of the Exchange Act, the Registrant caused this report to be signed on its behalf by the undersigned thereunto duly authorized. SABA PETROLEUM COMPANY DATED APRIL 4, 1997 By: /s/ Ilyas Chaudhary Ilyas Chaudhary Chairman of the Board, President and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
SIGNATURES TITLE DATE ---------- ----- ---- /s/ Ilyas Chaudhary - ---------------------------- Chairman of the Board, April 4, 1997 Ilyas Chaudhary President and Chief Executive Officer (Principal Executive Officer) /s/ Walton C. Vance April 4, 1997 - ---------------------------- Vice President, Chief Walton C. Vance Financial Officer and Secretary and Director (Principal Financial and Accounting Officer) /s/ Alex S. Cathcart Director April 4, 1997 - ---------------------------- Alex S. Cathcart /s/ William N. Hagler Director April 4, 1997 - ---------------------------- William N. Hagler /s/ William J. Hickey Director April 4, 1997 - ---------------------------- William J. Hickey /s/ Rodney C. Hill Director April 4, 1997 - ---------------------------- Rodney C. Hill /s/ William E. Richards Director April 4, 1997 - ---------------------------- William E. Richards
41 42 [REPORT OF INDEPENDENT ACCOUNTANTS] [COOPERS & LYBRAND LETTERHEAD] To the Board of Directors Saba Petroleum Company We have audited the accompanying consolidated balance sheets of Saba Petroleum Company and subsidiaries as of December 31, 1996 and 1995, and the related consolidated statements of income, stockholders' equity, and cash flows for the years then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Saba Petroleum Company and subsidiaries as of December 31, 1996 and 1995, and the consolidated results of their operations and their cash flows for the years then ended in conformity with generally accepted accounting principles. COOPERS & LYBRAND L.L.P. Los Angeles, California March 26, 1997 F-1 43 SABA PETROLEUM COMPANY AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS December 31, 1996 and 1995
1996 1995 ------------ ------------ ASSETS Current assets: Cash and cash equivalents $ 734,036 $ 640,287 Restricted certificate of deposit (Note 2) - 1,750,000 Accounts receivable, net of allowance for doubtful accounts of $65,000 (1996) and $57,000 (1995) 7,361,326 4,444,209 Other current assets 3,485,924 2,995,172 ------------ ------------ Total current assets 11,581,286 9,829,668 ------------ ------------ Property and equipment (Note 8): Oil and gas properties (full cost method) 44,494,387 32,602,571 Land 1,888,578 1,849,313 Plant and equipment 3,799,307 3,240,771 ------------ ------------ 50,182,272 37,692,655 Less accumulated depletion and depreciation (15,323,780) (10,108,845) ------------ ------------ Total property and equipment 34,858,492 27,583,810 ------------ ------------ Other assets: Deposits on properties 42,529 50,000 Notes receivable, less current portion 834,590 9,166 Deferred financing costs 1,123,250 1,995,458 Due from affiliates 205,226 183,975 Deposits and other 471,513 99,020 ------------ ------------ Total other assets 2,677,108 2,337,619 ------------ ------------ $ 49,116,886 $ 39,751,097 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable and accrued liabilities $ 5,377,137 $ 5,619,163 Oil imbalance obligation (Note 2) - 692,384 Income taxes payable 1,981,064 541,651 Current portion of long-term debt 1,805,556 504,985 ------------ ------------ Total current liabilities 9,163,757 7,358,183 Long-term debt, net of current portion 20,811,980 23,543,307 Other liabilities 108,295 194,836 Deferred taxes 590,285 321,237 Minority interest in consolidated subsidiary 727,359 485,285 ------------ ------------ Total liabilities 31,401,676 31,902,848 ------------ ------------ Commitments and contingencies (Note 12) Stockholders' equity: Preferred stock - no par value, authorized 50,000,000 shares; none issued - - Common stock - no par value, authorized 150,000,000 shares; issued and outstanding 10,081,026 (1996) and 8,529,180 (1995) shares 12,901,083 6,796,140 Retained earnings 4,802,845 1,038,129 Cumulative translation adjustment 11,282 22,480 Unearned compensation - (8,500) ------------ ------------ Total stockholders' equity 17,715,210 7,848,249 ------------ ------------ $ 49,116,886 $ 39,751,097 ============ ============
The accompanying notes are an integral part of these consolidated financial statements. F-2 44 SABA PETROLEUM COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME Years ended December 31, 1996 and 1995
1996 1995 ------------ -------------- Revenues: Oil and gas sales $ 31,520,757 $ 16,941,247 Other 1,681,587 753,008 ------------ ------------- Total revenues 33,202,344 17,694,255 ------------ ------------- Expenses: Production costs 14,604,291 10,561,552 General and administrative 3,919,435 2,005,192 Depletion, depreciation and amortization 5,527,418 2,826,684 ------------ ------------- Total expenses 24,051,144 15,393,428 ------------ ------------- Operating income 9,151,200 2,300,827 ------------ ------------- Other income (expense): Interest income 114,302 16,924 Other 92,149 (26,614) Interest expense, net of interest capitalized of $27,000 (1995) (2,401,856) (1,364,110) Gain on issuance of shares of subsidiary 8,305 124,773 ------------ ------------- Total other income (expense) (2,187,100) (1,249,027) ------------ ------------- Income before income taxes 6,964,100 1,051,800 Provision for taxes on income (2,957,983) (449,636) Minority interest in earnings of consolidated subsidiary (241,401) (55,632) ------------ ------------- Net income $ 3,764,716 $ 546,532 ============ ============= Net earnings per common share: Primary $ 0.40 $ 0.06 ============ ============= Fully-diluted $ 0.37 $ 0.06 ============ ============= Weighted average common and common equivalent shares outstanding: Primary 9,416,033 8,742,768 ============ ============= Fully-diluted 12,066,256 8,784,099 ============ =============
The accompanying notes are an integral part of these consolidated financial statements. F-3 45 SABA PETROLEUM COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY Years ended December 31, 1996 and 1995
Common Stock Cumulative Total ---------------------- Translation Unearned Retained Stockholders' Shares Amount Adjustment Compensation Earnings Equity --------- ----------- ---------- ------------ ---------- ------------- Balance at December 31, 1994 8,238,514 $ 5,772,457 $ - $ - $ 510,870 $ 6,283,327 Minority interest in subsidiary (19,273) (19,273) Exercise of options 116,666 189,583 189,583 Issuance of common stock for compensation 24,000 25,500 25,500 Issuance of common stock 150,000 600,000 600,000 Cumulative translation adjustment 22,480 22,480 Unearned compensation (8,500) (8,500) Contributed surplus - 208,600 208,600 Net income 546,532 546,532 ---------- ----------- --------- ------- ---------- ----------- Balance at December 31, 1995 8,529,180 6,796,140 22,480 (8,500) 1,038,129 7,848,249 Exercise of options 118,000 647,100 647,100 Issuance of common stock 14,000 42,000 42,000 Cumulative translation adjustment (11,198) (11,198) Unearned compensation 8,500 8,500 Debenture conversions 1,419,846 5,415,843 5,415,843 Net income 3,764,716 3,764,716 ---------- ----------- --------- ------- ---------- ----------- Balance at December 31, 1996 10,081,026 $12,901,083 $ 11,282 $ - $4,802,845 $17,715,210 ========== =========== ========= ======= ========== ===========
The accompanying notes are an integral part of these consolidated financial statements. F-4 46 SABA PETROLEUM COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS Years ended December 31, 1996 and 1995
1996 1995 ------------ ------------ Cash flows from operating activities: Net income $ 3,764,716 $ 546,532 Adjustments to reconcile net income to net cash provided by operations: Depletion, depreciation and amortization 5,527,418 2,826,684 Amortization of unearned compensation 8,500 17,000 Deferred tax provision (benefit) 366,389 (39,000) Compensation expense attributable to non-employee option 91,600 - Minority interest in earnings of consolidated subsidiary 241,403 55,632 Gain on issuance of shares of subsidiary (8,305) (124,773) Changes in: Accounts receivable (2,919,287) (1,999,984) Other assets (572,233) (2,452,503) Accounts payable and accrued liabilities (237,328) 2,396,976 Income taxes payable and other liabilities 650,644 509,343 ------------ ------------ Net cash provided by operating activities 6,913,517 1,735,907 ------------ ------------ Cash flows from investing activities: Deposit (purchase) of restricted certificate of deposit 1,750,000 (1,750,000) Expenditures for oil and gas properties (12,171,392) (12,807,412) Expenditures for equipment, net (585,893) (2,660,120) Proceeds from sale of oil and gas properties 256,646 157,933 ------------ ------------ Net cash used in investing activities (10,750,639) (17,059,599) ------------ ------------ Cash flows from financing activities: Proceeds from notes payable and long-term debt 17,085,315 34,814,900 Principal payments on notes payable and long-term debt (12,296,839) (19,136,299) Increase in notes receivable (1,172,639) - Proceeds from notes receivable 67,384 302,968 Increase in deferred financing costs (165,777) (1,854,421) Net change in accounts with affiliated companies (21,251) (47,120) Net proceeds from exercise of options and issuance of common stock 422,500 789,583 Increase in contributed surplus - 208,600 Capital subscription of minority interest 12,805 74,778 ------------ ------------ Net cash provided by financing activities 3,931,498 15,152,989 ------------ ------------ Effect of exchange rate changes on cash and cash equivalents (627) 12,006 ------------ ------------ Net increase (decrease) in cash and cash equivalents 93,749 (158,697) Cash and cash equivalents at beginning of year 640,287 798,984 ------------ ------------ Cash and cash equivalents at end of year $ 734,036 $ 640,287 ============ ============
The accompanying notes are an integral part of these consolidated financial statements. F-5 47 SABA PETROLEUM COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1996 AND 1995 1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - - GENERAL Saba Petroleum Company ("Saba" or the "Company") is a Colorado corporation formed in 1979 as a natural resources company. Saba is an international oil and gas producer with principal producing properties located in the continental United States, Canada and Colombia. Until 1994, all of the Company's principal assets were located in the United States. In 1994 and 1995, the Company acquired interests in producing properties in Canada and Colombia. For the years ended December 31, 1996 and 1995, approximately 50.4% and 33.3% of the Company's gross revenues from oil and gas production were derived from its international operations. Saba's principal United States oil and gas producing properties are located in California, Louisiana, Michigan, New Mexico, Oklahoma, Texas, and Wyoming. As of December 31, 1996, 55.1% of the Company's outstanding Common Stock is owned directly, or indirectly, by the Company's Chief Executive Officer. - - USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. - - CONSOLIDATION The consolidated financial statements include the accounts of the Company and its wholly and majority-owned subsidiaries. All significant intercompany balances and transactions have been eliminated. - - FAIR VALUE OF FINANCIAL INSTRUMENTS Cash and Cash Equivalents - The Company considers all liquid investments with an original maturity of three months or less to be cash equivalents. The carrying amount approximates fair value because of the short maturity of those instruments. Other Financial Instruments - The Company does not hold or issue financial instruments for trading purposes. The Company's financial instruments consist of notes receivable and long-term debt. The fair value of the Company's notes receivable and long-term debt, excluding the Debentures, is estimated based on current rates offered to the Company for similar issues of the same remaining maturates. The fair value of the Debentures is based on quoted market prices. The fair value of the Company's notes receivable and long-term debt, excluding the Debentures, at December 31, 1996 and 1995 approximates carrying value. The carrying value and fair value of the Debentures at December 31, 1996 and 1995 are as follows:
1996 1995 ---------------------- --------------------------- Carrying Fair Carrying Fair Value Value Value Value ---------- ----------- ----------- ------------ 9% convertible senior subordinated debentures - due 2005 $6,438,000 $36,374,700 $11,000,000 $10,945,000
F-6 48 SABA PETROLEUM COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) - - OIL AND GAS PROPERTIES The Company's oil and gas producing activities are accounted for using the full cost method of accounting. Accordingly, the Company capitalizes all costs, in separate cost centers for each country, incurred in connection with the acquisition of oil and gas properties and with the exploration for and development of oil and gas reserves. Such costs include lease acquisition costs, geological and geophysical expenditures, costs of drilling both productive and non-productive wells, and overhead expenses directly related to land acquisition and exploration and development activities. Proceeds from the disposition of oil and gas properties are accounted for as a reduction in capitalized costs, with no gain or loss recognized unless such disposition involves a significant change in reserves in which case the gain or loss is recognized. Depletion of the capitalized costs of oil and gas properties, including estimated future development, site restoration, dismantlement and abandonment costs, net of estimated salvage values, is provided using the equivalent unit-of-production method based upon estimates of proved oil and gas reserves and production which are converted to a common unit of measure based upon their relative energy content. Unproved oil and gas properties are not amortized but are individually assessed for impairment. The cost of any impaired property is transferred to the balance of oil and gas properties being depleted. In accordance with the full cost method of accounting, the net capitalized costs of oil and gas properties are not to exceed their related estimated future net revenues discounted at 10 percent, net of tax considerations, plus the lower of cost or estimated fair market value of unproved properties. Substantially all of the Company's exploration, development and production activities are conducted jointly with others and, accordingly, the financial statements reflect only the Company's proportionate interest in such activities. - - PLANT AND EQUIPMENT Plant, consisting of an asphalt refining facility, is stated at the acquisition price of $500,000 plus the cost to refurbish the equipment. Depreciation is calculated using the straight-line method over its estimated useful life. Equipment is stated at cost. Depreciation of equipment is calculated using the straight-line method over the estimated useful lives of the equipment, ranging from three to fifteen years. Depreciation expense in 1996 and 1995 was $293,245 and $155,900, respectively. Normal repairs and maintenance are charged to expense as incurred. Upon disposition of plant and equipment, any resultant gain or loss is recognized in current operations. Interest is capitalized in connection with the construction of major facilities. The capitalized interest is recorded as part of the asset to which it relates and is amortized over the asset's estimated useful life. The implementation in 1995 of Statement of Financial Accounting ("SFAS") No. 121, "Accounting for the Impairment of long-lived Assets and for long-lived Assets to Be Disposed Of", has had no impact on the financial statements. - - DEFERRED FINANCING COSTS The costs related to the issuance of debt are capitalized and amortized using the effective interest method over the original terms of the related debt. At December 31, 1996, the Company had unamortized costs in the amount of $102,837 and $1,020,413 relating to its bank credit facilities and debentures, respectively. Amortization expense in 1996 and 1995 was $241,827 and $63,600, respectively. F-7 49 SABA PETROLEUM COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) - - STOCK-BASED COMPENSATION In 1996, the Company implemented the disclosure requirements of SFAS No. 123, "Accounting for Stock-Based Compensation." This statement sets forth-alternative standards for recognition of the cost of stock-based compensation and requires that a company's financial statements include certain disclosures about stock-based employee compensation arrangements regardless of the method used to account for them. As allowed in this statement, the Company continues to apply Accounting Principles Board Opinion (APB) No. 25, "Accounting for Stock Issued to Employees," and related interpretations in recording compensation related to its plans. - - INCOME TAXES The Company accounts for income taxes pursuant to the asset and liability method of computing deferred income taxes. Deferred tax assets and liabilities are established for the temporary differences between the financial reporting bases and the tax bases of the Company's assets and liabilities at enacted tax rates expected to be in effect when such amounts are realized or settled. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amount expected to be realized. - - FOREIGN CURRENCY TRANSLATION Assets and liabilities of foreign subsidiaries are translated at year-end rates of exchange; income and expenses are translated at the weighted average rates of exchange during the year. The resultant cumulative translation adjustments are included as a separate component of stockholders' equity. Foreign currency transaction gains and losses are included in net income. - - EARNINGS PER COMMON SHARE Primary earnings per common share are based on the weighted average number of shares outstanding during each year plus, when their effect is dilutive, common stock equivalents consisting of certain shares subject to stock options. The calculation of fully diluted earnings per common share additionally assumes the conversion of the 9% convertible senior subordinated debentures due December 15, 2005, using the conversion price of $4.38 per common share. - - SALE OF SUBSIDIARY STOCK The Company accounts for a change in its proportionate share of a subsidiary's equity resulting from the issuance by the subsidiary of its stock in current operations in the consolidated financial statements. - - TWO-FOR-ONE FORWARD STOCK SPLIT On November 21, 1996, The Company's Board of Directors approved a two-for-one forward stock split effected as a stock dividend on all outstanding shares of Common Stock. The Company's outstanding stock option awards and Debentures were also adjusted accordingly. The record date established for such stock split was December 9, 1996 with a payment date of December 16, 1996. All share and per share amounts have been adjusted to give retroactive effect to this split for all periods presented. - - RECLASSIFICATION Certain previously reported financial information has been reclassified to conform to the current year's presentation. 2. ACQUISITIONS In September 1995, the Company acquired a 25% interest in the Teca and Nare oil fields ("Teca/Nare F-8 50 SABA PETROLEUM COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 2. ACQUISITIONS (CONTINUED) Fields") and a 50% interest in the Velasquez-Galan pipeline, all of which are located in Colombia, South America. The Company's gross acquisition cost for the acquired interests was $12.25 million, which was reduced by the Company's share of net revenue credits from the properties from the effective date of January 1, 1995 to the closing date ($3.95 million), leaving a net purchase price of $8.3 million. In addition, the Company assumed an oil imbalance obligation of approximately $1.25 million at the closing date. In December 1995, the Company acquired a 50% interest in the Cocorna oil field in Colombia at a net acquisition cost of $533,000. In connection with the acquisition of the Teca/Nare Fields, the Colombia government owned oil company (Ecopetrol) required that Omimex, the operator of the properties, obtain a letter of credit for the benefit of Ecopetrol in the amount of $3.5 million to secure payments due third party vendors at the Teca/Nare Fields. Such letter of credit was issued in November 1995. In connection with the issuance of the letter of credit, Omimex required that the Company pledge collateral consisting of a $1.75 million certificate of deposit. The letter of credit expired by its own terms in 1996 and the collateral was returned to the Company. The acquisition cost of the properties has been assigned to various accounts in the accompanying balance sheet (primarily oil and gas properties), and the results of operations of the properties are included in the accompanying financial statements from the respective dates of acquisition of each property. The following unaudited proforma financial information presents the results of operations of the Company as if the acquisitions had occurred as of January 1, 1995. The proforma financial information does not necessarily reflect the results of operations that would have occurred had the properties been acquired at January 1, 1995.
Year Ended December 31, (Dollars in thousands, except per share amounts) 1995 ---- (Unaudited) Total revenues $ 27,678 Total operating expenses, including general and administrative and depletion, depreciation and amortization (20,036) Interest expense (1,985) Other expense (10) Income before income taxes 5,647 Provision for taxes on income 2,767 --------- Net income $ 2,880 ========= Net earnings per common share $ 0.33 =========
F-9 51 SABA PETROLEUM COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 2. ACQUISITIONS (CONTINUED) In October 1995, all of the issued shares of Capco Resource Properties Ltd. ("CRPL"), the Company's 100% owned subsidiary, were exchanged for 13,437,322 voting common shares of Beaver Lake Resources Corporation ("BLRC"), a publicly traded corporation located in Alberta, Canada. The net assets of BLRC were deemed to be acquired at their net book value (which approximated fair market value) at the date of acquisition. Net assets acquired were as follows: Working capital deficiency $(105,981) Oil and gas properties 316,420 --------- $ 210,439 =========
On the same date as the share exchange with the Company, BLRC acquired interests in certain oil and gas properties in exchange for 1,443,204 shares of its common stock. Property interests of $399,527 were acquired and production notes receivable in the amount of $157,311 were deemed to be paid. In addition, as part of a private placement of 1,200,000 shares in 1995, the Company purchased 1,000,000 common shares of BLRC at a cost of approximately $370,000. In 1996, BLRC issued a total of 35,000 shares of common stock to minority shareholders. As a result of these transactions, the Company owned 74.3% of the outstanding common stock of BLRC at December 31, 1996. The sales of shares of common stock by the subsidiary resulted in net gains in 1996 and 1995 of $8,305 and $124,773, respectively, which the Company has reported in current operations. Deferred income taxes have not been recorded in conjunction with these transactions as the Company plans to maintain a majority ownership position in the subsidiary. 3. NOTES RECEIVABLE Notes receivable are comprised of the following at December 31, 1996:
1996 1995 ---- ---- Canadian prime plus 1% (5.75% at December 31, 1996) production notes receivable, with interest paid currently, collateralized by producing oil and gas properties $120,385 $121,126 Prime plus 0.75% (9% at December 31, 1996) promissory note from an officer of the Company with quarterly interest only installments, due April 30, 1998, collateralized by vested stock options 300,000 - 9% note receivable from a director of the Company, due June 30, 1997, uncollateralized 30,000 -
F-10 52 SABA PETROLEUM COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 3. NOTES RECEIVABLE (CONTINUED) Prime plus 0.75% (9% at December 31, 1996) note receivable from joint venture partner with principal payments through October 2000 and interest payments at the end of twenty-four and forty-eight months, collateralized by producing oil and gas properties 739,206 - 9.25% note receivable from an employee of the Company, with principal and interest due in full on September 30, 1997, collateralized by vested stock options 45,000 - Other 4,917 17,526 ---------- -------- 1,239,508 138,652 Less current portion (included in other current assets) 404,918 129,486 ---------- -------- $ 834,590 $ 9,166 ========== ========
4. OIL AND GAS PROPERTIES, LAND, PLANT AND EQUIPMENT Oil and gas properties, land, plant and equipment at December 31, 1996 and 1995 are as follows:
United States Canada Colombia Total ------- ------ -------- ----- December 31, 1996 ----------------- Oil and gas properties ---------------------- Unevaluated oil and gas properties $ 843,351 $ - $ - $ 843,351 Proved oil and gas properties 29,933,734 4,999,809 8,717,493 43,651,036 ----------- ----------- ----------- ----------- Total capitalized costs 30,777,085 4,999,809 8,717,493 44,494,387 Less accumulated depletion And depreciation 11,038,022 824,752 2,921,559 14,784,333 ----------- ----------- ----------- ----------- Capitalized costs, net $19,739,063 $ 4,175,057 $ 5,795,934 $29,710,054 =========== =========== =========== =========== Other property and equipment ---------------------------- Land $ 1,583,344 $ - $ 305,234 $ 1,888,578 Plant and equipment 2,222,464 69,081 1,507,762 3,799,307 ----------- ----------- ----------- ----------- 3,805,808 69,081 1,812,996 5,687,885 Less accumulated depreciation 337,816 26,874 174,757 539,447 ----------- ----------- ----------- ----------- $ 3,467,992 $ 42,207 $ 1,638,239 $ 5,148,438 =========== =========== =========== =========== December 31, 1995 ----------------- Oil and gas properties ---------------------- Unevaluated oil and gas properties $ 305,974 $ - $ - $ 305,974 Proved oil and gas properties 20,195,774 3,857,561 8,243,262 32,296,597 ----------- ----------- ----------- ----------- Total capitalized costs 20,501,748 3,857,561 8,243,262 32,602,571
F-11 53 SABA PETROLEUM COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 4. OIL AND GAS PROPERTIES, LAND, PLANT AND EQUIPMENT (CONTINUED) Less accumulated depletion And depreciation 8,538,599 518,304 780,675 9,837,578 ----------- ----------- ----------- ----------- Capitalized costs, net $11,963,149 $ 3,339,257 $ 7,462,587 $22,764,993 =========== =========== =========== =========== Other property and equipment ---------------------------- Land $ 1,548,938 $ - $ 300,375 $ 1,849,313 Plant and equipment 1,754,329 62,894 1,423,548 3,240,771 ----------- ----------- ----------- ----------- 3,303,267 62,894 1,723,923 5,090,084 Less accumulated depreciation 217,270 12,601 41,396 271,267 ----------- ----------- ----------- ----------- $ 3,085,997 $ 50,293 $ 1,682,527 $ 4,818,817 =========== =========== =========== ===========
Costs incurred in oil and gas property acquisition, exploration, and development activities are as follows:
United States Canada Colombia Total ----------- ------ -------- ----- 1996 ---- Exploration $ 1,832,579 $ 150,262 $ - $ 1,982,841 Development 5,572,690 734,269 - 6,306,959 Acquisition of proved properties 3,149,644 257,717 474,231 3,881,592 ----------- ---------- ---------- ----------- Total costs incurred $10,554,913 $1,142,248 $ 474,231 $12,171,392 =========== ========== ========== =========== 1995 ---- Exploration $ 328,322 $ 31,718 $ - $ 360,040 Development 1,453,593 134,883 - 1,588,476 Acquisition of proved properties 3,349,594 802,804 8,243,262 12,395,660 ----------- ---------- ---------- ----------- Total costs incurred $ 5,131,509 $ 969,405 $8,243,262 $14,344,176 =========== ========== ========== ===========
Oil and gas depletion expense in 1996 and 1995 was $4,979,361 and $2,605,419, or $2.22 and $1.80 per produced barrel of oil equivalent, respectively. 5. STATEMENT OF CASH FLOWS Following is certain supplemental information regarding cash flows:
1996 1995 ---- ---- Interest paid $2,309,475 $1,388,369 ========== ========== Income taxes paid $1,150,029 $ - ========== ==========
Non-cash investing and financing transactions: F-12 54 SABA PETROLEUM COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 5. STATEMENT OF CASH FLOWS (CONTINUED) In February 1996, the company issued 14,000 shares of Common Stock to a director of the Company in settlement of an obligation in the amount of $42,000. Debentures in the principal amount of $6,212,000, less related costs of $796,157, were converted into 1,419,846 shares of Common Stock during the year ended December 31, 1996. The Company incurred a credit to Stockholders' Equity in the amount of $91,600 resulting from the issuance of stock options to a consultant during the year ended December 31, 1996. The Company incurred a credit to Stockholders' Equity in the amount of $133,000 attributable to the income tax effect of stock options exercised during the year ended December 31, 1996. Cumulative foreign currency translation gains (losses) of ($15,655) and $18,216 were recorded during the years ended December 31, 1996 and 1995, respectively. The Company realized gains in 1996 and 1995 of $8,305 and $124,773, respectively, as a result of the issuance of common stock by a subsidiary. In January 1995, the Company awarded 24,000 shares of Common Stock with a fair market value of $25,500 to an employee. The acquisition cost of oil and gas properties which were acquired in September 1995 included an oil imbalance obligation in the amount of $1,248,866 which was assumed by the Company. In October 1995, the Company's Canadian subsidiary issued common stock to acquire a corporation at a recorded net cost of $210,439. In October 1995, interests in oil and gas properties with a cost of $399,527 were acquired by the issuance of 1,443,204 shares of common stock of the Company's Canadian subsidiary and cancellation of notes receivable in the amount of $157,311. 6. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES Accounts payable and accrued liabilities at December 31, 1996 and 1995 are as follows:
1996 1995 ---- ---- Trade accounts payable $3,545,599 $3,568,400 Undistributed revenue payable 341,614 398,519 Insurance and tax assessments payable 684,758 716,597 Other accrued expenses 805,166 935,647 ---------- ---------- Total $5,377,137 $5,619,163 ========== ==========
7. INCOME TAXES The components of income (loss) before income taxes and after minority interest in earnings of consolidated subsidiary for the years ended December 31, 1996 and 1995 are as follows:
1996 1995 -------- ------- United States $ 383,453 $ (523,572) Canada 693,439 134,138 Colombia 5,645,807 1,385,602 ---------- ---------- Total $6,722,699 $ 996,168 ========== ==========
F-13 55 SABA PETROLEUM COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 7. INCOME TAXES (CONTINUED) Components of income tax expense (benefit) for the years ended December 31, 1996 and 1995 are as follows:
1996 1995 ------ ------ Current: Federal $ 149,600 $(112,364) State 259,994 45,000 Foreign 2,182,000 556,000 ---------- --------- 2,591,594 488,636 ---------- --------- Deferred: Federal 207,787 (44,350) State 158,602 5,350 ---------- --------- 366,389 (39,000) ---------- --------- $2,957,983 $ 449,636 ========== =========
The provision (benefit) for income taxes differs from the amount that would result from applying the federal statutory rate for the years ended December 31, 1996 and 1995 as follows:
1996 1995 ---- ---- Expected tax provision (benefit) 34.0% 34.0% State income taxes, net of Federal benefit 4.1 3.3 Effect of foreign earnings (0.9) (13.0) Change in valuation allowance 4.4 15.6 Other 2.4 5.2 ---- ---- 44.0% 45.1% ==== ====
The tax effected temporary differences which give rise to the deferred tax provision consist of the following:
1996 1995 ----------- ---------- Property and equipment $1,084,200 $ 337,900 Effect of state taxes (120,000) (12,300) Net operating losses (2,200) 209,500 Foreign tax credits (845,811) (640,000) Alternative minimum tax credits (61,200) (38,100) Change in valuation allowance 295,000 155,000 Other 16,400 (51,000) ---------- --------- $ 366,389 $ (39,000) ========== =========
F-14 56 SABA PETROLEUM COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 7. INCOME TAXES (CONTINUED) The components of the tax effected deferred income tax asset (liability) as of December 31 are as follows:
1996 1995 ---------- ---------- Property and equipment $(2,060,800) $ (976,600) State taxes 171,800 51,800 Net operating losses 39,400 37,200 Foreign tax credits 1,600,800 640,000 Alternative minimum tax credits 196,400 135,200 Other 35,200 51,600 ----------- ---------- (17,200) (60,800) Valuation allowance (450,000) (155,000) ----------- ---------- Net deferred income tax liability $ (467,200) $ (215,800) =========== ==========
At December 31, 1996 and 1995, $123,000 and $105,400 of current deferred taxes are included in other current assets, respectively. At December 31, 1996, the Company had approximately $650,000 of California net operating loss carryovers that begin to expire in 1998. At December 31, 1996, the Company had approximately $1,600,000 of foreign tax credit carryovers, which expire in the year 2001. A $450,000 valuation allowance has been provided for a portion of the foreign tax credits which are not likely to be realized during the carryforward period. The Company also has alternative minimum tax credit carryforwards for federal and state purposes of approximately $156,700 and $39,700, respectively. The credits carry over indefinitely and can be used to offset future regular tax to the extent of current alternative minimum tax. In general, section 382 of the Internal Revenue Code includes provisions which limit the amount of net operating loss carryforwards and other tax attributes that may be used annually in the event that a greater than 50% ownership change (as defined) takes place in any three year period. As of December 31, 1996, management is not aware of such a change for purposes of section 382. 8. LONG-TERM DEBT Long-term debt at December 31, 1996 and 1995 consists of the following:
1996 1995 ---- ---- 9% convertible senior subordinated debentures - due 2005 $ 6,438,000 $11,000,000 Revolving loan agreement with a bank 12,100,000 9,500,000 Term loan agreement with a bank 450,000 - Demand loan agreement with a bank 1,605,136 1,026,392 Promissory note 450,000 900,000 Promissory notes - Capco 1,574,400 1,621,900 ----------- ------------ 22,617,536 24,048,292 Less current portion 1,805,556 504,985 ----------- ------------ $20,811,980 $23,543,307 =========== ============
F-15 57 SABA PETROLEUM COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 8. LONG-TERM DEBT (CONTINUED) On December 26, 1995, the Company issued $11,000,000 of 9% convertible senior subordinated debentures ("Debentures") due December 15, 2005. The Debentures are convertible into common stock of the Company, at the option of the holders of the Debentures, at any time prior to maturity at a conversion price of $4.38 per share, subject to adjustment in certain events. The Company has reserved 3,000,000 shares of its Common Stock for the conversion of the Debentures. The Debentures are not redeemable by the Company prior to December 15, 1997. Mandatory sinking fund payments of 15% of the original principal, adjusted for conversions prior to the date of payments, are required annually commencing December 15, 2000. The Debentures are uncollateralized and subordinated to all present and future senior debt, as defined, of the Company and are effectively subordinated to all liabilities of subsidiaries of the Company. The principal use of proceeds from the sale of the Debentures was to retire short-term indebtedness incurred by the Company in connection with its acquisitions of producing oil and gas properties in Colombia. A portion of the proceeds was used to reduce the balance outstanding under the Company's revolving credit agreement. On February 7, 1996, the Company issued an additional $1,650,000 of Debentures pursuant to the exercise of an over-allotment option by the underwriting group. Net proceeds to the Company were approximately $1.5 million and a portion was utilized to reduce the outstanding balance under the Company's revolving line of credit. Certain terms of the Debentures contain requirements and restrictions on the Company with regard to the following limitations on Restricted Payments (as defined in the Indenture), on transactions with affiliates, and on oil and gas property divestitures; Change of Control (as defined), which will require immediate redemption; maintenance of life insurance coverage of $5,000,000 on the life of the Company's Chief Executive Officer; and limitations on fundamental changes and certain trading activities, on Mergers and Consolidations (as defined) of the Company, and on ranking of future indebtedness. Debentures in the amount of $6,212,000 were converted into 1,419,846 shares of Common Stock during the year ended December 31, 1996. In September 1993, the Company consummated a Revolving Loan Agreement ("Agreement") with Bank One, Texas, N.A. The loan is subject to semi- annual redeterminations and will be converted to a three-year term loan on June 1, 1998. Funds advanced under the facility are collateralized by substantially all of the Company's U.S. oil and gas producing properties and the common stock of its principal U.S. subsidiaries. The Company is charged a commitment fee equal to 0.5% of the available, but not used, loan amount. Effective September 23, 1996, the Agreement was amended and restated. Included in the amendments was a reduction in the base lending rate to prime rate plus 0.75% (9.0% at December 31, 1996), and the option to select LIBOR rate pricing for portions of the outstanding indebtedness. In addition, the amended Agreement provides for a commitment ("term loan") of as much as $4.0 million with an interest rate of prime plus 4.0% (12.25% at December 31, 1996) which may be borrowed for the purpose of funding development of oil and gas properties in the United States. Effective November 1, 1996, the primary borrowing base for the revolving loan was increased from $9,200,000 to $14,000,000, subject to a monthly reduction of $250,000. In accordance with the terms of the Agreement, $1,356,000 of the loan balances are classified as currently payable at December 31, 1996. The Agreement requires, among other things, that the Company maintain at least a 1 to 1 working capital ratio, stockholders' equity of $6,250,000, a ratio of cash flow to debt service of not less than 1.25 to 1.0 and general and administrative expenses at a level not greater than F-16 58 SABA PETROLEUM COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 8. LONG-TERM DEBT (CONTINUED) 20% of revenue, all as defined in the Agreement. Additionally, the Company is restricted from paying dividends and advancing funds in excess of specified limits to affiliates. The Company was in compliance with the terms of the Agreement at December 31, 1996. Prior to March 5, 1996, BLRC had a demand non-revolving bank loan with principal repayments of $53,500 on the first day of every month. The loan provided for interest at a variable rate equal to the Canadian prime rate plus 1.75% per annum. Effective March 5, 1996, the loan was converted to a demand revolving reducing loan in the face amount of $1.8 million. Interest was payable at a variable rate equal to the Canadian prime rate plus 1% per annum (5.75% at December 31, 1996). Effective February 13, 1997, BLRC renegotiated its bank loan, and now has available a demand revolving reducing loan in the face amount of $2.6 million. Reductions to the maximum principal amount available under the loan will be reviewed on or before July 1, 1997, with no repayments of the balance outstanding at December 31, 1996 anticipated in 1997. Interest will be payable at a variable rate equal to the Canadian prime rate plus 0.75% per annum. The loan is collateralized by BLRC's Canadian oil and gas producing properties, and a first fixed and floating change debenture in the principal amount of $3.6 million over all assets of BLRC. Terms of the loan agreement require that, based on an annual engineering report, the discounted net present value of the collateralized properties exceed 175% of the outstanding loan balance and that estimated annual future net revenue exceed 150% of that period's debt service. Although the bank can demand payment in full of the loan at any time, it has provided a written commitment not to do so except in the event of default. The promissory note is due to the seller of an oil refining facility, which was acquired by the Company in June 1994. Final payment of the note, which bears interest at the prime rate in effect on the note anniversary date, plus two percent (10.25% at December 31, 1996), is due on June 24, 1997. The note is collateralized by a deed of trust on the acquired assets. The promissory notes - Capco are due to the Company's parent company, Capco Resources Ltd. and to Capco Resources, Inc., formerly wholly- owned by Capco Resources Ltd. and now majority-owned by Capco Resources Ltd. Payment of the notes, which bear interest at the rate of 9% per annum, is due April 1, 2006. The loan proceeds were utilized by the Company principally in connection with the acquisition of producing oil and gas properties in Colombia. The notes are subordinated to the same extent the Debentures are subordinated. Maturities of long term debt are as follows: 1997 $ 1,805,556 1998 5,091,247 1999 3,083,333 2000 4,067,493 2001 2,525,827 Thereafter 6,044,080 ----------- $22,617,536 ===========
F-17 59 SABA PETROLEUM COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 9. RELATED PARTY TRANSACTIONS Related party transactions are described as follows: In 1996, the Company provided a short-term advance to an affiliate in the amount of $10,000. In 1996, the Company received remittances in the amount of $120,200 and made payments in the amount of $90,900 for reimbursement of prior period account balances. In 1996, the Company charged affiliates $19,400 and was charged $152,300 by affiliates for interest on promissory notes. In 1996, the Company loaned $30,000 to a director of the Company, on an unsecured basis, at an interest rate of 9% per annum. In 1996, the Company loaned $300,000 to the Chief Executive Officer of the Company at an interest rate of prime plus 0.75% due in quarterly installments. The loan is collateralized by the officer's vested, but unexercised, Common Stock options. In 1996, an affiliate of the Company participated, on a joint interest basis, in one of the Company's exploratory drilling prospects. At December 31, 1996, the affiliate had been assessed a total of $112,150 for costs associated with the drilling prospect. Of such amount, $64,650 was unpaid at December 31, 1996. In 1996 and 1995, the Company charged its affiliates $26,300 and $92,900, respectively, for reimbursement of certain general and administrative expenses. In 1995, the Company charged an affiliate $7,600 and was charged $30,000 by affiliates for interest on short-term advances. In 1995, the Company received remittances from affiliates totaling $107,300 in payment of prior and current period charges for general and administrative expenses and cash advances. In 1995, the Company received a short-term advance in the amount of $10,500 from an affiliate. In 1995, the Company loaned $101,700 to a company controlled by the Company's Chief Executive Officer at an interest rate of 9% per annum. The loan is collateralized by the officer's vested, but unexercised, Common Stock options. In 1995, the Company borrowed $350,000 from a company controlled by a director of the Company. The entire amount, plus interest at the rate of 10% per annum, was repaid in December 1995. In 1995, affiliated companies loaned a total of $2,221,900 to the Company, at an interest rate of 9% per annum, in connection with the acquisition of producing oil and gas properties in Colombia. Of this amount, $600,000 was converted to equity by the issuance of 150,000 shares of Common Stock of the Company. The balance of the borrowings is due April 1, 2006 and is subordinated to the same extent as the Debentures are subordinated. The Company incurred interest expense in the amount of $67,600 in 1995 as a result of this indebtedness. F-18 60 SABA PETROLEUM COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 10. COMMON STOCK AND STOCK OPTIONS In April 1996 and June 1996, the Company's Board of Directors and shareholders, respectively, approved the Company's 1996 Incentive Equity Plan ("Plan"). The purpose of the Plan is to enable the Company to provide officers, other key employees and consultants with appropriate incentives and rewards for superior performance. Subject to certain adjustments, the maximum aggregate number of shares of the Company's Common Stock that may be issued pursuant to the Plan, and the maximum number of shares of Common Stock granted to any individual in any calendar year, shall not in the aggregate exceed 500,000 and 100,000, respectively. At December 31, 1996, no awards had been made under the Plan. In July 1995, the Company cancelled its Incentive and Nonqualified Stock Option Plans. No options were granted under either plan prior to cancellation. During the year 1996, the Company's issued options to acquire 100,000 shares of the Company's Common Stock to a consultant. The options had an exercise price of $4.00 and were exercisable over a period of 180 days, beginning May 21, 1996. The options were fully exercised during the year 1996. The Company also issued options to acquire 20,000 shares of the Company's Common Stock to an employee under the terms of an employment agreement. During the year 1995, the Company issued options to acquire 200,000 shares of the Company's Common Stock to a consultant. The options had an exercise price of $1.63 and were exercisable for a period of one year, beginning January 2, 1995. Options to acquire 116,666 shares of Common Stock were exercised during the year ended December 31, 1995. In July 1995, the consulting arrangement was terminated and the balance of the options was cancelled. The Company also issued options to acquire 200,000 shares of the Company's Common Stock to an employee under the terms of an employment agreement. In January 1995, the Company awarded 24,000 shares of Common Stock to an employee pursuant to the terms of an employment agreement. The cost of the stock award, based on the stock's fair market value at the award date, was charged to stockholders' equity and was amortized against earnings over the contract term. As of December 31, 1996, the Company had outstanding options for 742,000 shares of Common Stock to certain employees of the Company. These options, which are not covered by the Incentive Equity Plan, become exercisable ratably over a period of five years from the date of issue. The exercise price of the options, which ranges from $1.25 to $4.38, is the fair market value of the Common Stock at the date of grant. There is no contractual expiration date for exercise of these options. The Company accounts for stock based compensation to employees under the rules of Accounting Principles Board Opinion No 25. The compensation cost for options granted in 1996 and 1995 was $139,962 and $115,880, respectively. F-19 61 SABA PETROLEUM COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 10. COMMON STOCK AND STOCK OPTIONS (CONTINUED) Information regarding the shares under option and weighted average exercise price for the years ended December 31, 1996 and 1995 is as follows:
1996 1995 ---------------------------- --------------------------- Wt. Avg. Wt. Avg. Shares Ex. Pr. Shares Ex. Pr. -------- --------- ---------- -------- Beginning of year 740,000 $1.40 890,000 $1.42 Granted 120,000 $4.06 400,000 $1.56 Exercised (118,000) $3.58 (116,666) $1.63 Cancelled - (433,334) $1.52 -------- -------- End Of Year 742,000 $1.49 740,000 $1.40 ======== ======== Options exercisable at end of year 306,000 $1.37 176,000 $1.34 ======== ===== ======== ===== Weighted average fair value of options granted during the year $1.17 $0.29 ===== =====
The fair value of each option granted during 1996 and 1995 is estimated on the date of grant using the Black-Scholes option-pricing model with the following assumptions: (a) risk-free interest rates ranging from 4.9% to 7.9%, (b) expected volatility of 58.4%, (c) average time to exercise ranging from six month to five years, and (d) expected dividend yield of 0.0%. If the compensation cost for the Company's 1996 and 1995 grants to employees had been determined consistent with SFAS No. 123, the Company's net income and net earnings per common share (primary) for 1996 and 1995 would approximate the proforma amounts set forth below:
1996 1995 ----------------------------- --------------------------- As Reported Proforma As Reported Proforma ----------- -------- ----------- -------- Net income $3,764,716 $3,733,426 $546,532 $457,189 ========== ========== ======== ======== Net earnings per common share (primary) $0.40 $0.40 $0.06 $0.05 ===== ===== ===== =====
11. RETIREMENT PLAN The Company sponsors a defined contribution retirement savings plan ("401(k) Plan") to assist all eligible U.S. employees in providing for retirement or other future financial needs. The Company currently provides matching contributions equal to 50% of each employee's contribution, subject to a maximum of 4% of employee earnings. The Company's contributions to the 401(k) Plan were $44,014 in 1996 and $25,745 in 1995. F-20 62 SABA PETROLEUM COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 12. COMMITMENTS AND CONTINGENCIES The Company is a defendant in various legal proceedings, which arise in the normal course of business. Based on discussions with legal counsel, management does not believe that the ultimate resolution of such actions will have a significant effect on the Company's financial statements or operations. LEASES The Company leases office space, vehicles and office equipment under non-cancelable operating leases expiring in the years 1997 through 2001. Future minimum lease payments under all leases are as follows:
Year Ending December 31, ------------------------ 1997 $218,767 1998 176,285 1999 120,151 2000 100,413 2001 96,292 -------- $711,908 ========
Rent expense amounted to $246,013 and $129,470 for the years ended December 31, 1996 and 1995, respectively. CONCENTRATION OF CREDIT RISK AND MAJOR CUSTOMERS The Company invests its cash primarily in deposits with major banks. Certain deposits may, at times, be in excess of federally insured limits ($2,461,583 and $2,740,655 at December 31, 1996 and December 31, 1995, respectively, according to bank records). The Company has not incurred losses related to such cash balances. The Company's accounts receivable result from its activities in the oil and gas industry. Concentrations of credit risk with respect to trade receivables are limited due to the large number of joint interest partners comprising the Company's customer base. Ongoing credit evaluations of the financial condition of joint interest partners are performed and, generally, no collateral is required. The Company maintains reserves for potential credit losses and such losses have not exceeded management's expectations. Included in accounts receivable at December 31, 1996 and 1995 are the following amounts due from unaffiliated parties (each accounting for 10% or more of accounts receivable):
1996 1995 ---- ---- Customer A $2,566,700 $1,986,000 ========== ========== Customer B $1,267,100 $ 817,900 ========== ========== Customer C $ 899,600 $ - ========== ==========
F-21 63 SABA PETROLEUM COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 12. COMMITMENTS AND CONTINGENCIES (CONTINUED) Sales to major unaffiliated customers (customers accounting for 10 percent or more of gross revenue), all representing purchasers of oil and gas and related transportation tariffs and the applicable geographic area for each customer, for each of the years ended December 31, 1996 and 1995 are as follows:
Geographic Area 1996 1995 --------------- ---- ---- Customer A Colombia $13,594,000 $4,505,000 =========== ========== Customer B United States $ 4,117,000 $2,926,000 =========== ========== Customer C United States $ - $2,150,000 =========== ==========
All sales to the geographic area of Colombia are to the government owned oil company. CONTINGENCIES The Company is subject to extensive Federal, state, and local environmental laws and regulations. These requirements, which change frequently, regulate the discharge of materials into the environment. The Company believes that it is in compliance with existing laws and regulations. ENVIRONMENTAL CONTINGENCIES The Colombian Ministry of the Environment ("Ministry") issued a resolution dated June 7, 1995 that set forth a number of measures aimed at correcting certain deficiencies that the Ministry has allegedly found in environmental aspects of the Teca and Nare fields. Among such measures, the Ministry ordered the temporary closing of one of five production modules and of any wells processed in that module until Texas Petroleum Company, the former owner and operator of the properties, provided a document detailing the timetable to implement some of the measures described above. The temporary closing of the module did not have a substantial effect on total production because substantially all of the crude oil which would otherwise have been processed in the closed module was directed to other production modules. The resolution also ordered the opening of an environmental investigation of Texas Petroleum Company's operation of the Teca and Nare fields. The document containing the requested timetable was presented to the Ministry on July 6, 1995. On June 18, 1996, the Ministry issued a resolution which allowed the curent operator of the Teca and Nare fields to reopen the module, while requiring its efforts to finalize correction of the cited deficiencies. In 1993, the Company acquired a producing mineral interest from a major oil company ("Seller"). At the time of acquisition, the Company's investigation revealed that the Seller had suffered a discharge of diluent (a light oil based fluid which is often mixed with heavier grade crudes). The purchase agreement required the Seller to remediate the area of the diluent spill. After the Company assumed operation of the property, the Company became aware of the fact that diluent was seeping into a drainage area, which traverses the property. The Company took action to eliminate the fluvial contamination and requested that the Seller bears the cost of remediation. The Seller has taken the F-22 64 SABA PETROLEUM COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 12. COMMITMENTS AND CONTINGENCIES (CONTINUED) position that its obligation is limited to the specified contaminated area and that the source of the contamination is not within the area that the Seller has agreed to remediate. The Company has commenced an investigation into the source of the contamination to ascertain whether it is physically part of the area which the Seller agreed to remediate or is a separate spill area. Investigation and discussions with the Seller are ongoing. Should the Company be required to remediate the area itself, the cost to the Company could be significant. The Company has spent approximately $150,000 to date in remediation activities, and present estimates are that the cost of completes remediation could approach $1 million. Since the investigation is not complete, an accurate estimate of cost cannot be made. 13. BUSINESS SEGMENTS The Company considers that its operations are principally in one industry segment that of acquisition, exploration, development and production of oil and gas reserves. A summary of the Company's operations by geographic area for the years ended December 31, 1996 and 1995 is as follows:
(Dollars in thousands) Corporate United and States Canada Colombia Other Total ------ ------ -------- ----- ----- Year ended December 31, 1996 ---------------------------- Total revenues $15,907 $3,105 $13,594 $ 596 $33,202 Production costs 8,160 1,172 5,272 - 14,604 Other operating expenses 759 536 213 - 1,508 Depreciation, depletion and amortization 2,565 353 2,275 334 5,527 Income tax expense (benefit) 1,561 2,917 (1,520) 2,958 ------- ------ ------- Results of operations from oil and gas producing activities $ 2,862 $1,044 $ 2,917 ======= ====== ======= Interest and other expenses (net) 4,840 4,840 -------- ------- Net income (loss) $ (3,058) $ 3,765 ======== ======= Identifiable assets at December 31, 1996 $28,730 $5,346 $12,473 $ 2,568 $49,117 ======= ====== ======= ======== ======= Year ended December 31, 1995 ---------------------------- Total revenues $11,538 $1,577 $ 4,505 $ 74 $17,694 Production costs 7,431 901 2,229 - 10,561 Other operating expenses 398 243 51 - 692 Depreciation, depletion and amortization 1,735 156 823 113 2,827
F-23 65 SABA PETROLEUM COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 13. BUSINESS SEGMENTS (CONTINUED) Income tax expense (benefit) 849 147 645 (1,191) 450 ------- ------ ------- ------- -------- Results of operations from oil and gas producing activities $ 1,125 $ 130 $ 757 ======= ====== ======= Interest and other expenses (net) 2,617 2,617 ------- ------- Net income (loss) $(1,465) $ 547 ======= ======= Identifiable assets at December 31, 1995 $19,525 $3,963 $13,514 $ 2,749 $39,751 ======= ====== ======= ======= =======
F-24 66 SABA PETROLEUM COMPANY AND SUBSIDIARIES SUPPLEMENTAL INFORMATION ABOUT OIL AND GAS PRODUCING ACTIVITIES (UNAUDITED) ESTIMATED PROVED RESERVES Estimates of the Company's proved developed and undeveloped oil and gas reserves for its working and royalty interest wells were prepared by independent engineers. The estimates are based upon engineering principles generally accepted in the petroleum industry and take into account the effect of past performance and existing economic conditions. Reserve estimates vary from year to year because they are based upon judgmental factors involved in interpreting and analyzing production performance, geological and engineering data and changes in prices, operating costs and other economic, regulatory, and operating conditions. Changes in such factors can have a significant impact on the estimated future recoverable reserves and estimated future net revenue by changing the economic lives of the properties. Proved undeveloped oil and gas reserves include only those reserves which are expected to be recovered on undrilled acreage from new wells which are reasonably certain of production when drilled, or from presently existing wells which could require relatively major expenditures to effect recompletion. Presented below is a summary of proved reserves of the Company's oil and gas properties:
United Year ended December 31, 1996 States Canada (1) Colombia Total ---------------------------- ------ ---------- -------- ----- Oil (Barrels) Proved reserves: Beginning of year 6,562,595 926,200 5,042,502 12,531,297 Acquisition, exploration and development of minerals in place 4,501,828 103,837 - 4,605,665 Revisions of previous estimates 5,950,525 24,771 5,595,772 11,571,068 Production (803,070) (134,008) (1,031,207) (1,968,285) Sales of minerals in place (60,820) - - (60,820) ---------- ---------- ----------- ---------- End of year 16,151,058 920,800 9,607,067 26,678,925 ========== ========== =========== ========== Proved developed reserves, end of year 7,993,854 710,000 4,692,140 13,395,994 ========== ========== =========== ========== Gas (Thousands of cubic feet) Proved reserves: Beginning of year 9,103,049 10,376,000 - 19,479,049 Acquisition, exploration and development of minerals in place 4,186,184 924,033 - 5,110,217 Revisions of previous estimates 1,046,326 48,213 - 1,094,539 Production (1,089,576) (561,042) - (1,650,618) Sales of minerals in place (132,018) (236,204) - (368,222) ---------- ---------- ----------- ---------- End of year 13,113,965 10,551,000 - 23,664,965 ========== ========== =========== ========== Proved developed reserves, end of year 11,520,707 2,654,000 - 14,174,707 ========== ========== =========== ==========
(1) See reference (1) on page F-26 F-25 67 SABA PETROLEUM COMPANY AND SUBSIDIARIES SUPPLEMENTAL INFORMATION ABOUT OIL AND GAS PRODUCING ACTIVITIES (CONTINUED) (UNAUDITED) ESTIMATED PROVED RESERVES (CONTINUED)
United Year ended December 31, 1995 States Canada(1) Colombia Total - ---------------------------- ------ --------- -------- ----- Oil (Barrels) Proved reserves: Beginning of year 6,671,341 464,390 - 7,135,731 Acquisition, exploration and Development of minerals in place 1,295,876 289,113 5,473,310 7,058,299 Revisions of previous estimates (691,553) 264,497 - (427,056) Production (710,271) (85,800) (430,808) (1,226,879) Sales of minerals in place (2,798) (6,000) - (8,798) --------- ---------- --------- ---------- End of year 6,562,595 926,200 5,042,502 12,531,297 ========= ========== ========== ========== Proved developed reserves, end of year 5,385,856 750,500 4,731,369 10,867,725 ========= ========== ========== ========== Gas (Thousands of cubic feet) Proved reserves: Beginning of year 7,225,973 2,565,800 - 9,791,773 Acquisition, exploration and Development of minerals in place 1,333,669 464,028 - 1,797,697 Revisions of previous estimates 1,519,718 7,832,888 - 9,352,606 Production (938,577) (398,616) - (1,337,193) Sales of minerals in place (37,734) (88,100) - (125,834) --------- ---------- --------- ---------- End of year 9,103,049 10,376,000 - 19,479,049 ========= ========== ========== ========== Proved developed reserves, end of year 8,190,986 2,051,000 - 10,241,986 ========= ========== ========== ==========
(1) The proved reserve information at December 31, 1996 and 1995 includes the following proved reserve amounts attributable to the approximately 26% minority interest resulting from the CRPL business combination with BLRC in October 1995. See Note 2 of Notes to Consolidated Financial Statements.
1996 1995 ---- ---- Oil (Bbls) 236,911 237,237 Gas (Mcf) 2,714,646 2,657,709 Barrels of oil equivalent (BOE) 689,352 680,188 Standardized measure of discounted future net cash flows $2,840,628 $1,893,643
F-26 68 SABA PETROLEUM COMPANY AND SUBSIDIARIES SUPPLEMENTAL INFORMATION ABOUT OIL AND GAS PRODUCING ACTIVITIES (CONTINUED) (UNAUDITED) STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS AND CHANGES THEREIN RELATING TO PROVED OIL AND GAS RESERVES The following information has been prepared in accordance with Statement of Financial Accounting Standards No. 69, which requires the standardized measure of discounted future net cash flows to be based on sales prices, costs and statutory income tax rates in effect at the time the projections are made and a 10 percent per year discount rate. The projections should not be viewed as estimates of future cash flows nor should the "standardized measure" be interpreted as representing current value to the Company.
1996 ------------------------------------------------------------ (Dollars in thousands) United States Canada (1) Colombia Total ------ ---------- -------- ----- Future cash inflows $ 324,206 $ 39,985 $157,552 $ 521,743 Future production costs (143,964) (13,247) (63,458) (220,669) Future development costs (24,432) (587) (22,153) (47,172) Future income tax expenses (36,539) (9,529) (22,172) (68,240) --------- -------- -------- --------- Future net cash flows 119,271 16,622 49,769 185,662 10 percent annual discount for estimated timing of cash flows (45,942) (5,581) (17,650) (69,173) --------- -------- -------- --------- Standardized measure of discounted future net cash flows $ 73,329 $ 11,041 $ 32,119 $ 116,489 ========= ======== ======== =========
1995 -------------------------------------------------------------- (Dollars in thousands) United States Canada(1) Colombia Total ------ --------- -------- ------- Future cash inflows $ 100,559 $ 25,411 $ 52,335 $ 178,305 Future production costs (56,871) (8,979) (30,193) (96,043) Future development costs (3,997) (3,064) (1,675) (8,736) Future income tax expenses (10,872) (3,204) (5,623) (19,699) -------- -------- -------- -------- Future net cash flows 28,819 10,164 14,844 53,827 10 percent annual discount for estimated timing of cash flows (9,585) (2,771) (2,406) (14,762) -------- -------- -------- -------- Standardized measure of discounted future net cash flows $ 19,234 $ 7,393 $ 12,438 $ 39,065 ======== ======== ======== ========
(1) See reference (1) on page F-26 F-27 69 SABA PETROLEUM COMPANY AND SUBSIDIARIES SUPPLEMENTAL INFORMATION ABOUT OIL AND GAS PRODUCING ACTIVITIES (CONTINUED) (UNAUDITED) STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS AND CHANGES THEREIN RELATING TO PROVED OIL AND GAS RESERVES (CONTINUED) The following are the principal sources of changes in the standardized measure of discounted future net cash flows during 1996 and 1995.
1996 ----------------------------------------------------------- (Dollars in thousands) United States Canada (1) Colombia Total ------ ---------- -------- ----- \ Balance at beginning of year $ 19,234 $ 7,393 $ 12,438 $ 39,065 Acquisitions, discoveries and extensions 43,988 1,604 - 45,592 Sales and transfers of oil and gas produced, net of production costs (7,590) (1,845) (7,605) (17,040) Changes in estimated future development costs (15,038) 2,430 (16,233) (28,841) Net changes in prices, net of production costs 14,951 5,680 20,390 41,021 Sales of reserves in place (667) (77) - (744) Development costs incurred during the period 330 120 - 450 Changes in production rates and other 16 (490) (2,236) (2,710) Revisions of previous quantity estimates 32,023 436 32,781 65,240 Accretion of discount 2,467 748 1,601 4,816 Net change in income taxes (16,385) (4,958) (9,017) (30,360) -------- ------- ------- --------- Balance at end of year $ 73,329 $11,041 $ 32,119 $ 116,489 ======== ======= ======== =========
(1) See reference (1) on page F-26 F-28 70 SABA PETROLEUM COMPANY AND SUBSIDIARIES SUPPLEMENTAL INFORMATION ABOUT OIL AND GAS PRODUCING ACTIVITIES (CONTINUED) (UNAUDITED) STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS AND CHANGES THEREIN RELATING TO PROVED OIL AND GAS RESERVES (CONTINUED)
1995 ----------------------------------------------------------- (Dollars in thousands) United States Canada(1) Colombia Total ------ --------- -------- ----- Balance at beginning of year $18,779 $ 2,348 $ - $21,127 Acquisitions, discoveries and extensions 6,561 2,123 17,848 26,532 Sales and transfers of oil and gas produced, net of production costs (3,873) (670) (1,837) (6,380) Changes in estimated future development costs 2,329 (2,716) - (387) Net changes in prices, net of production costs (1,682) 1,614 - (68) Sales of reserves in place (11) (115) - (126) Development costs incurred during the period 126 - - 126 Changes in production rates and other (3,358) (2,757) - (6,115) Revisions of previous quantity estimates (1,452) 7,313 - 5,861 Accretion of discount 2,367 332 - 2,699 Net change in income taxes (552) (79) (3,573) (4,204) ------- ------- ------- ------- Balance at end of year $19,234 $ 7,393 $12,438 $39,065 ======= ======= ======= =======
(1) See reference (1) on page F-26 F-29 EX-10.20 2 EXHIBIT 10.20 1 EXHIBIT 10.20 FIRST AMENDMENT TO FIRST AMENDED AND RESTATED LOAN AGREEMENT DATED SEPTEMBER 23, 1996 BY AND BETWEEN SABA PETROLEUM COMPANY, ET AL. AND BANK ONE, TEXAS, N.A. This First Amendment to the First Amended and Restated Loan Agreement dated September 23, 1996 (this "First Amendment") by and between SABA PETROLEUM COMPANY, a Colorado corporation (the "Borrower") et al., and BANK ONE, TEXAS, N.A., a national banking association (the "Bank") , is entered into on this 5th day of November, 1996. W I T N E S S E T H: Borrower and Bank have entered into a First Amended and Restated Loan Agreement dated September 23, 1996, (the "Loan Agreement"). Borrower has requested that Bank amend certain provisions of the Loan Agreement, and the Bank has agreed to such amendments to the extent expressly set forth herein. NOW, THEREFORE, in consideration of the promises herein contained, and for other good and valuable consideration, the receipt and sufficiency of which are acknowledged by the Borrower and the Bank, and each intending to be legally bound hereby, the parties agree as follows: I. Specific Amendments to Loan Agreement. Article I is hereby amended by adding or replacing, as applicable, the following definitions: "EAMC" means Energy Asset Management Company, L.L.C., an Arkansas limited liability company. "First Amendment" means the First Amendment to this Agreement executed by Borrower and Bank on November 5, 1996. "Former MV Partners" means DuBose Ventures, Inc. and Rockbridge Oil & Gas, Inc. "Guarantor (s)" means, individually and collectively, Saba Energy of Texas, Incorporated, a Texas corporation, Saba Petroleum, Inc., a California corporation, Saba Petroleum of Michigan, Inc., a Michigan corporation, and MV Ventures, G.P., a Texas general partnership. "Guaranty" means, with respect to each Guarantor other than MV Ventures, the guaranty of such Guarantor of all of Borrower's Obligations to the Bank, executed pursuant to the 1 2 Prior Loan Agreement, as ratified pursuant to this Agreement, and with respect to MV Ventures, its guaranty executed pursuant to the First Amendment. "MV Acquisition" means the closing of the MV Purchase and Sale Agreement. "MV Partnership Agreement" means that certain partnership agreement executed on November 1, 1995, between the Former Partners, as subsequently amended. "MV Purchase and Sale Agreement" means that certain Purchase and Sale Agreement dated October 8, 1996, between the Former Partners, as Sellers, and SETI and EAMC, as Buyers, pursuant to which SETI and EAMC acquired MV Ventures and became the sole partners therein. "MV Ventures" means that certain Texas general partnership formally known as MV Ventures, G.P., formed pursuant to the MV Partnership Agreement. "Revolving Commitment Limit" means $16,000,000.00 as of the date of this Agreement, and such different amounts as are subsequently established, from time to time, pursuant to Section 2.19 hereof. "SETI" means Saba Energy of Texas, Incorporated, a Texas corporation, which is a wholly-owned subsidiary of Borrower. Section 2.03 is amended by inserting the following text after the second sentence of such section: Effective as of the closing of the First Amendment, Borrowing Base I is redetermined to be Fourteen Million and No/100 Dollars ($14,000,000.00), which shall thereafter decline in the amount of $250,000.00, monthly, beginning on December 1, 1996, and at the beginning of each successive month thereafter until the effective date of the next redetermination of the Borrowing Base as set forth in this Section. Article III is hereby amended by adding the following new Section 3.13 thereto: 3.13 Closing of First Amendment. Prior to the funding of any Loans that are based on the increased Loan availability resulting from the increase in the Borrowing Base pursuant to the First Amendment, in addition to Borrower satisfying the requirements of the other applicable Sections of Article III, the Bank shall have received: 2 3 (a) satisfactory evidence that SETI and EAMC have closed the MV Acquisition, subject only to payment to the Former Partners of an aggregate cash sum not to exceed $3,836,571.35, and that upon the Bank's advance of Loan proceeds sufficient to fund such payment, such transaction shall have been consummated. (b) satisfactory evidence that: - the Former Partners have amended the MV Partnership Agreement to correctly designate the name of "MV Ventures, G.P.," and to include provisions adequate to insure that the sale of the partnership from the Former Partners to SETI and EAMC shall not cause a dissolution of the partnership, - SETI and EAMC have acquired MV Ventures free and clear of all liens, claims and encumbrances (including, but not limited to, releases obtained at least one day prior to closing of the First Amendment of any of the foregoing held or claimed by Compass Bank, Lexas Oil, L.L.C., or LCO Company), - MV Ventures has Marketable Title to its Oil and Gas Properties, as described in the MV Purchase and Sale Agreement, and - SETI and EAMC have amended the MV Partnership Agreement to designate SETI as Managing Partner and to grant the Managing Partner full complete power and authority to manage the business of the Partnership. (c) a Guaranty, in form and substance satisfactory to the Bank, pursuant to which MV Ventures shall guaranty the Obligations of Borrower to Bank. (d) a mortgage of the Oil and Gas Properties of MV Ventures, in form and substance satisfactory to the Bank, pursuant to which the Oil and Gas Properties of MV Ventures are mortgaged to secure the Obligations of Borrower to the Bank and MV Ventures' obligations under its Guaranty to the Bank. (e) a security agreement, in form and substance satisfactory to the Bank, pursuant to which SETI pledges it partnership interest in MV Ventures, and in the contracts, accounts and 3 4 proceeds associated therewith or resulting therefrom, to the Bank to secure the Obligations of Borrower and the Guaranty of SETI. (f) UCC-1 Financing Statements, in form and substance satisfactory to the Bank, relating to the instruments identified in clauses (d) and (e), above. (g) Transfer order letters, in form and substance satisfactory to the Bank, from MV Ventures to the Bank covering MV Ventures' interest in production from its Oil and Gas Properties. (h) a certificate of the secretary or assistant secretary of SETI, both in its own capacity and in its capacity as managing partner of MV Ventures, attesting to the adoption of resolutions by SETI and the adoption of a unanimous consent by SETI and EAMC, as the sole partners of MV Ventures, authorizing the transactions evidenced by the First Amendment. (i) a Compliance Certificate executed by Borrower. (j) a Request for Advance executed by Borrower. (k) such other documents and instruments as Bank may reasonably request. The terms "satisfactory evidence" or "evidence satisfactory to the Bank," as used in this section 3.13, means evidence satisfactory to the Bank, in its sole discretion. Section 8.04 is hereby amended to change to address and fax number of Borrower and each Guarantor to: c/o Saba Petroleum Company 201 N. Salsipuedes, Suite 104 Santa Barbara, California 93103 Attention: Walton C. Vance Fax: (805) 884-0672 II. Reaffirmation of Representations and Warranties. To induce the Bank to enter into this First Amendment, the Borrower and each Guarantor hereby reaffirms, as of the date hereof, its representations and warranties contained in Article IV of the Loan Agreement and in all other documents executed pursuant thereto, and additionally represents and warrants as follows: 4 5 A. The execution and delivery of this First Amendment and the performance by the Borrower and each Guarantor of its obligations under this First Amendment are within the Borrower's and each Guarantor's power, have been duly authorized by all necessary corporate action, have received all necessary governmental approval (if any shall be required), and do not and will not contravene or conflict with any provision of law or of the charter or by-laws of the Borrower or any Guarantor or of any agreement binding upon the Borrower or any Guarantor. B. The Loan Agreement as amended by this First Amendment represents the legal, valid and binding obligations of the Borrower and each Guarantor, enforceable against each in accordance with their respective terms subject as to enforcement only to bankruptcy, insolvency, reorganization, moratorium or other similar laws affecting the enforcement of creditors' rights generally. C. No Event of Default or Unmatured Event of Default has occurred and is continuing as of the date hereof. III. Defined Terms. Except as amended hereby, terms used herein that are defined in the Loan Agreement shall have the same meanings herein. IV. Reaffirmation of Loan Agreement. This First Amendment shall be deemed to be an amendment to the Loan Agreement, and the Loan Agreement, as further amended hereby, is hereby ratified, approved and confirmed in each. and every respect. All references to the Loan Agreement herein and in any other document, instrument, agreement or writing shall hereafter be deemed to refer to the Loan Agreement as amended hereby. V. Entire Agreement. The Loan Agreement, as hereby further amended, embodies the entire agreement between the Borrower, the Guarantors and the Bank and supersedes all prior proposals, agreements and understandings relating to the subject matter hereof. The Borrower and each Guarantor certifies that it is relying on no representation, warranty, covenant or agreement except for those set forth in the Loan Agreement as hereby further amended and the other documents previously executed or executed of even date herewith. VI. Governing Law. THIS FIRST AMENDMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF TEXAS AND THE APPLICABLE LAWS OF THE UNITED STATES OF AMERICA. This First Amendment has been entered into in Harris County, Texas, and it shall be performable for all purposes in Harris County, Texas. Courts within the State of Texas shall have jurisdiction over any and all disputes between the Borrower and the Bank, whether in law or equity, including, but not limited to, any and all disputes arising out of or relating to this First Amendment or any other 5 6 Loan Document; and venue in any such dispute whether in federal or state court shall be laid in Harris County, Texas. VII. Severability. Whenever possible each provision of this First Amendment shall be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this First Amendment shall be prohibited by or invalid under applicable law, such provision shall be ineffective to the extent of such prohibition or invalidity, without invalidating the remainder of such provision or the remaining provisions of this First Amendment. VIII. Execution in Counterparts. This First Amendment may be executed in any number of counterparts and by the different parties on separate counterparts, and each such counterpart shall be deemed to be an original, but all such counterparts shall together constitute but one and the same instrument, and any signed counterpart shall be deemed delivered by the party executing such counterpart if sent to any other party hereto by electronic facsimile transmission. IX. Section Captions. Section captions used in this First Amendment are for convenience of reference only, and shall not affect the construction of this First Amendment. X. Successors and Assigns. This First Amendment shall be binding upon the Borrower, each Guarantor and the Bank and their respective successors and assigns, and shall inure to the benefit of the Borrower, each Guarantor and the Bank, and the respective successors and assigns of the Bank. XI. Non-Application of Chapter 15 of Texas Credit Codes. The provisions of Chapter 15 of the Texas Credit Code (Vernon's Texas Civil Statutes, Article 5069-15) are specifically declared by the parties hereto not to be applicable to the Loan Agreement as hereby further amended or any of the other Loan Documents or to the transactions contemplated hereby. XII. Notice. THIS FIRST AMENDMENT TOGETHER WITH THE LOAN AGREEMENT, AND THE OTHER LOAN DOCUMENTS REPRESENT THE FINAL AGREEMENT BETWEEN THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES. THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES. 6 7 IN WITNESS WHEREOF, the parties hereto have caused this First Amendment to be duly executed as of the day and year first above written. BORROWER SABA PETROLEUM COMPANY By: /s/ WALTON C. VANCE ----------------------------- Walton C. Vance, Chief Financial Officer BANK BANK ONE, TEXAS, N.A. By: /s/ LINDA F. MASERA ----------------------------- Linda F. Masera Vice President GUARANTORS: SABA ENERGY OF TEXAS, INCORPORATED By: /s/ BRADLEY T. KATZUNG ------------------------------- Bradley T. Katzung, President SABA PETROLEUM, INC. By: /s/ WALTON C. VANCE ------------------------------- Walton C. Vance, Chief Financial officer SABA PETROLEUM OF MICHIGAN, INC. By: /s/ BRADLEY T. KATZUNG ------------------------------- Bradley T. Katzung, President MV VENTURES, G. P. By: SABA ENERGY OF TEXAS, INCORPORATED, Managing Partner By: /s/ BRADLEY T. KATZUNG ------------------------------- Bradley T. Katzung, President 7 EX-10.21 3 EXHIBIT 10.21 1 Exhibit 10.21 AGREEMENT MINUTES In the month of February there were several meetings between Omimex de Colombia and Ecopetrol to analyze different aspects of the new crude price negotiation for the Cocorna and Nare Association and the new tariff for the crude transported through the Velasquez-El Sauce Pipeline, Property of Omimex. As per the mentioned before and in consideration to the additional contract DIJ-(P)-424-AD, signed on March 8, 1994, that had validity until December 31, 1995. From January 1, 1996 the accepted clauses were as per contract LEG-205-84 with its modifications agreed an April 8, 1987, which was mentioned by the Presidency of Ecopetrol in its letter sent to Texas Petroleum Company on September 28, 1995 ECP-625). Once the mentioned points were evaluated, it were agreed on the following aspects. 1st. From February 1, 1996 and for three (3) consecutive years, the monthly purchasing crude price from Teca and Nare fields will be determined by using the arithmetic average of a crude basket and a crude fuel oil basket with a maximum (ceiling) and minimum (floor) discount. Value which will be in relation to the Crude Texas Intermediate current price (This price is published in the Platts Oilgram, and will be: CRUDE BASKET: Arithmetic average of the crude Maya, Mandji and Itsmus according to gravity API and sulphur content. The process of calculation will be done in the same way as per the contract that was in place until Dec. 31, 1995. CRUDE FUEL OIL BASKET: Arithmetic Average between the fuel oil with 1% of sulphur from the USA Gulf and the fuel oil of Ecopetrol for exportation without corrections. The calculation mechanism will be the same as per the contract that was valid until Dec. 31, 1995. DISCOUNT: The average of the corrected crude basket and fuel oil (calculated with two decimal digits) will be affected by a discount value that will depend upon the current average monthly price of the West Texas Intermediate crude. This should be stated a month prior to the invoicing date (Price published in the Platts Oilgram) in the same way that is done for the crude and fuel oil baskets, and these are: CRUDE PRICES WTI PURCHASING PRICE Less than 16,00 US$/B Average Basket - 1,65 Between 16,00 and 20,00 US$/B Average Basket - 2,05 Over 20,00 US$/B Average Basket - 2,45 2nd. Ecopetrol will transport through the Velasquez - Sauce Pipeline owned by Omimex de Colombia its production share from Teca and Nare fields plus the required crude's disolvent in a proportion of 1.5 barrels per heavy oil crude; with the following tariff: 2 From 0 to 18,000 Bpdc 0.61 US$/Bbl Which are valid from February 1st, 1996 From 18,001 Bpdc and over 0.56 US$/Bbl 3rd. It is modified the deadline for the payment of the invoices, both in Pesos and Dollars, and will be in thirty (30) days from the date that Ecopetrol receives the invoices processed adequately. 4th. The crude pending of devolution by Omimex, mentioned in an additional contract DIJ-(P)-424AD OF March 8, 1994, will be returned to Ecopetrol the total volume (84,302 Barrels) and in cash during the month of February of 1996. It is signed the present agreement, which should be ratified for both administrations, in the Technical Division of Ecopetrol on February 23, 1996. For Omimex de Colombia For Ecopetrol Segundo A. Gonzalez Jorge Lozano J. Gustavo Mendez O. EX-10.22 4 EXHIBIT 10.22 1 Exhibit 10.22 OPERATING AGREEMENT VELASQUEZ FIELD THIS AGREEMENT, entered into this 11th day of September, 1995, but effective December 30, 1994, by and between OMIMEX DE COLOMBIA, LTD., hereinafter designated and referred to as "Operator", and SABACOL, INC., hereinafter referred to as "Non-Operator", collectively called the Parties, WITNESSETH: WHEREAS, the Parties to this agreement are owners of the Velasquez Field, Colombia, S.A. identified in Exhibit "A", and the Parties hereto have reached an agreement to develop and operate this Field, NOW, THEREFORE, it is agreed as follows: ARTICLE I DEFINITIONS As used in this agreement, the following words and terms shall have the meanings here ascribed to them: A. The term "oil and gas" shall mean oil, gas, casinghead gas, gas condensate, and all other liquid or gaseous hydrocarbons and other marketable substances produced therewith, unless an intent to limit the inclusiveness of this term is specifically stated. B. The term "Contract Area" shall mean all lands and oil and gas interests intended to be developed and operated for oil and gas purposes under this agreement. Such lands and oil and gas interests are described in Exhibit "A". C. The term "drillsite" shall mean the site on which a proposed well is to be located. D. The terms "Drilling Party" and "Consenting Party" shall mean a party who agrees to join in and pay its share of the cost of any operation conducted under the provisions of this agreement. E. The terms "Non-Drilling Party" and "Non-Consenting Party" shall mean a party who elects not to participate in a proposed operation. Unless the context otherwise clearly indicates, words used in the singular include the plural, the plural include the singular, and the neuter gender includes the masculine and the feminine. Page 1 2 ARTICLE II EXHIBITS The following exhibits, as indicated below and attached hereto, are incorporated in and made a part hereof: A. Exhibit "A" - Identification of the lands subject to this agreement and the interests of the Parties. B. Exhibit "B" - Accounting Procedure C. Exhibit "C" - Insurance ARTICLE III INTEREST OF THE PARTIES Unless changed by other provisions, all costs and liabilities incurred in operations under this agreement shall be borne and paid, and all equipment and materials acquired in operations on the Contract Area shall be owned, by the Parties as their interests are set forth in Exhibit "A". In the same manner, the Parties shall also own all production of oil and gas from the Contract Area. Nothing contained in this Article III. shall be deemed an assignment or cross-assignment of interests covered hereby. ARTICLE IV OPERATOR OMIMEX DE COLOMBIA, LTD., shall be Operator of the Contract Area, and shall conduct and direct and have full control of all operations on the Contract Area as permitted and required by, and within the limits of this agreement. It shall conduct all operations in a good and workmanlike manner, but it shall have no liability as Operator to the other party for losses sustained or liabilities incurred, except such as may result from gross negligence or willful misconduct. Operator may resign at any time by written notice thereof to Non-Operator. If Operator terminates its legal existence, no longer owns an interest in the Contract Area, or is no longer capable of serving as Operator because Operator is insolvent, bankrupt or is placed in receivership, Operator shall be deemed to have resigned without any action by Non-Operator, except the selection of a successor. Operator may be removed by Non-Operator by majority vote or if it fails or refuses to carry out its duties hereunder. Such resignation or removal shall not become effective until 7:00 A.M. on the first day of the calendar month following the expiration of (90) days after giving of the notice of resignation by Operator or action by the Non-Operator to remove Operator, unless a successor Operator has been selected and assumes the duties of Operator at an earlier date. Page 2 3 Upon the resignation of Operator or removal by Non-Operator, a successor Operator shall be selected by Parties owning an interest in the Contract Area at the time such successor Operator is selected, excluding the ownership of the retiring or removed Operator. The number of employees used by the Operator in conducting operations hereunder, their selection, and the hours of labor and the compensation for services performed shall be determined by Operator, and all such employees shall be the employees of Operator. ARTICLE V DRILLING AND DEVELOPMENT A. OPERATIONS: Should any party hereto desire to drill additional wells on the Contract Area or rework, deepen or plug back a dry hole or a well not currently producing in paying quantities, the party desiring to perform such operation shall give the other party written notice of the proposed operation and the estimated cost of the operation. The party receiving such a notice shall have thirty (30) days after receipt of the notice within which to notify the party wishing to do the work whether they elect to participate in the cost of the proposed operation. If a rig is on location the notice of a proposed rework, plug back or drill deeper may be given by telephone and the response period shall be limited to forty-eight (48) hours, exclusive of Saturday, Sunday and legal holidays. Failure of a party receiving such notice to reply within the period fixed above shall constitute an election by that party not to participate in the cost of the proposed operation. Any notice or response given by telephone shall be promptly confirmed in writing. If all Parties elect to participate in such a proposed operation, Operator shall, within ninety (90) days after expiration of the notice period (or as promptly as possible after the expiration of the forty-eight (48) hour period when a drilling rig is on location), actually commence the proposed operation and complete it with due diligence at the risk and expense of all the Parties hereto. Said commencement may be extended for thirty (30) days, upon written notice to the other party, if in the Operator's sole opinion additional time is reasonably necessary to obtain permits, equipment or surface rights. If not commenced within the time periods set forth above, then the Operator shall resubmit to the other party its proposal as if no prior proposal had been made. If less than all Parties approve any proposed operation, the proposing party, immediately after the expiration of the applicable notice period, shall advise the Consenting Parties of the total interest approving such operation and its recommendation as to whether the Consenting Parties should proceed with the operation as proposed. If the decision is to proceed the entire cost and risk of conducting such operations shall be borne by the Consenting Parties in their adjusted proportions. Upon commencement of operations in accordance with the provisions of this Article, each Non-Consenting Party shall be deemed to have relinquished to Consenting Parties, and the Consenting Parties shall own and be entitled to receive, in proportion to their respective interests, all such Non-Consenting Party's interest in the well and share of production therefrom until the proceed of the sale of such share, calculated at the well shall equal the total of the following: Page 3 4 a) 300% of each Non-Consenting Party's share of the cost of any newly acquired surface equipment beyond the wellhead connections (including, but not limited to, stock tanks, separators, treaters, pumping equipment and piping), plus 100% of each such Non-Consenting Party's share of the cost of operation of the well commencing with first production and continuing until each such Non-Consenting Party's relinquished interest shall revert to it, it agreed that each Non-Consenting Party's share of such cost and equipment will be that interest which would have been chargeable to such Non-Consenting Party had it participated in the well from the beginning of the operations; and b) 300% of that portion of the cost and expenses of drilling, reworking, deepening, plugging back, testing and completing, and 300% of that portion of the cost of newly acquired equipment in the well (to and including the wellhead connections), which would have been chargeable to such Non-Consenting Party if it had participated therein. An election not to participate in the drilling or the deepening of a well shall be deemed an election not to participate in any reworking or plugging back operation proposed in such well, or portion thereof, to which the initial Non-Consent election applied that is conducted at any time prior to full recovery by the Consenting Parties of the Non-Consenting Parties recoupment account. Any such work during the recoupment period shall be deemed part of the cost of operation of said well and there shall be added to the sums to be recouped by the Consenting Parties 300% of that portion of the costs of the work. Within sixty (60) days after the completion of any operation under this Article, the Operator shall furnish each Non-Consenting Party with an inventory of the equipment in and connected to the well, and an itemized statement of the cost of the operation. Thereafter, at least semi-annually, the Operator shall provide each Non-Consenting Party with a payout statement reflecting costs and revenue attributable to the well from the time of the non-consent election to the date of the statement. If and when the Consenting Parties recover from a Non-Consenting Party's relinquished interest the amounts provided for above, the relinquished interests of such Non-Consenting Party shall automatically revert to it, and from and after such reversion, such Non-Consenting Party shall own the same interest in such well, the material and equipment in or pertaining thereto, and the production therefrom as such Non-Consenting Party would have been entitled had it participated in the operation on said well. B. TAKING OF PRODUCTION: Each Party to this agreement shall be responsible for disposing of and accounting for its proportionate share of the production in accordance with the sales agreement(s) with Ecopetrol or any other purchaser as agreed to by the Parties or as required by the appropriate government authority of the Republic of Colombia. C. ACCESS TO CONTRACT AREA AND INFORMATION: Each party shall have access to the Contract Area at all reasonable times, at its sole cost and risk 4 5 to inspect or observe operations, and shall have access at reasonable times to information pertaining to the development or operation thereof, including Operator's books and records relating thereto. Operator, upon request, shall furnish each of the other Parties with copies of all forms and reports filed with governmental agencies, daily drilling reports, well logs, tank tables, daily gauge and run tickets and reports of stock on hand at the first of each month, and shall make available samples of any cores or cuttings taken from any well drilled on the Contract Area. The cost of gathering and furnishing information to Non-Operator, other than that specified above, shall be charged to the Non-Operator that requests the information. D. ABANDONMENT OF WELLS: If a well has produced, excluding the interest of any Non-Consenting Party, it shall not be plugged and abandoned without the consent of all Parties. If all Parties consent to the plugging and abandonment, such action shall be at the cost, risk and expense of all the Parties. Should Operator after diligent effort, be unable to contact any party, or should any party fail to reply with-in forty-eight (48) hours after receipt of notice of the proposal to plug and abandon such well, such party shall be deemed to have consented to the proposed abandonment. If a well has produced, excluding the interest of any Non-Consenting Party, shall not be plugged and abandoned without the consent of all Parties. If all Parties consent the plugging shall be at the cost, risk and expense of all the Parties. If, within thirty (30) days, after receipt of the notice to plug and abandon, any party elects not to consent to the plugging of the well, then said party shall assume operation of the well and pay the Parties consenting to the plugging and abandonment the estimated salvage value less the estimated cost to plug and abandon the well. Each abandoning party shall assign, without warranty, express or implied, of any kind or nature, all its interest in the well. Thereafter the abandoning Parties shall have no further responsibility, liability, or interest in the operation of or production from the well. All wells shall be plugged and abandoned in accordance with all governmental rules and regulations. ARTICLE VI EXPENDITURES AND LIABILITIES OF PARTIES A. LIABILITIES OF PARTIES: The liability of the Parties shall be several, not joint or collective. Each party shall be responsible only for its obligations, and shall be liable only for its proportionate share of the costs of developing and operating the Contract Area. Accordingly, the liens granted among the Parties are given to secure only the debts of each severally. It is not the intention of the Parties to create, nor shall this agreement be construed as creating, a mining or other partnership or association, or to render the Parties liable as partners. B. LIENS AND PAYMENT DEFAULTS: Each Non-Operator grants to Operator, a lien on all of each Non-Operator's right in the Page 5 6 Contract Area, and a security interest in its share of oil and/or gas when extracted and its interest in all equipment, to secure payment of its share of expense, together with interest thereon at the rate shown in Exhibit "B". Operator grants a like lien and security interest to the Non-Operators to secure payment of Operator's proportionate share of expense. C. PAYMENTS AND ACCOUNTING: Except as otherwise specifically provided, Operator shall promptly pay and discharge expenses incurred in the development and operation of the Contract Area pursuant to this agreement and shall charge each of the Parties hereto with their respective proportionate shares upon the expense basis provided in Exhibit "B". Operator shall keep an accurate record of the joint account hereunder, showing expenses and charges and credits made and received. Operator may request advance payment of estimated expenses. If any party fails to pay its share of said estimated expenses within the time specified, the amount due shall bear interest as provided in Exhibit "B". Such request shall include a detail listing of the expenses to be covered by the advance payment. Exhibit "B" shall detail the accounting procedures for the Contract Area. D. LIMITATION OF EXPENDITURES: Operator shall notify all Parties in writing and an AFE shall be prepared before incurring any item of expense, which is equal to or exceeds US $50,000.00. Such item of expense shall not be incurred unless a majority in interest of the Parties signify their consent thereto in writing within 10 days of the written notice. E. INSURANCE: Operator shall also carry or provide insurance for the benefit of the joint account of the Parties as outline in Exhibit "C", attached to and made a part hereof. Operator shall require all contractors engaged in work on or for the Contract Area to maintain statutorily required insurance and insurance equal to that shown on Exhibit "C". F. ANNUAL BUDGET MEETING: Operator shall, with at least 30 days written notice, call an annual meeting of the Parties for the purpose of approving an annual budget and capital expenditures program. ARTICLE VII MAINTENANCE OF UNIFORM INTEREST For the purpose of maintaining uniformity of ownership of the interests covered by this agreement, no party shall sell, encumber, transfer or make other disposition of its interest in the Contract Area and in the wells, equipment and production unless such disposition covers the entire undivided interest of the party. Page 6 7 ARTICLE VIII CLAIMS AND LAWSUITS Operator may settle any single uninsured third party damage claim or suit arising from operations hereunder if the expenditure does not exceed Twenty Thousand Dollars (US $20,000.00) and if the payment is in complete settlement of such claim or suit. If the amount required for settlement exceeds the above amount, the Parties hereto shall assume and take over further handling of the claim or suit, unless such authority is delegated to Operator. All costs and expenses of handling, settling or otherwise discharging such claim or suit shall be the joint expense of the Parties participating in the operation from which the claim or suit arises. If a claim is made against any party or any party is sued on account of any matter arising from operations hereunder over which such individual has no control because of the rights given Operator by this agreement, such party shall immediately notify all other Parties, and the claim or suit shall be treated as any other claim or suit involving operations hereunder. ARTICLE IX FORCE MAJEURE If any party is rendered unable, wholly or in part, by force majeure to carry out its obligations under this agreement, other than the obligation to make money payments, that party shall give to all other Parties prompt written notice of the force majeure with reasonably full particulars concerning it; thereupon, the obligations of the party giving the notice, so far as they are affected by the force majeure, shall be suspended during, but no longer than, the continuance of the force majeure. The affected party shall use all reasonable diligence to remove the force majeure situation as quickly as practicable. The requirement that any force majeure shall be remedied with all reasonable dispatch shall not require the settlement of strikes, lockouts, or other labor difficulty by the party involved, contrary to its wishes; how all such difficulties shall be handled shall be entirely within the discretion of the party concerned. The term "force majeure", as here employed, shall mean an act of God, strike, lockout, or other industrial disturbance, act of the public enemy, war, blockade, public riot, lightning, fire, storm, flood, explosion, governmental action, governmental delay, restraint or inaction, unavailability of equipment and any other cause, whether of the kind specifically enumerated above or otherwise, which is not reasonably within the control of the party claiming suspension. ARTICLE X NOTICES All notices authorized or required between the Parties and required by any of the provisions of this agreement, unless otherwise specifically provided, shall be given in writing by mail or telegram, postage or charges prepaid, or by telex or telecopier and addressed to the Parties to whom the notice Page 7 8 is given at the addresses listed in Exhibit "A". The originating notice given under any provision hereof shall be deemed given only when received by the party to whom such notice is directed, and the time for such party to give any notice in response thereto shall run from the date the originating notice is received. The second or any responsive notice shall be deemed given when deposited in the mail or with the telegraph company, with postage or charges prepaid, or sent by telex or telecopier. Each party shall have the right to change its address at any time, and from time to time, by giving written notice thereof to all other Parties. ARTICLE XI TERM OF AGREEMENT This agreement shall remain in full force and effect as to the Contract Area for so long as any wells are producing from the Contract Area. Upon termination of this agreement the Parties shall remain responsible for the proportionate share of any costs attributable to the final plugging and abandonment of the wells and the facilities associated therewith. It is agreed however, that the termination of this agreement shall not relieve any party from any liability which has accrued or attached prior to the date of such termination. ARTICLE XII APPLICABLE LAW This agreement, its meaning and interpretation and the relationship of the Parties hereunder, shall be governed by the laws of the United States of America and all matters arising therefrom shall be brought before and submitted exclusively to the courts of United States. ARTICLE XIII MISCELLANEOUS A. US INTERNAL REVENUE CODE ELECTION It is the express and specific intent of the Parties that a partnership relationship not be created between them or among them and any other co-owner of an interest in the Contract Area. In accordance with the applicable provision of the US Internal Revenue Code of 1954 and regulations promulgated pursuant and further thereto, the Parties do hereby elect not to be treated or considered as partners and further elect that none of the provisions of Sub-Chapter K of said Code shall be applicable with respect to the operation of the Contract Area. The Parties expressly authorize Operator to file with the proper authorities executed copies of this agreement, and such copies when filed, shall be conclusive notice to said authorities of this election pursuant to said Contract Area from all of the provisions of said Sub-Chapter K and said regulations. Operator may in lieu of filing copies hereof, notify said authorities of this election by separate instrument in proper form. 8 9 B. HEADINGS: The topic heading used herein are inserted for convenience only and shall not be construed as having any substantive significance or meaning. C. MODIFICATION: There shall be no modification or amendment of this agreement except by written instrument signed by all Parties. D. ASSIGNMENT: Except as otherwise provided herein, this agreement shall be binding upon and inure to the benefit of the Parties, their respective successors and assigns. This instrument may be executed in any number of counterparts, each of which shall be considered an original for all purposes. IN WITNESS WHEREOF, this agreement is executed as of the date first above mentioned. WITNESSED: OPERATOR: [SIG] OMIMEX DE COLOMBIA, LTD. - ------------------------- [SIG] [SIG] - ------------------------- -------------------------- WITNESSED: NON-OPERATOR: [SIG] SABACOL, INC. - -------------------------- [SIG] [SIG] - -------------------------- --------------------------- Page 9 10 EXHIBIT "A" Attached to and made a part of that certain Operating Agreement covering the Velasquez Field by and between OMIMEX DE COLOMBIA, LTD. and SABACOL, INC. dated the 11th day of September, 1995, but effective December 30, 1994. CONTRACT AREA & INTERESTS OF THE PARTIES CONTRACT AREA: VELASQUEZ FIELD -- LOCATED IN THE PUERTO BOYACA MUNICIPALITY, STATE OF BOYACA, REPUBLIC OF COLOMBIA, S.A. WHICH IS PART OF THE PRIVATE PROPERTY DENOMINATED "GUAGUAQUI-TERAN", THE LATTER REGISTERED UNDER NUMBER 7, PAGES 58 THROUGH 66 OF BOOK 2 OF THE LEGAL DEPARTMENT FILES OF THE MINISTRY OF MINES AND ENERGY. INTERESTS OF THE PARTIES: PERCENT ------- OMIMEX DE COLOMBIA, LTD. 75% 5608 Malvey, Penthouse Suite Carrera 17 No. 93-82 Off. 303 Fort Worth, Texas 76107 Santafe De Bogota, Colombia Phone: (817) 735-1500 Phone: 571-623-5905 Fax: (817) 735-8033 Fax: 571-218-1395 SABACOL, INC. 25% 17512 Von Karman Ave. 109 No. 15-60 Off. 301 Irvine, California 92714 Santafe De Bogota, Colombia Phone: (714) 724-1112 Phone: 571-612-7185 Fax: (714) 724-1555 Fax: 571-612-3969 11 EXHIBIT "B" JOINT OPERATIONS ACCOUNTING PROCEDURE In the event of a conflict between the provisions of this Accounting Procedure and the provisions of the Agreement to which this Accounting Procedure is attached, the provisions Agreement shall prevail. The purpose of this Accounting Procedure is to establish equitable methods for determining charges and credits applicable to operations under the Agreement. The Parties agree that if any of such methods prove unfair or inequitable to Operator or Non-Operator(s), the Parties will meet and in good faith endeavor to agree on changes in methods deemed necessary to correct any unfairness or inequity. 1- GENERAL PROVISIONS 1.1 Definitions 1.1.1. Agreement means the Joint Operating Agreement to which this Accounting Procedure is attached. 1.1.2. Contract Area shall have the same definition as contained in the Agreement. 1.1.3. Controllable Material shall mean material which the Operator according to good oil field practice, subjects to record control and inventory. A list of types of such material shall be furnished to Non-Operator(s) upon request. 1.1.4. Days shall in all cases mean calendar days. 1.1.5. Field Supervisors as used herein the term "Field Supervisors" shall mean those employees whose primary function in Joint Operations is the direct supervision of other employees and/or contract labor directly employed on the Joint Property in a field operating capacity. 1.1.6. Joint Account shall be the set of accounts maintained by the Operator to record all expenditures and other transactions under the provisions of the Agreement. 1.1.7. Joint operations shall mean all activities necessary and proper under the provisions of the Agreement. 1.1.8. Joint Property shall mean the real and personal property acquired and held for use in connection with operations under the Agreement. 12 1.1.9. Material shall mean personal property, including supplies and use charge, acquired and held for use in Joint Operations. 1.1.10 Non-Operator(s) shall mean the parties to the Agreement other than the Operator. 1.1.11 Operator shall have the same definition as contained in the Agreement. 1.1.12. Party or Parties shall have the same definitions as contained in the Agreement. 1.1.13. Technical Employees as used herein the term "Technical Employees" shall mean those employees having special and specific engineering, geological or other professional skills, and whose primary function in Joint Operations is handling of specific operating conditions and problems for the benefit of the Joint Property. 1.1.14. Operating Committee as used herein shall mean such committee as may be appointed by the parties consisting of one representative of the Operator and one representative of each Non-Operator. 1.2 Statements, Billings and Adjustments 1.2.1. Each Party to the Agreement is responsible for preparing its own accounting, statistical and tax reports to meet Contract Area and any other country or corporate requirements, except that Operator shall be responsible for preparation and filling of any United States Partnership Income Tax Returns that may be required. The parties may elect out of Subchapter K. Operator is required to furnish Non-Operator(s) statements and billings in such form as required to facilitate discharging such responsibilities. 1.2.2. Operator shall bill Non-Operator(s) on or before the last day of each month for their proportionate share of expenditures for the preceding month. Such billings shall be accompanied by statement of charges and credits to the Joint Account summarized by appropriate accounting classifications indicative of the nature thereof, except that items of Controllable Material and unusual charges and credits shall be detailed. Such billings shall indicate the monetary origin (Colombian Pesos or U.S. Dollars) of the charges and credits. 13 1.2.3. Operator shall, upon request by Non-Operator(s), furnish a description of such accounting classifications. 1.2.4. In accordance with Colombian law, operator shall keep the Joint Account in Colombian pesos. The Operator will also maintain these accounts in U.S. dollar equivalency or shall provide the applicable exchange rate(s) monthly so that Non-Operator(s) may convert these Colombian peso accounts to U.S. Dollars each month. The parties shall agree as to the procedure to be used in establishing the exchange rate(s) to be used in making the conversion from Colombian pesos to U.S. dollars or vice-versa. Expenditures made in U.S. Dollars shall be separately identified and reported to Non-Operator(s) on a monthly basis. Accounts maintained for recording property, plant and equipment shall be maintained in both Colombia pesos and U.S. dollars and such accounts shall reflect the monetary origin (pesos or dollars) of each item of property, plant and equipment purchased for the Joint Account. In the conversion of currencies and in accounting for advances of different currencies as provided for in Paragraph 1.3 of this Article, or any other currency transactions affecting the Joint Operations, it is the intent that none of the Parties shall experience gain or loss at the expense of, or to the benefit of, the other Parties. 1.2.5. Payment of the bills referred to in paragraph 1.2.2. of this article shall not prejudice the rights of any Non-Operator(s) to protest or question the correctness thereof; however, all bills and statements rendered to Non-Operator(s) by Operator during any calendar year shall conclusively be presumed to be true and correct after twenty-four (24) months following the end of any such calendar year, unless within the said twenty-four month period a Non-Operator takes written exception thereto and makes claim on Operator for adjustment. No adjustment favorable to Operator shall be made unless it is made within the same prescribed period. The provisions of this paragraph shall not prevent adjustments resulting from a physical inventory of the Joint Property acquired for Joint operations. 1.2.6. The accrual method of accounting shall be used for the Joint Account. 14 1.3 Advances and Payment 1.3.1. Non-Operator(s) shall advance by immediately available funds to Operator within 15 days of notice by Operator their share of estimated cash requirements for the succeeding month's Operations in accordance with Article VI of the Agreement. Such advance shall be credited when the actual billings per 1.2.2. above are issued. 1.3.2. Should the Operator be required to pay any large (in excess of U.S. $50,000.00) sums of money on behalf of the Joint Operation, which were unforeseen at the time of providing the Non-Operator(s) with said monthly estimates of its requirements, the Operator shall make a written request of the Non-Operators(s) for special advances covering the Non-Operators' share of such payments. Non-Operator(s) shall make their proportional special advances within fifteen (15) days after receipt of such notice. 1.3.3. If Non-Operator(s) advances exceed their share of the expenditures, the next succeeding cash advance requirements, after such determination, shall be reduced accordingly or deducted from the next billing, whichever comes first. However, Non-Operator(s) may request that excess advances be refunded. The Operator shall make such refund within fifteen (15) days after receipt of Non-Operator(s) request. Such refund shall be made in the currency so advanced. 1.3.4. If Non-Operator(s) advances are less than their share of actual expenditures, the deficiency shall, at operator's option, be added to subsequent cash advance requirements or be paid by Non-Operator(s) within thirty (30) days following receipt of Operators for such deficiency. 1.3.5. If Operator does not request Non-Operator(s) to advance their share of estimated cash requirements, Non-Operator(s) shall pay their share of actual expenditures within thirty (30) days following receipt of Operator's billing. 1.3.6. Payment of advances or billings shall be made on or before the due date, and if not so paid the unpaid balance shall be treated as provided under Article VI of the Agreement. 15 1.4 Audits 1.4.1. A Non-Operator, upon at least thirty (30) days written notice to Operator and other Non-Operator(s) shall have the right at its sole expense to audit the Joint Account and related records for any calendar year or portion thereof within the twenty-four (24) month period following the end of such calendar year; however, the conducting of an audit shall not extend the time for the taking of written exception to and the adjustment of accounts as provided for in Paragraph 1.2.5. of this Article. Where there are two or more Non-Operators the Non-Operators shall make every reasonable effort to conduct joint or simultaneous audits in a manner which will result in a minimum of inconvenience to the Operator. 1.4.2. Subject to unanimous prior approval of the Parties, the cost of any special audit or verification of the Joint Account that is for the benefit of all Parties shall be chargeable to the Joint Account. 1.4.3. Normal recurring internal audits of the Joint Account made by the Operator to assess internal controls shall be chargeable to the Joint Account and copies thereof shall be furnished to Non-Operators upon request. 1.5 Interest 1.5.1 Should interest be accessed per the terms of the Agreement, (1) the rate on non U.S. $ Cash Calls shall be the Colombian Prime Rate as quoted by Banco Ganadero plus 10% and (2) on U.S. $ Cash Calls Prime as quoted by Bank One, Texas, N.A. plus 3%. Should said rate(s) exceed the maximum rate allowed by law, then the maximum lawful rate(s) shall apply. 2- CHARGEABLE COST AND EXPENDITURES Operator shall charge Joint Account for all costs necessary to conduct Joint Operations in or with respect to the Contract Area. Such cost shall include, but are not necessarily limited to: 2.1 Control, License or Permit Payments 2.1.1. All expenditures necessary to acquire and to maintain rights to the Contract Area. 16 2.2 Labor and Related Costs 2.2.1. Salaries. Salaries and wages of Operator's field employees directly employed on the Joint Property in the conduct of Joint Operations, salaries and wages of Field Supervisors, and salaries and wages of Technical Employees that perform work and services directly relating to or for the benefit of the Joint Property. 2.2.2. Salary Benefits. Operator's cost of holiday, vacation, sickness and disability benefits and other customary allowances paid to employees whose salaries and wages are chargeable to the Joint Account under Article 2.2.1 above. Such costs under this Article 2.2.2 may be charged on a "when and as paid basis" or by "percentage assessment" on the amount of salaries and wages chargeable to the Joint Account under Article 2.2.1 above. If percentage assessment is used, the rate shall be based on the Operator's cost experience and adjusted at least annually to the Operator's actual cost. 2.2.3. Assessments. Expenditures or contributions made pursuant to assessments imposed by governmental authority which are applicable to Operator's costs chargeable to the Joint Account under Article 2.2.1 and 2.2.2 above. 2.2.4. Personal Related Expenses. Personal Expenses, including but not limited to the following: travel and other reasonable reimbursable expenses of Operator's employees, hospital and medical expense, schools for employees and their children, insurance policies, and all other reasonable activities applicable to the employee and family, of those employees whose salaries and wages are chargeable to the Joint Account under Article 2.2.1 above. 2.2.5. Employee Benefit Plans. Operator's current cost of established plans for employees' group life insurance, hospitalization, pension, retirement, stock purchase, thrift, bonus, and other customary benefit plans of a like nature provided under Operator's usual practices, applicable to Operator's labor cost chargeable to the Joint Account under Article 2.2.1 above shall be at Operator's actual cost. 17 2.3 Material 2.3.1. Material purchased or furnished by Operator for use in Joint Operations as provided under Article 3 of this Accounting Procedure. 2.4 Transportation and Employee Relocation Costs 2.4.1. Transportation of Material and other related costs such as expediting crating, dock charges, inland and ocean freight, customs duties and taxes and unloading at destination. 2.4.2. Transportation of employees as required in the conduct of Joint Operations. 2.4.3. Relocation costs to the Contract Area vicinity or to other locations in Colombia of employees permanently or temporarily assigned to the Joint Operations. Such costs shall include transportation of employees' families and their personal and household effects and all other relocation costs in accordance with Operator's usual practice. Relocation from Colombia shall not be charged to the Joint Account. 2.5 Services 2.5.1. Contract services, professional consultants, and other services covered by Paragraph 2.8 2.5.2. Technical services for specific projects resulting in a presentation or a written report, such as, but not limited to, laboratory analysis, drafting, geophysical interpretation, engineering, and related data processing, performed by the Operator and its Affiliates for the direct benefit of the Joint Operations, provided such costs shall not exceed those currently prevailing if performed by outside technical service companies. 2.5.3. Use of equipment, services and facilities furnished by Operator or Non-Operated(s) or their Affiliates provided such equipment, services or facilities is of a quality and cost commensurate and competitive with that offered by third parties in the general vicinity of the Contract Area. 2.6 Damage and Losses to Joint Property 2.6.1. All costs or expenses necessary for the repair or replacement of Joint Property resulting from 18 damages or losses incurred by fire, flood, storm, theft, accident, or any other cause. Operator shall furnish Non-Operator(s) written notice of damages or losses in excess of nominal value as soon as practicable. Any payment(s) by insurance companies shall be deducted in determining the amount due. 2.7 Insurance 2.7.1. Net premiums for insurance are required by the Parties of the Agreement. 2.7.2. Actual expenditures in the settlement of all losses, claims, damages, judgements, and other expenses for the benefit of the Joint Operations a per the Agreement. 2.7.3. Credits for settlements received from the insurance policies and others. 2.8 Legal Expense 2.8.1. All costs or expenses of litigation or legal services otherwise necessary or expedient for the protection of the Joint Property, including but not limited to attorney's fees, court costs, cost of investigation or procuring evidence and amounts paid in settlement or satisfaction of any such litigation of claims. These services may be performed by the Operator's legal staff or an outside firm as necessary. Operator shall not incur more than Ten Thousand U.S. Dollar (US $10,000) in costs for legal services in connection with any single, suit, proceeding or matter without first obtaining the prior approval of the other parties. 2.9 Duties and Taxes 2.9.1. All duties and taxes (except taxes based on income, net worth and royalty based on production from the Contract Area and any other taxes for which the Parties are liable severally but not Jointly), fees and governmental assessment of every kind and nature in relation with Joint Operations. 2.10 Offices, Camps and Miscellaneous Facilities 2.10.1. Cost of maintaining and operating any offices, suboffices, camps, warehouses, housing and other facilities directly serving the Joint Operations shall be charged to the Joint Account. If such 19 Facilities serve operations in addition to the Joint operations, the costs shall be allocated to the properties served on an equitable basis as may be approved by the Operating Committee which approval shall not be unreasonably withheld. 2.11 Administrative Overhead 2.11.1. An administrative overhead covering services and related office costs of personnel performing administrative, legal, accounting, purchasing, treasury, tax, employee relations, computer services and other functions for the benefit of the Operations provided they are not included elsewhere, shall be charged to the Joint Account monthly. 2.11.2. The charge under the foregoing paragraph shall be for services of all personnel and offices of Operator who are not directly assigned to operations and shall be charged each month at the rate of 12% on total expenditures attributable to Joint Operations in the preceding month, except only 5% shall be charged on expenditures for capital expenditure items. 2.11.3. Notwithstanding anything to the contrary which might be stated in the Accounting Procedure, it is understood that no cost or expenditure included under sections 2.2.1 through 2.10 shall be included or duplicated in the administrative overhead rate charged in this Article 2.11. Further, at any party's request, the rates in 2.11.2 above shall be reviewed annually and adjusted if determined to be inadequate or excessive. 2.12 Other Expenditures 2.12.1. Any other expenditures not covered or dealt with in the foregoing provisions which are incurred by the Operator and its Affiliates for the ordinary, necessary and proper conduct of the Joint Operations. 3- MATERIALS The cost of material, equipment and supplies purchased or furnished by the Operator for use on the Joint Property shall be charged to the Joint Account on the basis set forth below. So far as it is reasonably practical and consistent with efficient and economical operation, only such material shall be purchased for or transferred to the Joint Property as may be required for immediate use, and the accumulation of surplus stock shall be avoided. 20 operator shall give thirty (30) days written notice of intention to take such inventories to allow Non-Operator(s) to be represented when any inventory is taken. Failure of any Non-Operator to be represented shall bind such Non-operator to accept the inventory taken by operator. 3.3.2. Reconciliation of inventory with the Joint Account shall be made and a list of overages and shortages as well as obsolete and surplus materials shall be furnished to the Non-Operator(s). Inventory adjustments shall be made to the Joint Account in accordance with good accounting practices. 3.3.3. Whenever there is a sale or change of interest in the Joint Property, a special inventory shall be taken by the operator if required by the seller and/or purchaser and the seller and/or purchaser of such interest shall bear all of the expense thereof. In such cases, both the seller and the purchaser shall be entitled to be represented and shall be governed by the inventories taken. 4- FIXED ASSETS Inventories of Fixed Assets will be taken as determined by the Parties but not less than every five (5) years. Operator shall give thirty (30) days written notice of intention to take such inventories to allow Non-Operator(s) to be represented when any inventory is taken. Failure of any Non-Operator to be represented shall bind such Non-Operator to accept the inventory taken by operator. 21 EXHIBIT "C" Attached to and made a part of that certain Operating Agreement covering the Velasquez Field by and between OMIMEX DE COLOMBIA, LTD. and SABACOL, INC. dated the 11th day of September, 1995, but effective December 30, 1994. INSURANCE Operator shall, in the performance of its obligations hereunder, carry statutorily required insurance and Public Liability Insurance in amounts of not less than US $ 1,000,000.00 per occurance or accident with an aggregate limit of not less than US $ 2,000,000.00. Operator shall likewise cause all contractors to carry insurance in such amounts commensurate with those set forth above. EX-10.23 5 EXHIBIT 10.23 1 Exhibit 10.23 OPERATING AGREEMENT COCORNA AND NARE ASSOCIATIONS THIS AGREEMENT, entered into this 11th day of September, 1995, but effective January 1, 1995, by and between OMIMEX DE COLOMBIA, LTD., hereinafter designated and referred to as "Operator", and SABACOL, INC., hereinafter referred to as "Non-Operator", collectively called the Parties, WITNESSETH: WHEREAS, the Parties to this agreement are owners of the Cocorna and Nare Associations, Colombia, S.A. identified in Exhibit "A", and the Parties hereto have reached an agreement to develop and operate these Fields, NOW, THEREFORE, it is agreed as follows: ARTICLE I DEFINITIONS As used in this agreement, the following words and terms shall have the meanings here ascribed to them: A. The term "oil and gas" shall mean oil, gas, casinghead gas, gas condensate, and all other liquid or gaseous hydrocarbons and other marketable substances produced therewith, unless an intent to limit the inclusiveness of this term is specifically stated. B. The term "Contract Area" shall mean all lands and oil and gas interests intended to be developed and operated for oil and gas purposes under this agreement. Such lands and oil and gas interests are described in Exhibit "A". C. The term "drillsite" shall mean the site on which a proposed well is to be located. D. The terms "Drilling Party" and "Consenting Party" shall mean a party who agrees to join in and pay its share of the cost of any operation conducted under the provisions of this agreement. E. The terms "Non-Drilling Party" and "Non-Consenting Party" shall mean a party who elects not to participate in a proposed operation. Unless the context otherwise clearly indicates, words used in the singular include the plural, the plural include the singular, and the neuter gender includes the masculine and the feminine. Page l 2 ARTICLE II EXHIBITS The following exhibits, as indicated below and attached hereto, are incorporated in and made a part hereof: A. Exhibit "A" - Identification of the lands subject to this agreement and the interests of the Parties. B. Exhibit "B" - Accounting Procedure C. Exhibit "C" - Insurance ARTICLE III INTEREST OF THE PARTIES Unless changed by other provisions, all costs and liabilities incurred in operations under this agreement shall be borne and paid, and all equipment and materials acquired in operations on the Contract Area shall be owned, by the Parties as their interests are set forth in Exhibit "A". In the same manner, the Parties shall also own all production of oil and gas from the Contract Area. Nothing contained in this Article III shall be deemed an assignment or cross-assignment of interests covered hereby. ARTICLE IV OPERATOR OMIMEX DE COLOMBIA, LTD., shall be Operator of the Contract Area, and shall conduct and direct and have full control of all operations on the Contract Area as permitted and required by, and within the limits of this agreement. It shall conduct all operations in a good and workmanlike manner, but it shall have no liability as Operator to the other party for losses sustained or liabilities incurred, except such as may result from gross negligence or willful misconduct. Operator may resign at any time by written notice thereof to Non-Operator. If Operator terminates its legal existence, no longer owns an interest in the Contract Area, or is no longer capable of serving as Operator because Operator is insolvent, bankrupt or is placed in receivership, Operator shall be deemed to have resigned without any action by Non-Operator, except the selection of a successor. Operator may be removed by Non-Operator by majority vote or if it fails or refuses to carry out its duties hereunder. Such resignation or removal shall not become effective until 7:00 A.M. on the first day of the calendar month following the expiration of (90) days after giving of the notice of resignation by Operator or action by the Non-Operator to remove Operator, unless a successor Operator has been selected and assumes the duties of Operator at an earlier date. Page 2 3 Upon the resignation of Operator or removal by Non-Operator, a successor Operator shall be selected by Parties owning an interest in the Contract Area at the time such successor Operator is selected, excluding the ownership of the retiring or removed Operator. The number of employees used by the Operator in conducting operations hereunder, their selection, and the hours of labor and the compensation for services performed shall be determined by Operator, and all such employees shall be the employees of Operator. ARTICLE V DRILLING AND DEVELOPMENT A. OPERATIONS: Should any party hereto desire to drill additional wells on the Contract Area or rework, deepen or plug back a dry hole or a well not currently producing in paying quantities, the party desiring to perform such operation shall given the other party written notice of the proposed operation and the estimated cost of the operation. The party receiving such a notice shall have thirty (30) days after receipt of the notice within which to notify the party wishing to do the work whether they elect to participate in the cost of the proposed operation. If a rig is on location the notice of a proposed rework, plug back or drill deeper may be given by telephone and the response period shall be limited to forty-eight (48) hours, exclusive of Saturday, Sunday and legal holidays. Failure of a party receiving such notice to reply within the period fixed above shall constitute an election by that party not to participate in the cost of the proposed operation. Any notice or response given by telephone shall be promptly confirmed in writing. If all Parties elect to participate in such a proposed operation, Operator shall, within ninety (90) days after expiration of the notice period (or as promptly as possible after the expiration of the forty-eight (48) hour period when a drilling rig is on location), actually commence the proposed operation and complete it with due diligence at the risk and expense of all the Parties hereto. Said commencement may be extended for thirty (30) days, upon written notice to the other party, if in the Operator's sole opinion such additional time is reasonably necessary to obtain permits, equipment or surface rights. If not commenced within the time periods set forth above, then the Operator shall resubmit to the other party its proposal as if no prior proposal had been made. If less than all Parties approve any proposed operation, the proposing party, immediately after the expiration of the applicable notice period, shall advise the Consenting Parties of the total interest approving such operation and its recommendation as to whether the Consenting Parties should proceed with the operation as proposed. If the decision is to proceed the entire cost and risk of conducting such operations shall be borne by the Consenting Parties in their adjusted proportions. Upon commencement of operations in accordance with the provisions of this Article, each Non-Consenting Party shall be deemed to have relinquished to Consenting Parties, and the Consenting Parties shall own and be entitled to receive, in proportion to their respective interests, all such Non-Consenting Party's interest in the well and share of production therefrom until the proceed of the sale of such share, calculated at the well shall equal the total of the following: Page 3 4 a) 300% of each Non-Consenting Party's share of the cost of any newly acquired surface equipment beyond the wellhead connections (including, but not limited to, stock tanks, separators, treaters, pumping equipment and piping), plus 100% of each such Non-Consenting Party's share of the cost of operation of the well commencing with first production and continuing until each such Non-Consenting Party's relinquished interest shall revert to it, it being agreed that each Non-Consenting Party's share of such cost and equipment will be that interest which would have been chargeable to such Non-Consenting Party had it participated in the well from the beginning of the operations; and b) 300% of that portion of the cost and expenses of drilling, reworking, deepening, plugging back, testing and completing, and 300% of that portion of the cost of newly acquired equipment in the well (to and including the wellhead connections), which would have been chargeable to such Non-Consenting Party if it had participated therein. An election not to participate in the drilling or the deepening of a well shall be deemed an election not to participate in any reworking or plugging back operation proposed in such well, or portion thereof, to which the intital Non-Consent election applied that is conducted at any time prior to full recovery by the Consenting Parties of the Non-Consenting Parties recoupment account. Any such work during the recoupment period shall be deemed part of the cost of operation of said well and there shall be added to the sums to be recouped by the Consenting Parties 300% of that portion of the costs of the work. Within sixty (60) days after the completion of any operation under this Article, the Operator shall furnish each Non-Consenting Party with an inventory of the equipment in and connected to the well, and an itemized statement of the cost of the operation. Thereafter, at least semi-annually, the Operator shall provide each Non-Consenting Party with a payout statement reflecting costs and revenue attributable to the well from the time of the non-consent election to the date of the statement. If and when the Consenting Parties recover from a Non-Consenting Party's relinquished interest the amounts provided for above, the relinquished interests of such Non-Consenting Party shall automatically revert to it, and from and after such reversion, such Non-Consenting Party shall own the same interest in such well, the material and equipment in or pertaining thereto, and the production thereform as such Non-Consenting Party would have been entitled had it participated in the operation on said well. B. TAKING OF PRODUCTION: Each Party to this agreement shall be responsible for disposing of and accounting for its proportionate share of the production in accordance with the sales agreement(s) with Ecopetrol or any other purchaser as agreed to by the Parties or as required by the appropriate government authority of the Republic of Colombia. C. ACCESS TO CONTRACT AREA AND INFORMATION: Each party shall have access to the Contract Area at all reasonable times, at its sole cost and risk 4 5 to inspect or observe operations, and shall have access at reasonable times to information pertaining to the development or operation thereof, including Operator's books and records relating thereto. Operator, upon request, shall furnish each of the other Parties with copies of all forms and reports filed with governmental agencies, daily drilling reports, well logs, tank tables, daily guage and run tickets and reports of stock on hand at the first of each month, and shall make available samples of any cores or cuttings taken from any well drilled on the Contract Area. The cost of gathering and furnishing information to Non-Operator, other than that specified above, shall be charged to the Non-Operator that requests the information. D. ABANDONMENT OF WELLS: If a well has produced, excluding the interest of any Non-Consenting Party, it shall not be plugged and abandoned without the consent of all Parties. If all Parties consent to the plugging and abandonment, such action shall be at the cost, risk and expense of all the Parties. Should Operator, after diligent effort, be unable to contact any party, or should any party fail to reply with-in forty-eight (48) hours after receipt of notice of the proposal to plug and abandon such well, such party shall be deemed to have consented to the proposed abandonment. If a well has produced, excluding the interest of any Non-Consenting Party, shall not be plugged and abandoned without the consent of all Parties. If all Parties consent the plugging shall be at the cost, risk and expense of all the Parties. If, within thirty (30) days, after receipt of the notice to plug and abandon, any party elects not to consent to the plugging of the well, then said party shall assume operation of the well and pay the Parties consenting to the plugging and abandonment the estimated salvage value less the estimated cost to plug and abandon the well. Each abandoning party shall assign, without warranty, express or implied, of any kind or nature, all its interest in the well. Thereafter the abandoning Parties shall have no further responsibility, liability, or interest in the operation of or production from the well. All wells shall be plugged and abandoned in accordance with all governmental rules and regulations. ARTICLE VI EXPENDITURES AND LIABILITIES OF PARTIES A. LIABILITY OF PARTIES: The liability of the Parties shall be several, not joint or collective. Each party shall be responsible only for its obligations, and shall be liable only for its proportionate share of the costs of developing and operating the Contract Area. Accordingly, the liens granted among the Parties are given to secure only the debts of each severally. It is not the intention of the Parties to create, nor shall this agreement be construed as creating, a mining or other partnership or association, or to render the Parties liable as partners. B. LIENS AND PAYMENT DEFAULTS: Each Non-Operator grants to Operator, a lien on all of each Non-Operator's right in the Page 5 6 Contract Area, and a security interest in its share of oil and/or gas when extracted and its interest in all equipment, to secure payment of its share of expense, together with interest thereon at the rate shown in Exhibit "B". Operator grants a like lien and security interest to the Non-Operators to secure payment of Operator's proportionate share of expense. C. PAYMENTS AND ACCOUNTING: Except as otherwise specifically provided, Operator shall promptly pay and discharge expenses incurred in the development and operation of the Contract Area pursuant to this agreement and shall charge each of the Parties hereto with their respective proportionate shares upon the expense basis provided in Exhibit "B". Operator shall keep an accurate record of the joint account hereunder, showing expenses and charges and credits made and received. Operator may request advance payment of estimated expenses. If any party fails to pay its share of said estimated expenses within the time specified, the amount due shall bear interest as provided in Exhibit "B". Such request shall include a detail listing of the expenses to be covered by the advance payment. Exhibit "B" shall detail the accounting procedures for the Contract Area. D. LIMITATION OF EXPENDITURES: Operator shall notify all Parties in writing and an AFE shall be prepared before incurring any item of expense, which is equal to or exceeds US $50,000.00. Such item of expense shall not be incurred unless a majority in interest of the Parties signify their consent thereto in writing within 10 days of the written notice. E. INSURANCE: Operator shall also carry or provide insurance for the benefit of the joint account of the Parties as outlined in Exhibit "C", attached to and made a part hereof. Operator shall require all contractors engaged in work on or for the Contract Area to maintain statutorily required insurance and insurance equal to that shown on Exhibit "C". F. ANNUAL BUDGET MEETING: Operator shall, with at least 30 days written notice, call an annual meeting of the Parties for the purpose of approving an annual budget and capital expenditures program. ARTICLE VII MAINTENANCE OF UNIFORM INTEREST For the purpose of maintaining uniformity of ownership of the interests covered by this agreement, no party shall sell, encumber, transfer or make other disposition of its interest in the Contract Area and in the wells, equipment and production unless such disposition covers the entire undivided interest of the party. Page 6 7 ARTICLE VIII CLAIMS AND LAWSUITS Operator may settle any single uninsured third party damage claim or suit arising from operations hereunder if the expenditure does not exceed Twenty Thousand Dollars (US $20,000.00) and if the payment is in complete settlement of such claim or suit. If the amount required for settlement exceeds the above amount, the Parties hereto shall assume and take over further handling of the claim or suit, unless such authority is delegated to Operator. All costs and expenses of handling, settling or otherwise discharging such claim or suit shall be the joint expense of the Parties participating in the operation from which the claim or suit arises. If a claim is made against any party or any party is sued on account of any matter arising from operations hereunder over which such individual has no control because of the rights given Operator by this agreement, such party shall immediately notify all other Parties, and the claim or suit shall be treated as any other claim or suit involving operations hereunder. ARTICLE IX FORCE MAJEURE If any party is rendered unable, wholly or in part, by force majeure to carry out its obligations under this agreement, other than the obligation to make money payments, that party shall give to all other Parties prompt written notice of the force majeure with reasonably full particulars concerning it; thereupon, the obligations of the party giving the notice, so far as they are affected by the force majeure, shall be suspended during, but no longer than, the continuance of the force majeure. The affected party shall use all reasonable diligence to remove the force majeure situation as quickly as practicable. The requirement that any force majeure shall be remedied with all reasonable dispatch shall not require the settlement of strikes, lockouts, or other labor difficulty by the party involved, contrary to its wishes; how all such difficulties shall be handled shall be entirely within the discretion of the party concerned. The term "force majeure", as here employed, shall mean an act of God, strike, lockout, or other industrial disturbance, act of the public enemy, war, blockade, public riot, lightning, fire, storm, flood, explosion, governmental action, governmental delay, restraint or inaction, unavailability of equipment, and any other cause, whether of the kind specifically enumerated above or otherwise, which is not reasonably within the control of the party claiming suspension. ARTICLE X NOTICES All notices authorized or required between the Parties and required by any of the provisions of this agreement, unless otherwise specifically provided, shall be given in writing by mail or telegram, postage or charges prepaid, or by telex or telecopier and addressed to the Parties to whom the notice Page 7 8 is given at the addresses listed in Exhibit "A". The originating notice given under any provision hereof shall be deemed given only when received by the party to whom such notice is directed, and the time for such party to give any notice in response thereto shall run from the date the originating notice is received. The second or any responsive notice shall be deemed given when deposited in the mail or with the telegraph company, with postage or charges prepaid, or sent by telex or telecopier. Each party shall have the right to change its address at any time, and from time to time, by giving written notice thereof to all other Parties. ARTICLE XI TERM OF AGREEMENT This agreement shall remain in full force and effect as to the Contract Area for so long as any wells are producing from the Contract Area. Upon termination of this agreement the Parties shall remain responsible for the proportionate share of any costs attributable to the final plugging and abanonment of the wells and the facilities associated therewith. It is agreed however, that the termination of this agreement shall not relieve any party from any liability which has accrued or attached prior to the date of such termination. ARTICLE XII APPLICABLE LAW This agreement, its meaning and interpretation and the relationship of the Parties hereunder, shall be governed by the laws of the United States of America and all matters arising therefrom shall be brought before and submitted exclusively to the courts of United States. ARTICLE XIII MISCELLANOUS A. US INTERNAL REVENUE CODE ELECTION It is the express and specific intent of the Parties that a partnership relationship not be created between them or among them and any other co-owner of an interest in the Contract Area. In accordance with the applicable provision of the US Internal Revenue Code of 1954 and regulations promulgated pursuant and further thereto, the Parties do hereby elect not to be treated or considered as partners and further elect that none of the provisions of Sub-Chapter K of said Code shall be appicable with respect to the operation of the Contract Area. The Parties expressly authorize Operator to file with the proper authorities executed copies of this agreement, and such copies when filed, shall be conclusive notice to said authorities of this election pursuant to said Contract Area from all of the provisions of said Sub-Chapter K and said regulations. Operator may in lieu of filing copies hereof, notify said authorities of this election by separate instrument in proper form. 8 9 B. HEADINGS: The topic heading used herein are inserted for convenience only and shall not be construed as having any substantive significance or meaning. C. MODIFICATION: There shall be no modification or amendment of this agreement except by written instrument signed by all Parties. D. ASSIGNMENT: Except as otherwise provided herein, this agreement shall be binding upon and inure to the benefit of the Parties, their respective successors and assigns. This instrument may be executed in any number of counterparts, each of which shall be considered an original for all purposes. IN WITNESS WHEREOF, this agreement is executed as of the date first above mentioned. WITNESSED: OPERATOR: [SIG.] OMIMEX DE COLOMBIA, LTD. - ----------------------------- [SIG.] [SIG.] - ------------------------------ -------------------------- WITNESSED: NON-OPERATOR: [SIG.] SABACOL, INC. - ----------------------------- [SIG.] [SIG.] - ----------------------------- --------------------------- Page 9 10 EXHIBIT "A" Attached to and made a part of that certain Operating Agreement covering the Velasquez Field by and between OMIMEX DE COLOMBIA, LTD. and SABACOL, INC. dated the 11th day of September, 1995, but effective December 30, l994. CONTRACT AREA & INTERESTS OF THE PARTIES CONTRACT AREA: VELASQUEZ FIELD - - LOCATED IN THE PUERTO BOYACA MUNICIPALITY, STATE OF BOYACA, REPUBLIC OF COLOMBIA, S.A. WHICH IS PART OF THE PRIVATE PROPERTY DENOMINATED "GUAGUAQUI-TERAN", THE LATTER REGISTERED UNDER NUMBER 7, PAGES 58 THROUGH 66 OF BOOK 2 OF THE LEGAL DEPARTMENT FILES OF THE MINISTRY OF MINES AND ENERGY. INTERESTS OF THE PARTIES: PERCENT ------- OMIMEX DE COLOMBIA, LTD. 75% 5608 Malvey, Penthouse Suite Carrera 17 No. 93-82 Off. 303 Fort Worth, Texas 76107 Santafe De Bogota, Colombia Phone: (817) 735-1500 Phone: 571-623-5905 Fax: (817) 735-8033 Fax: 571-218-1395 SABACOL, INC. 25% 17512 Von Karman Ave. 109 No. 15 - 60 Off. 301 Irvine, California 92714 Santafe De Bogota, Colombia Phone: (714) 724-1112 Phone: 571 - 612-7185 Fax: (714) 724-1555 Fax: 571 - 612-3969 11 EXHIBIT "B" JOINT OPERATIONS ACCOUNTING PROCEDURE In the event of a conflict between the provisions of this Accounting Procedure and the provisions of the Agreement to which this Accounting Procedure is attached, the provisions Agreement shall prevail. The purpose of this Accounting Procedure is to establish equitable methods for determining charges and credits applicable to operations under the Agreement. The Parties agree that if any of such methods prove unfair or inequitable to Operator or NonOperator(s), the Parties will meet and in good faith endeavor to agree on changes in methods deemed necessary to correct any unfairness or inequity. 1- GENERAL PROVISIONS 1.1 Definitions 1.1.1. Agreement means the Joint Operating Agreement to which this Accounting Procedure is attached. 1.1.2. Contract Area shall have the same definition as contained in the Agreement. 1.1.3. Controllable Material shall mean material which the Operator according to good oil field practice, subjects to record control and inventory. A list of types of such material shall be furnished to Non-Operator(s) upon request. 1.1.4. Days shall in all cases mean calendar days. 1.1.5. Field Supervisors as used herein the term "Field Supervisors" shall mean those employees whose primary function in Joint Operations is the direct supervision of other employees and/or contract labor directly employed on the Joint Property in a field operating capacity. 1.1.6. Joint Account shall be the set of accounts maintained by the Operator to record all expenditures and other transactions under the provisions of the Agreement. 1.1.7. Joint Operations shall mean all activities necessary and proper under the provisions of the Agreement. 1.1.8. Joint Property shall mean the real and personal property acquired and held for use in connection with operations under the Agreement. 12 1.1.9. Material shall mean personal property, including supplies and use charge, acquired and held for use in Joint Operations. 1.1.10 Non-Operator(s) shall mean the parties to the Agreement other than the operator. 1.1.11 Operator shall have the same definition as contained in the Agreement. 1.1.12. Party or Parties shall have the same definitions as contained in the Agreement. 1.1.13. Technical Employees as used herein the term "Technical Employees" shall mean those employees having special and specific engineering, geological or other professional skills, and whose primary function in Joint operations is handling of specific operating conditions and problems for the benefit of the Joint Property. 1.1.14. Operating Committee as used herein shall mean such committee as may be appointed by the parties consisting of one representative of the Operator and one representative of each Non-Operator. 1.2 Statements, Billings and Adjustments 1.2.1. Each Party to the Agreement is responsible for preparing its own accounting, statistical and tax reports to meet Contract Area and any other country or corporate requirements, except that Operator shall be responsible for preparation and filling of any United States Partnership Income Tax Returns that may be required. The parties may elect out of Subchapter K. Operator is required to furnish Non-Operator(s) statements and billings in such form as required to facilitate discharging such responsibilities. 1.2.2. Operator shall bill Non-Operator(s) on or before the last day of each month for their proportionate share of expenditures for the preceding month. Such billings shall be accompanied by statement of charges and credits to the Joint Account summarized by appropriate accounting classifications indicative of the nature thereof, except that items of Controllable Material and unusual charges and credits shall be detailed. Such billings shall indicate the monetary origin (Colombian Pesos or U.S. Dollars) of the charges and credits. 13 1.2.3. Operator shall, upon request by Non-Operator(s), furnish a description of such accounting classifications. 1.2.4. In accordance with Colombian law, Operator shall keep the Joint Account in Colombian pesos. The operator will also maintain these accounts in U.S. dollar equivalency or shall provide the applicable exchange rate(s) monthly so that Non-Operator(s) may convert these Colombian peso accounts to U.S. Dollars each month. The parties shall agree as to the procedure to be used in establishing the exchange rate(s) to be used in making the conversion from Colombian pesos to U.S. dollars or vice-versa. Expenditures made in U.S. Dollars shall be separately identified and reported to NonOperator(s) on a monthly basis. Accounts maintained for recording property, plant and equipment shall be maintained in both Colombia pesos and U.S. dollars and such accounts shall reflect the monetary origin (pesos or dollars) of each item of property, plant and equipment purchased for the Joint Account. In the conversion of currencies and in accounting for advances of different currencies as provided for in Paragraph 1.3 of this Article, or any other currency transactions affecting the Joint Operations, it is the intent that none of the Parties shall experience gain or loss at the expense of, or to the benefit of, the other Parties. 1.2.5. Payment of the bills referred to in paragraph 1.2.2. of this article shall not prejudice the rights of any Non-Operator(s) to protest or question the correctness thereof; however, all bills and statements rendered to Non-Operator(s) by Operator during any calendar year shall conclusively be presumed to be true and correct after twenty-four (24) months following the end of any such calendar year, unless within the said twenty-four month period a Non-Operator takes written exception thereto and makes claim on operator for adjustment. No adjustment favorable to Operator shall be made unless it is made within the same prescribed period. The provisions of this paragraph shall not prevent adjustments resulting from a physical inventory of the Joint Property acquired for Joint Operations. 1.2.6. The accrual method of accounting shall be used for the Joint Account. 14 1.3 Advances and Payment 1.3.1. Non-Operator(s) shall advance by immediately available funds to Operator within 15 days of notice by Operator their share of estimated cash requirements for the succeeding month's Operations in accordance with Article VI of the Agreement. Such advance shall be credited when the actual billings per 1.2.2. above are issued. 1.3.2. Should the Operator be required to pay any large (in excess of U.S. $50,000.00) sums of money on behalf of the Joint operation, which were unforeseen at the time of providing the Non- Operator(s) with said monthly estimates of its requirements, the Operator shall make a written request of the Non-Operators(s) for special advances covering the Non-Operators' share of such payments. Non-Operator(s) shall make their proportional special advances within fifteen (15) days after receipt of such notice. 1.3.3. If Non-Operator(s) advances exceed their share of the expenditures, the next succeeding cash advance requirements, after such determination, shall be reduced accordingly or deducted from the nextbilling, whichever comes first. However, Non-Operator(s) may request that excess advances be refunded. The Operator shall make such refund within fifteen (15) days after receipt of Non-Operator(s) request. Such refund shall be made in the currency so advanced. 1.3.4. If Non-Operator(s) advances are less than their share of actual expenditures, the deficiency shall, at Operator's option, be added to subsequent cash advance requirements or be paid by Non-Operator(s) within thirty (30) days following receipt of Operator(s) for such deficiency. 1.3.5. If Operator does not request Non-Operator(s) to advance their share of estimated cash requirements, Non-Operator(s) shall pay their share of actual expenditures within thirty (30) days following receipt of Operator's billing. 1.3.6. Payment of advances or billings shall be made on or before the due date, and if not so paid the unpaid balance shall be treated as provided under Article VI of the Agreement. 15 1.4 Audits 1.4.1. A Non-Operator, upon at least thirty (30) days written notice to Operator and other Non-Operator(s) shall have the right at its sole expense to audit the Joint Account and related records for any calendar year or portion thereof within the twenty-four (24) month period following the end of such calendar year; however, the conducting of an audit shall not extend the time for the taking of written exception to and the adjustment of accounts as provided for in Paragraph 1.2.5. of this Article. Where there are two or more Non-Operators the Non-Operators shall make every reasonable effort to conduct joint or simultaneous audits in a manner which will result in a minimum of inconvenience to the Operator. 1.4.2. Subject to unanimous prior approval of the Parties, the cost of any special audit or verification of the Joint Account that is for the benefit of all Parties shall be chargeable to the Joint Account. 1.4.3. Normal recurring internal audits of the Joint Account made by the Operator to assess internal controls shall be chargeable to the Joint Account and copies thereof shall be furnished to Non-Operators upon request. 1.5 Interest 1.5.1 Should interest be accessed per the terms of the Agreement, (1) the rate on non U. S. $ Cash Calls shall be the Colombian Prime Rate as quoted by Banco Ganadero plus 10% and (2) on U. S. $ Cash Calls Prime as quoted by Bank One, Texas, N.A. plus 3%. Should said rate(s) exceed the maximum rate allowed by law, then the maximum lawful rate(s) shall apply. 2- CHARGEABLE COST AND EXPENDITURES operator shall charge Joint Account for all costs necessary to conduct Joint Operations in or with respect to the Contract Area. Such cost shall include, but are not necessarily limited to: 2.1 Control, License or Permit Payments 2.1.1. All expenditures necessary to acquire and to maintain rights to the Contract Area. 16 2.2 Labor and Related Costs 2.2.1. Salaries. Salaries and wages of Operator's field employees directly employed on the Joint Property in the conduct of Joint Operations, salaries and wages of Field Supervisors, and salaries and wages of Technical Employees that perform work and services directly relating to or for the benefit of the Joint Property. 2.2.2. Salary Benefits. Operator's cost of holiday, vacation, sickness and disability benefits and other customary allowances paid to employees whose salaries and wages are chargeable to the Joint Account under Article 2.2.1 above. Such costs under this Article 2.2.2 may be charged on a "when and as paid basis" or by "percentage assessment" on the amount of salaries and wages chargeable to the Joint Account under Article 2.2.1 above. If percentage assessment is used, the rate shall be based on the Operator's cost experience and adjusted at least annually to the Operator's actual cost. 2.2.3. Assessments. Expenditures or contributions made pursuant to assessments imposed by governmental authority which are applicable to Operator's costs chargeable to the Joint Account under Article 2.2.1 and 2.2.2 above. 2.2.4. Personal Related Expenses. Personal Expenses, including but not limited to the following: travel and other reasonable reimbursable expenses of Operator's employees, hospital and medical expense, schools for employees and their children, insurance policies, and all other reasonable activities applicable to the employee and family, of those employees whose salaries and wages are chargeable to the Joint Account under Article 2.2.1 above. 2.2.5. Employee Benefit Plans. Operator's current cost of established plans for employees' group life insurance, hospitalization, pension, retirement, stock purchase, thrift, bonus, and other customary benefit plans of a like nature provided under Operator's usual practices, applicable to operator's labor cost chargeable to the Joint Account under Article 2.2.1 above shall be at Operator's actual cost. 17 2.3. Material 2.3.1. Material purchased or furnished by Operator for use in Joint Operations as provided under Article 3 of this Accounting Procedure. 2.4 Transportation and Employee Relocation Costs 2.4.1. Transportation of Material and other related costs such as expediting crating, dock charges, inland and ocean freight, customs duties and taxes and unloading at destination. 2.4.2. Transportation of employees as required in the conduct of Joint Operations. 2.4.3. Relocation costs to the Contract Area vicinity or to other locations in Colombia of employees permanently or temporarily assigned to the Joint Operations. Such costs shall include transportation of employees' families and their personal and household effects and all other relocation costs in accordance with Operator's usual practice. Relocation from Colombia shall not be charged to the Joint Account. 2.5 Services -------- 2.5.1. Contract services, professional consultants, and other services covered by Paragraph 2.8 2.5.2. Technical services for specific projects resulting in a presentation or a written report, such as, but not limited to, laboratory analysis, drafting, geophysical interpretation, engineering, and related data processing, performed by the Operator and its Affiliates for the direct benefit of the Joint Operations, provided such costs shall not exceed those currently prevailing if performed by outside technical service companies. 2.5.3 Use of equipment, services and facilities furnished by Operator or Non-Operated(s) or their Affiliates provided such equipment, services or facilities is of a quality and cost commensurate and competitive with that offered by third parties in the general vicinity of the Contract Area. 2.6 Damage and Losses to Joint Property 2.6.1 All costs or expenses necessary for the repair or replacement of Joint Property resulting from 18 damages or losses incurred by fire, flood, storm, theft, accident, or any other cause. Operator shall furnish Non- Operator(s) written notice of damages or losses in excess of nominal value as soon as practicable. Any payment(s) by insurance companies shall be deducted in determining the amount due. 2.7 Insurance 2.7.1. Net premiums for insurance are required by the Parties of the Agreement. 2.7.2. Actual expenditures in the settlement of all losses, claims, damages, judgements, and other expenses for the benefit of the Joint Operations as per the Agreement. 2.7.3. Credits for settlements received from the insurance policies and others. 2.8 Legal Expense 2.8.1. All costs or expenses of litigation or legal services otherwise necessary or expedient for the protection of the Joint Property, including but not limited to attorney's fees, court costs, cost of investigation or procuring evidence and amounts paid in settlement or satisfaction of any such litigation of claims. These services may be performed by the Operator's legal staff or an outside firm as necessary. Operator shall not incur more than Ten Thousand U.S. Dollar (US $10,000) in costs for legal services in connection with any single suit, proceeding or matter without first obtaining the prior approval of the other parties. 2.9 Duties and Taxes 2.9.1. All duties and taxes (except taxes based on income, net worth and royalty based on production from the Contract Area and any other taxes for which the Parties are liable severally but not Jointly), fees and governmental assessment of every kind and nature in relation with Joint Operations. 2.10 Offices, Camps and Miscellaneous Facilities 2.10.1. Cost of maintaining and operating any offices, suboffices, camps, warehouses, housing and other facilities directly serving the Joint operations shall be charged to the Joint Account. If such 19 facilities serve operations in addition to the Joint Operations, the costs shall be allocated to the properties served on an equitable basis as may be approved by the Operating Committee which approval shall not be unreasonably withheld. 2.11 Administrative Overhead 2.11.1. An administrative overhead covering services and related office costs of personnel performing administrative, legal, accounting, purchasing, treasury, tax, employee relations, computer services and other functions for the benefit of the operations provided they are not included elsewhere, shall be charged to the Joint Account monthly. 2.11.2. The charge under the foregoing paragraph shall be for services of all personnel and offices of Operator who are not directly assigned to operations and shall be charged each month at the rate of 12% on total expenditures attributable to Joint Operations in the preceding month, except only 5% shall be charged on expenditures for capital expenditure items. 2.11.3. Notwithstanding anything to the contrary which might be stated in the Accounting Procedure, it is understood that no cost or expenditure included under sections 2.2.1 through 2.10 shall be included or duplicated in the administrative overhead rate charged in this Article 2.11. Further, at any party's request, the rates in 2.11.2 above shall be reviewed annually and adjusted if determined to be inadequate or excessive. 2.12 Other Expenditures 2.12.1. Any other expenditures not covered or dealt with in the foregoing provisions which are incurred by the Operator and its Affiliates for the ordinary, necessary and proper conduct of the Joint Operations. 3- MATERIALS The cost of material, equipment and supplies purchased or furnished by the Operator for use on the Joint Property shall be charged to the Joint Account on the basis set forth below. So far as it is reasonably practical and consistent with efficient and economical operation, only such material shall be purchased for or transferred to the Joint Property as may be required for immediate use, and the accumulation of surplus stock shall be avoided. 20 Operator shall give thirty (30) days written notice of intention to take such inventories to allow Non-Operator(s) to be represented when any inventory is taken. Failure of any Non-Operator to be represented shall bind such Non-Operator to accept the inventory taken by Operator. 3.3.2. Reconciliation of inventory with the Joint Account shall be made and a list of overages and shortages as well as obsolete and surplus materials shall be furnished to the Non-Operator(s). Inventory adjustments shall be made to the Joint Account in accordance with good accounting practices. 3.3.3. Whenever there is a sale or change of interest in the Joint Property, a special inventory shall be taken by the Operator if required by the seller and/or purchaser and the seller and/or purchaser of such interest shall bear all of the expense thereof. In such cases, both the seller and the purchaser shall be entitled to be represented and shall be governed by the inventories taken. 4- FIXED ASSETS Inventories of Fixed Assets will be taken as determined by the Parties but not less than every five (5) years. Operator shall give thirty (30) days written notice of intention to take such inventories to allow Non-Operator(s) to be represented when any inventory is taken. Failure of any Non-Operator to be represented shall bind such Non-Operator to accept the inventory taken by Operator. 21 EXHIBIT "C" Attached to and made a part of that certain Operating Agreement covering the Velasquez Field by and between OMIMEX DE COLOMBIA, LTD. and SABACOL INC. dated the 11th day of September, 1995, but effective December 30, 1994. INSURANCE Operator shall, in the performance of its obligations hereunder, carry statutorily required insurance and Public Liability Insurance in amounts of not less than US $ 1,000,000.00 per occurance or accident with an aggregate limit of not less than US $ 2,000,000.00. Operator shall likewise cause all contractors to carry insurance in such amounts commensurate with those set forth above. EX-10.24 6 EXHIBIT 10.24 1 Exhibit 10.24 OPERATING AGREEMENT VELASQUEZ-GALAN PIPELEINE THIS AGREEMENT, entered into this 11th day of September, 1995, but effective January 1, 1995, by and between OMIMEX DE COLOMBIA, LTD., hereinafter designated and referred to as "Operator", and SABACOL, INC., hereinafter referred to as "Non-Operator", collectively called the Parties, WITNESSETH: WHEREAS, the Parties to this agreement are owners of the Velasquez-Galan Pipeline, Colombia, S.A. identified in Exhibit "A", and the Parties hereto have reached an agreement to develop and operate this Pipeline, NOW, THEREFORE, it is agreed as follows: ARTICLE I DEFINITIONS As used in this agreement, the following words and terms shall have the meanings here ascribed to them: A. The term "Contract Area" or "Pipeline" shall mean the Velasquez-Galan Pipeline and its associated facilities Such being described in Exhibit "A". Unless the context otherwise clearly indicates, words used in the singular include the plural, the plural include the singular, and the neuter gender includes the masculine and the feminine. ARTICLE II EXHIBITS The following exhibits, as indicated below and attached hereto, are incorporated in and made a part hereof: A. Exhibit "A" - Identification of the Pipeline subject to this agreement and the interests of the Parties. B. Exhibit "B" - Accounting Procedure Page 1 2 C. Exhibit "C" - Insurance ARTICLE III INTEREST OF THE PARTIES Unless changed by other provisions, all costs and liabilities incurred in operations under this agreement shall be borne and paid, and all equipment and materials acquired in operations on the Contract Area shall be owned, by the Parties as their interests are set forth in Exhibit "A". In the same manner, the Parties shall also share in the revenues from the Contract Area. Nothing contained in this Article III shall be deemed an assignment or cross-assignment of interests covered hereby. ARTICLE IV OPERATOR OMIMEX DE COLOMBIA, LTD., shall be Operator of the Contract Area, and shall conduct and direct and have control of all operations on the Contract Area as permitted and required by, and within the limits of this agreement. It shall conduct all operations in a good and workmanlike manner, but it shall have no liability as Operator to the other party for losses sustained or liabilities incurred, except such as may result from gross negligence or willful misconduct. Operator may resign at any time by written notice thereof to Non-Operator. If Operator terminates its legal existence, no longer owns an interest in the Contract Area, or is no longer capable of serving as Operator because Operator is insolvent, bankrupt or is placed in receivership, Operator shall be deemed to have resigned without any action by Non-Operator, except the selection of a successor. Operator may be removed by Non-Operator by majority vote or if it fails or refuses to carry out its duties hereunder. Such resignation or removal shall not become effective until 7:00 A.M. on the first day of the calendar month following the expiration of (90) days after giving of the notice of resignation by Operator or action by the Non-Operator to remove Operator, unless a successor Operator has been selected and assumes the duties of Operator at an earlier date. Upon the resignation of Operator or removal by Non-Operator, a successor Operator shall be selected by Parties owning an interest in the Contract Area at the time such successor Operator is selected, excluding the ownership of the retiring or removed Operator. The number of employees used by the Operator in conducting operations hereunder, their selection, and the hours of labor and the compensation for services performed shall be determined by Operator, and all such employees shall be the employees of Operator. Page 2 3 ARTICLE V ACCESS TO CONTRACT AREA AND INFORMATION Each party shall have access to the Contract Area at all reasonable times, at its sole cost and risk to inspect or observe operations, and shall have access at reasonable times to information pertaining to the development or operation thereof, including Operator's books and records relating thereto. Operator, upon request, shall furnish each of the other Parties with copies of all forms and reports filed with governmental agencies and reports of crude oil volumes transported by the Pipeline. The cost of gathering and furnishing information to Non-Operator, other than that specified above, shall be charged to the Non-Operator that requests the information. ARTICLE VI REVENUES, EXPENDITURES AND LIABILITIES, OF PARTIES A. Liability of Parties: The liability of the Parties shall be several, not joint or collective. Each party shall be responsible only for its obligations, and shall be liable only for its proportionate share of the costs of developing and operating the Contract Area. Accordingly, the liens granted among the Parties are given to secure only the debts of each severally. It is not the intention of the Parties to create, nor shall this agreement be construed as creating, a mining or other partnership or association, or to render the Parties liable as partners. B. Liens and Payment Defaults: Each Non-Operator grants to Operator, a lien on all of each Non-Operator's right in the Contract Area, and a security interest in its interest in all equipment and the revenues received from Third Parties for the transportation of crude oil, to secure payment of its share of expense, together with interest thereon at the rate shown in Exhibit "B". Operator grants a like lien and security interest to the Non-Operators to secure payment of Operator's proportionate share of expense. C. Payments and Accounting: Except as otherwise specifically provided, Operator shall promptly pay and discharge expenses incurred in the development and operation of the Contract Area pursuant to this agreement and shall charge each of the Parties hereto with their respective proportionate shares upon the expense basis provided in Exhibit "B". Operator shall keep an accurate record of the joint account hereunder, showing expenses and charges and credits made and received. Operator may request advance payment of estimated expenses. If any party fails to pay its share of said estimated expenses within the time specified, the amount due shall bear interest as provided in Exhibit "B". Such request shall include a detail listing of the expenses to be covered by the advance payment. Page 3 4 Revenue for transport of Third Party crude oil by the Pipeline shall shared by the Parties in the proportionate shares as set forth on Exhibit "A". Payment by Operator to Non-Operator shall be made within 30 days of the date of receipt by Operator of payment from the Third Party. Exhibit "B" shall detail the accounting procedures for the Contract Area. D. Limitation of Expenditures: Operator shall notify all Parties in writing and an AFE shall be prepared before incurring any item of expense, which is equal to or exceeds US $50,000.00. Such item of expense shall not be incurred unless a majority in interest of the Parties signify their consent thereto in writing within 10 days of the written notice. E. Insurance: Operator shall also carry or provide insurance for the benefit of the joint account of the Parties as outline in Exhibit "C", attached to and made a part hereof. Operator shall require all contractors engaged in work on or for the Contract Area to maintain statutorily required insurance and insurance equal to that shown on Exhibit "C". F. Annual Budget Meeting: Operator shall, with at least 30 days written notice, call an annual meeting of the Parties for the purpose of approving an annual budget and capital expenditures program. ARTICLE VII MAINTENANCE OF UNIFORM INTEREST For the purpose of maintaining uniformity of ownership of the interests covered by this agreement, no party shall sell, encumber, transfer or make other disposition of its interest in the Contract Area and in the wells, equipment and production unless such disposition covers the entire undivided interest of the party. ARTICLE VIII CLAIMS AND LAWSUITS Operator may settle any single uninsured third party damage claim or suit arising from operations hereunder if the expenditure does not exceed Twenty Thousand Dollars (US $20,000.00) and if the payment is in complete settlement of such claim or suit. If the amount required for settlement exceeds the above amount, the Parties hereto shall assume and take over further handling of the claim or suit, unless such authority is delegated to Operator. All costs and expenses of handling, settling or otherwise discharging such claim or suit shall be the joint expense of the Parties participating in the operation from which the claim or suit arises. If a claim is made against any Page 4 5 party or any party is sued on account of any matter arising from operations hereunder over which such individual has no control because of the rights given Operator by this agreement, such party shall immediately notify all other Parties, and the claim or suit shall be treated as any other claim or suit involving operations hereunder. ARTICLE IX FORCE MAJEURE If any party is rendered unable, wholly or in part, by force majeure to carry out its obligations under this agreement, other than the obligation to make money payments, that party shall give to all other Parties prompt written notice of the force majeure with reasonably full particulars concerning it; thereupon, the obligations of the party giving the notice, so far as they are affected by the force majeure, shall be suspended during, but no longer than, the continuance of the force majeure. The affected party shall use all due diligence to remove the force majeure situation as quickly as practicable. The requirement that any force majeure shall be remedied with all reasonable dispatch shall not require the settlement of strikes, lockouts, or other labor difficulty by the party involved, contrary to wishes; how all such difficulties shall be handled shall be entirely within the discretion of the party concerned. The term "force majeure", as here employed, shall mean an act of God, strike, lockout, or other industrial disturbance, act of the public enemy, war, blockade, public riot, lightning, fire, storm, flood, explosion, governmental action, governmental delay, restraint or inaction, unavailability of equipment, and any other cause, whether of the kind specifically enumerated above or otherwise, which is not reasonably within the control Of the party claiming suspension. ARTICLE X NOTICES All notices authorized or required between the Parties and required by any of the provisions of this agreement, unless otherwise specifically provided, shall be given in writing by mail or telegram, postage or charges prepaid, or by telex or telecopier and addressed to the Parties to whom the notice is given at the addresses listed in Exhibit "A". The originating notice given under any provision hereof shall be deemed given only when received by the party to whom such notice is directed, and the time for such party to give any notice in response thereto shall run from the date the originating notice is received. The second or any responsive notice shall be deemed given when deposited in the mail or with the telegraph company, with postage or charges prepaid, or sent by telex or telecopier. Each party shall have the right to change its address at any time, and from time to time, by giving written notice thereof to all other Parties. Page 5 6 ARTICLE XI TERM OF AGREEMENT This agreement shall remain in full force and effect as to the Contract Area for so long as the Pipeline is in operation. Upon termination of this agreement the Parties shall remain responsible for the proportionate share of any costs attributable to the final plugging and abandonment of the wells and the facilities associated therewith. It is agreed however, that the termination of this agreement shall not relieve any party from any liability which has accrued or attached prior to the date of such termination. ARTICLE XII APPLICABLE LAW This agreement, its meaning and interpretation and the relationship of the Parties hereunder, shall be governed by the laws of the United States of America and all matters arising therefrom shall be brought before and submitted exclusively to the courts of United States. ARTICLE XIII MISCELLANOUS A. US INTERNAL REVENUE CODE ELECTION It is the express and specific intent of the Parties that a partnership relationship not be created between them or among them and any other co-owner of an interest in the Contract Area. In accordance with the applicable provision of the US Internal Revenue Code of 1954 and regulations promulgated pursuant and further thereto, the Parties do hereby elect not to be treated or considered as partners and further elect that none of the provisions of Sub-Chapter K of said Code shall be appicable with respect to the operation of the Contract Area. The Parties expressly authorize Operator to file with the proper authorities executed copies of this agreement, and such copies when filed, shall be conclusive notice to said authorities of this election pursuant to said Contract Area from all of the provisions of said Sub-Chapter K and said regulations. Operator may in lieu of filing copies hereof, notify said authorities of this election by separate instrument in proper form. B. HEADINGS: The topic heading used herein are inserted for convenience only and shall not be construed as having any substantive significance or meaning. 6 7 C. MODIFICATION: There shall be no modification or amendment of this agreement except by written instrument signed by all Parties. D. ASSIGNMENT: Except as otherwise provided herein, this agreement shall be binding upon and inure to the benefit of the Parties, their respective successors and assigns. This instrument may be executed in any number of counterparts, each of which shall be considered an original for all purposes. IN WITNESS WHEREOF, this agreement is executed as of the date first above mentioned. WITNESS OPERATOR: [SIG] ____________________________ OMIMEX DE COLOMBIA, LTD. [SIG] [SIG] ____________________________ ______________________________ WITNESS NON-OPERATOR: SABACOL, INC. [SIG] ____________________________ [SIG] [SIG] ____________________________ ______________________________ Page 7 8 EXHIBIT "A" Attached to and made a part of that certain Operating Agreement covering Velasquez-Galan Pipeline by and between OMIMEX DE COLOMBIA, LTD. and SABACOL, INC. dated the 11th day of September, 1995, but effective January 1, 1995. CONTRACT AREA & INTERESTS OF THE PARTIES CONTRACT AREA: VELASQUEZ - GALAN PIPELINE Being the Pipeline described in Attachment 6 of that certain Purchase and Sale Agreement dated April 20, 1995 by and between Texas Petroleum Company and Omimex de Colombia, Ltd. and Sabacol, Inc. covering the Cocorna and Nare Associations and Velasquez- Galan Pipeline. INTERESTS OF THE PARTIES: PERCENT OMIMEX DE COLOMBIA LTD. 50% 5608 Malvey, Penthouse Suite Carrera 17 No. 93-82 Off. 303 Fort Worth, Texas 76107 Santafe De Bogota, Colombia Phone: (817) 735-1500 Phone: 571-623-5905 Fax: (817) 735-8033 Fax: 571-218-1395 SABACOL, INC. 50% 17512 Von Karman Ave. 109 No. 15-60 Off. 301 Irvine, California 92714 Santafe De Bogota, Colombia Phone: (714) 724-1112 Phone: 571-612-7185 Fax: (714) 724-1555 Fax: 571-612-3969 9 EXHIBIT "B" JOINT OPERATIONS ACCOUNTING PROCEDURE In the event of a conflict between the provisions of this Accounting Procedure and the provisions of the Agreement to which this Accounting Procedure is attached, the provisions Agreement shall prevail. The purpose of this Accounting Procedure is to establish equitable methods for determining charges and credits applicable to operations under the Agreement. The Parties agree that if any of such methods prove unfair or inequitable to Operator or Non-Operator(s), the Parties will meet and in good faith endeavor to agree on changes in methods deemed necessary to correct any unfairness or inequity. 1- GENERAL PROVISIONS 1.1 Definitions 1.1.1. Agreement means the Joint Operating Agreement to which this Accounting procedure is attached. 1.1.2. Contract Area shall have the same definition as contained in the Agreement. 1.1.3. Controllable Material shall mean material which the Operator according to good oil field practice, subjects to record control and inventory. A list of types of such material shall be furnished to Non-Operator(s) upon request. 1.1.4. Days shall in all cases mean calendar days. 1.1.5. Field Supervisors as used herein the term "Field Supervisors" shall mean those employees whose primary function in Joint Operations is the direct supervision of other employees and/or contract labor directly employed on the Joint Property in a field operating capacity. 1.1.6. Joint Account shall be the set of accounts maintained by the Operator to record all expenditures and other transactions under the provisions of the Agreement. 1.1.7. Joint Operations shall mean all activities necessary and proper under the provisions of the Agreement. 1.1.8. Joint Property shall mean the real and personal property acquired and held for use in connection with operations under the Agreement. 10 1.1.9. Material shall mean personal property, including supplies and use charge, acquired and held for use in Joint Operations. 1.1.10 Non-Operator(s) shall mean the parties to the Agreement other than the Operator. 1.1.11 Operator shall have the same definition as contained in the Agreement. 1.1.12. Party or Parties shall have the same definitions as contained in the Agreement. 1.1.13. Technical Employees as used herein the term "Technical Employees" shall mean those employees having special and specific engineering, geological or other professional skills, and whose primary function in Joint Operations is handling of specific operating conditions and problems for the benefit of the Joint Property. 1.1.14. Operating Committee as used herein shall mean such committee as may be appointed by the parties consisting of one representative of the Operator and one representative of each Non-Operator. 1.2 Statements, Billings and Adjustments 1.2.1. Each Party to the Agreement is responsible for preparing its own accounting, statistical and tax reports to meet Contract Area and any other country or corporate requirements, except that Operator shall be responsible for preparation and filling of any United States Partnership Income Tax Returns that may be required. The parties may elect out of Subchapter K. Operator is required to furnish Non-Operator(s) statements and billings in such form as required to facilitate discharging such responsibilities. 1.2.2. Operator shall bill Non-Operator(s) on or before the last day of each month for their proportionate share of expenditures for the preceding month. Such billings shall be accompanied by statement of charges and credits to the Joint Account summarized by appropriate accounting classifications indicative of the nature thereof, except that items of Controllable Material and unusual charges and credits shall be detailed. Such billings shall indicate the monetary origin (Colombian Pesos or U.S. Dollars) of the charges and credits. 11 1.2.3. Operator shall, upon request by Non-Operator(s), furnish a description of such accounting classifications. 1.2.4. In accordance with Colombian law, Operator shall keep the Joint Account in Colombian pesos. The Operator will also maintain these accounts in U.S. dollar equivalency or shall provide the applicable exchange rate(s) monthly so that Non-Operator(s) may convert these Colombian peso accounts to U.S. Dollars each month. The parties shall agree as to the procedure to be used in establishing the exchange rate(s) to be used in making the conversion from Colombian pesos to U.S. dollars or vice-versa. Expenditures made in U.S. Dollars shall be separately identified and reported to Non-Operator(s) on a monthly basis. Accounts maintained for recording property, plant and equipment shall be maintained in both Colombia pesos and U.S. dollars and such accounts shall reflect the monetary origin (pesos or dollars) of each item of property, plant and equipment purchased for the Joint Account. In the conversion of currencies and in accounting for advances of different currencies as provided for in Paragraph 1.3 of this Article, or any other currency transactions affecting the Joint Operations, it is the intent that none of the Parties shall experience gain or loss at the expense of, or to the benefit of, the other Parties. 1.2.5. Payment of the bills referred to in paragraph 1.2.2. of this article shall not prejudice the rights of any Non-Operator(s) to protest or question the correctness thereof; however, all bills and statements rendered to Non-Operator(s) by operator during any calendar year shall conclusively be presumed to be true and correct after twenty-four (24) months following the end of any such calendar year, unless within the said twenty-four month period a Non-Operator takes written exception thereto and makes claim on Operator for adjustment. No adjustment favorable to Operator shall be made unless it is made within the same prescribed period. The provisions of this paragraph shall not prevent adjustments resulting from a physical inventory of the Joint Property acquired for Joint Operations. 1.2.6. The accrual method of accounting shall be used for the Joint Account. 12 1.3 Advances and Payment 1.3.1. Non-Operator(s) shall advance by immediately available funds to Operator within 15 days of notice by Operator their share of estimated cash requirements for the succeeding month's Operations in accordance with Article VI of the Agreement. Such advance shall be credited when the actual billings per 1.2.2. above are issued. 1.3.2. Should the Operator be required to pay any large (in excess of U.S. $50,000.00) sums of money on behalf of the Joint Operation, which were unforeseen at the time of providing the Non-Operator(s) with said monthly estimates of its requirements, the Operator shall make a written request of the Non-Operators(s) for special advances covering the Non-Operators' share of such payments. Non-Operator(s) shall make their proportional special advances within fifteen (15) days after receipt of such notice. 1.3.3. If Non-Operator(s) advances exceed their share of the expenditures, the next succeeding cash advance requirements, after such determination, shall be reduced accordingly or deducted from the next billing, whichever comes first. However, Non-Operator(s) may request that excess advances be refunded. The Operator shall make such refund within fifteen (15) days after receipt of Non-Operator(s) request. Such refund shall be made in the currency so advanced. 1.3.4. If Non-Operator(s) advances are less than their share of actual expenditures, the deficiency shall, at Operator's option, be added to subsequent cash advance requirements or be paid by Non-Operator(s) within thirty (30) days following receipt of Operators for such deficiency. 1.3.5. If Operator does not request Non-Operator(s) to advance their share of estimated cash requirements, Non-Operator(s) shall pay their share of actual expenditures within thirty (30) days following receipt of Operator's billing. 1.3.6. Payment of advances or billings shall be made on or before the due date, and if not so paid the unpaid balance shall be treated as provided under Article VI of the Agreement. 13 1.4 Audits 1.4.1. A Non-Operator, upon at least thirty (30) days written notice to Operator and other Non-Operators shall have the right at its sole expense to audit the Joint Account and related records for any calendar year or portion thereof within the twenty-four (24) month period following the end of such calendar year; however, the conducting of an audit shall not extend the time for the taking of written exception to and the adjustment of accounts as provided for in Paragraph 1.2.5. of this Article. Where there are two or more Non-Operators the Non-Operators shall make every reasonable effort to conduct joint or simultaneous audits in a manner which will result in a minimum of inconvenience to the Operator. 1.4.2. Subject to unanimous prior approval of the Parties, the cost of any special audit or verification of the Joint Account that is for the benefit of all Parties shall be chargeable to the Joint Account. 1.4.3. Normal recurring internal audits of the Joint Account made by the operator to assess internal controls shall be chargeable to the Joint Account and copies thereof shall be furnished to Non-Operators upon request. 1.5 Interest 1.5.1 Should interest be accessed per the terms of the Agreement, (1) the rate on non U.S. $ Cash Calls shall be the Colombian Prime Rate as quoted by Banco Ganadero plus 10% and (2) on U.S. $ Cash Calls Prime as quoted by Bank One, Texas, N.A. plus 3%. Should said rate(s) exceed the maximum rate allowed by law, then the maximum lawful rate(s) shall apply. 2. CHARGEABLE COST AND EXPENDITURES Operator shall charge Joint Account for all costs necessary to conduct Joint Operations in or with respect to the Contract Area. Such cost shall include, but are not necessarily limited to: 2.1 Control, License or Permit Payments 2.1.1. All expenditures necessary to acquire and to maintain rights to the Contract Area. 14 2.2 Labor and Related Costs 2.2.1. Salaries. Salaries and wages of Operator's field employees directly employed on the Joint Property in the conduct of Joint Operations, salaries and wages of Field Supervisors, and salaries and wages of Technical Employees that perform work and services directly relating to or for the benefit of the Joint Property. 2.2.2. Salary Benefits. Operator's cost of holiday, vacation, sickness and disability benefits and other customary allowances paid to employees whose salaries and wages are chargeable to the Joint Account under Article 2.2.1 above. Such costs under this Article 2.2.2 may be charged on a "when and as paid basis" or by "percentage assessment" on the amount of salaries and wages chargeable to the Joint Account under Article 2.2.1 above. If percentage assessment is used, the rate shall be based on the Operator's cost experience and adjusted at least annually to the Operator's actual cost. 2.2.3. Assessments. Expenditures or contributions made pursuant to assessments imposed by governmental authority which are applicable to Operator's costs chargeable to the Joint Account under Article 2.2.1 and 2.2.2 above. 2.2.4 Personal Related Expenses. Personal Expenses, including but not limited to the following: travel and other reasonable reimbursable expenses of Operator's employees, hospital and medical expense, schools for employees and their children, insurance policies, and all other reasonable activities applicable to the employee and family, of those employees whose salaries and wages are chargeable to the Joint Account under Article 2.2.1 above. 2.2.5. Employee Benefit Plans. Operator's current cost of established plans for employees' group life insurance, hospitalization, pension, retirement, stock purchase, thrift, bonus, and other customary benefit plans of a like nature provided under Operator's usual practices, applicable to Operator's labor cost chargeable to the Joint Account under Article 2.2.1 above shall be at operator's actual cost. 15 2.3. Material 2.3.1. Material purchased or furnished by Operator for use in Joint Operations as provided under Article 3 of this Accounting Procedure. 2.4 Transportation and Employee Relocation Costs 2.4.1. Transportation of Material and other related costs such as expediting crating, dock charges, inland and ocean freight, customs duties and taxes and unloading at destination. 2.4.2. Transportation of employees as required in the conduct of Joint Operations. 2.4.3. Relocation costs to the Contract Area vicinity or to other locations in Colombia of employees permanently or temporarily assigned to the Joint Operations. Such costs shall include transportation of employees' families and their personal and household effects and all other relocation costs in accordance with Operator's usual practice. Relocation from Colombia shall not be charged to the Joint Account. 2.5 Services 2.5.1. Contract services, professional consultants, and other services covered by Paragraph 2.8 2.5.2. Technical services for specific projects resulting in a presentation or a written report, such as, but not limited to, laboratory analysis, drafting, geophysical interpretation, engineering, and related data processing, performed by the Operator and its Affiliates for the direct benefit of the Joint Operations, provided such costs shall not exceed those currently prevailing if performed by outside technical service companies. 2.5.3 Use of equipment, services and facilities furnished by Operator or Non-Operator(s) or their Affiliates provided such equipment, services or facilities is of a quality and cost commensurate and competitive with that offered by third parties in the general vicinity of the Contract Area. 2.6 Damage and Losses to Joint Property 2.6.1 All costs or expenses necessary for the repair or replacement of Joint Property resulting from 16 damages or losses incurred by fire, flood, storm, theft, accident, or any other cause. Operator shall furnish Non- Operator(s) written notice of damages or losses in excess of nominal value as soon as practicable. Any payment(s) by insurance companies shall be deducted in determining the amount due. 2.7 Insurance 2.7.1. Net premiums for insurance are required by the Parties of the Agreement. 2.7.2. Actual expenditures in the settlement of all losses, claims, damages, judgements, and other expenses for the benefit of the Joint Operations as per the Agreement. 2.7.3. Credits for settlements received from the insurance policies and others. 2.8 Legal Expense 2.8.1. All costs or expenses of litigation or legal services otherwise necessary or expedient for the protection of the Joint Property, including but not limited to attorney's fees, court costs, cost of investigation or procuring evidence and amounts paid in settlement or satisfaction of any such litigation of claims. These services may be performed by the Operator's legal staff or an outside firm as necessary. Operator shall not incur more than Ten Thousand U.S. Dollar (US $10,000) in costs for legal services in connection with any single, suit, proceeding or matter without first obtaining the prior approval of the other parties. 2.9 Duties and Taxes 2.9.1. All duties and taxes (except taxes based on income, net worth and royalty based on production from the Contract Area and any other taxes for which the Parties are liable severally but not Jointly), fees and governmental assessment of every kind and nature in relation with Joint Operations. 2.10 Offices, Camps and Miscellaneous Facilities 2.10.1. Cost of maintaining and operating any offices, suboffices, camps, warehouses, housing and other facilities directly serving the Joint Operations shall be charged to the Joint Account. If such 17 facilities serve operations in addition to the Joint Operations, the costs shall be allocated to the properties served on an equitable basis as may be approved by the Operating Committee which approval shall not be unreasonably withheld. 2.11 Administrative Overhead 2.11.1. An administrative overhead covering services and related office costs of personnel performing administrative, legal, accounting, purchasing, treasury, tax, employee relations, computer services and other functions for the benefit of the Operations provided they are not included elsewhere, shall be charged to the Joint Account monthly. 2.11.2. The charge under the foregoing paragraph shall be for services of all personnel and offices of Operator who are not directly assigned to Operations and shall be charged each month at the rate of 12% on total expenditures attributable to Joint Operations in the preceding month, except only 5% shall be charged on expenditures for capital expenditure items. 2.11.3. Notwithstanding anything to the contrary which might be stated in the Accounting Procedure, it is understood that no cost or expenditure included under sections 2.2.1 through 2.10 shall be included or duplicated in the administrative overhead rate charged in this Article 2.11. Further, at any party's request, the rates in 2.11.2 above shall be reviewed annually and adjusted if determined to be inadequate or excessive. 2.12 Other Expenditures 2.12.1. Any other expenditures not covered or dealt with in the foregoing provisions which are incurred by the Operator and its Affiliates for the ordinary, necessary and proper conduct of the Joint Operations. 3- MATERIALS The cost of material, equipment and supplies purchased or furnished by the Operator for use on the Joint Property shall be charged to the Joint Account on the basis set forth below. So far as it is reasonably practical and consistent with efficient and economical operation, only such material shall be purchased for or transferred to the Joint Property as may be required for immediate use, and the accumulation of surplus stock shall be avoided. 18 3.1 Materials Cost, Purchase, Furnishing 3.1.1. Material purchased shall be charged at the actual net cost incurred by Operator or its Affiliates to obtain the material from third parties. Net cost shall include, but shall not be limited to, such items as the cost of purchasing, transportation, duties, license fees and applicable taxes. 3.1.2. New Material (Condition "1") purchased for the Joint Account or transferred from Operator's stock or other properties shall be priced at Operator's book cost. Good used Material (Condition "2") being used Material in sound and serviceable condition, suitable for reuse without reconditioning shall be priced at seventy-five percent (75%) of such book cost. Material which cannot be classified as "Condition 2" but which, after reconditioning will be further serviceable for original function as good second-hand material (Condition 2) or is serviceable for original function, but substantially not suitable for reconditioning, shall be classified as "Condition 3" material and priced at fifty percent (50%) of "Condition 1" price. Material which cannot be classified as "Condition 2" or "Condition 3" shall be priced at a value commensurate with its use. If the Operator wishes to use a method other than the above for charging used material to the Joint Account, such other method shall first be approved by the Operating Committee. 3.2 Disposal 3.2.1. Operator shall be under no obligation to purchase the interest of Non-Operator(s) in new or used surplus Material. 3.2.2. Operator shall have the right to dispose of surplus Materials but shall advise and secure prior agreement of Non-Operators of all proposed disposition of Materials valued in the aggregate One Hundred-Thousand U.S. Dollars (U.S. $100,000) or more per year. 3.2.3. Proceeds from all sales shall be credited to the Joint Account at the net amount actually collected. 3.3 Inventories 3.3.1. Periodic inventories shall be taken by Operator of all Controllable Materials at least annually or more frequently if required by the Parties. 19 Operator shall give thirty (30) days written notice of intention to take such inventories to allow Non-Operator(s) to be represented when any inventory is taken. Failure of any Non-Operator to be represented shall bind such Non-Operator to accept the inventory taken by Operator. 3.3.2. Reconciliation of inventory with the Joint Account shall be made and a list of overages and shortages as well as obsolete and surplus materials shall be furnished to the Non-Operator(s). Inventory adjustments shall be made to the Joint Account in accordance with good accounting practices. 3.3.3. Whenever there is a sale or change of interest in the Joint Property, a special inventory shall be taken by the Operator if required by the seller and/or purchaser and the seller and/or purchaser of such interest shall bear all of the expense thereof. In such cases, both the seller and the purchaser shall be entitled to be represented and shall be governed by the inventories taken. 4- FIXED ASSETS Inventories of Fixed Assets will be taken as determined by the Parties but not less than every five (5) years. Operator shall give thirty (30) days written notice of intention to take such inventories to allow Non-Operator(s) to be represented when any inventory is taken. Failure of any Non-Operator to be represented shall bind such Non-Operator to accept the inventory taken by Operator. 20 EXHIBIT "C" Attached to and made a part of that certain Operating Agreement covering Velasquez-Galan Pipeline by and between OMIMEX DE COLOMBIA, LTD. and SABACOL, INC. dated the 11th day of September, 1995, but effective January 1, 1995. INSURANCE Operator shall, in the performance of its obligations hereunder, carry statutorily required insurance and Public Liability Insurance in amounts of not less than US $1,000,000.00 per occurance or accident with an aggregate limit of not less than US $2,000,000.00. Operator shall likewise cause all contractors to carry insurance in such amounts commensurate with those set forth above. EX-10.25 7 EXHIBIT 10.25 1 Exhibit 10.25 OPERATING AGREEMENT COCORNA CONCESSION THIS AGREEMENT, entered into this 11th day of September, 1995, but effective January 1, 1995, by and between OMIMEX DE COLOMBIA, LTD., hereinafter designated and referred to as "Operator", and SABACOL, INC., hereinafter referred to as "Non-Operator", collectively called the Parties, WITNESSETH: WHEREAS, the Parties to this agreement are owners of the Cocorna Concession, Colombia, S.A. identified in Exhibit "A", and the Parties hereto have reached an agreement to develop and operate this Field, NOW, THEREFORE, it is agreed as follows: ARTICLE I DEFINITIONS As used in this agreement, the following words and terms shall have the meanings here ascribed to them: A. The term "oil and gas" shall mean oil, gas, casinghead gas, gas condensate, and all other liquid or gaseous hydrocarbons and other marketable substances produced therewith, unless an intent to limit the inclusiveness of this term is specifically stated. B. The term "Contract Area" shall mean all lands and oil and gas interests intended to be developed and operated for oil and gas purposes under this agreement. Such lands and oil and gas interests are described in Exhibit "A". C. The term "drillsite" shall mean the site on which a proposed well is to be located. D. The terms "Drilling Party" and "Consenting Party" shall mean a party who agreed to join in and pay its share of the cost of any operation conducted under the provisions of this agreement. E. The terms "Non-Drilling Party" and "Non-Consenting Party" shall mean a party who elects not to participate in a proposed operation. Unless the context otherwise clearly indicates, words used in the singular include the plural, the plural include the singular, and the neuter gender includes the masculine and the feminine. Page 1 2 ARTICLE II EXHIBITS The following exhibits, as indicated below and attached hereto, are incorporated in and made a part hereof: A. Exhibit "A" - Identification of the lands subject to this agreement and the interests of the Parties. B. Exhibit "B" - Accounting Procedure C. Exhibit "C" - Insurance ARTICLE III INTEREST OF THE PARTIES Unless changed by other provisions, all costs and liabilities incurred in operations under this agreement shall be borne and paid, and all equipment and materials acquired in operations on the Contract Area shall be owned, by the Parties as their interests are set forth in Exhibit "A". In the same manner, the Parties shall also own all production of oil and gas from the Contract Area. Nothing contained in this Article III shall be deemed an assignment or cross-assignment of interests covered hereby. ARTICLE IV OPERATOR OMIMEX DE COLOMBIA, LTD., shall be Operator of the Contract Area, and shall conduct and direct and have full control of all operations on the Contract Area as permitted and required by, and within the limits of this agreement. It shall conduct all operations in a good and workmanlike manner, but it shall have no liability as Operator to the other party for losses sustained or liabilities incurred, except such as may result from gross negligence or willful misconduct. Operator may resign at any time by written notice thereof to Non-Operator. If Operator terminates its legal existence, no longer owns an interest in the Contract Area, or is no longer capable of serving as Operator because Operator is insolvent, bankrupt or is placed in receivership, Operator shall be deemed to have resigned without any action by Non-Operator, except the selection of a successor. Operator may be removed by Non-Operator by majority vote or if it fails or refuses to carry out its duties hereunder. Such resignation or removal shall not become effective until 7:00 A.M. on the first day of the calendar month following the expiration of (90) days after giving of the notice of resignation by Operator or action by the Non-Operator to remove Operator, unless a successor Operator has been selected and assumes the duties of Operator at an earlier date. Page 2 3 Upon the resignation of Operator or removal by Non-Operator, a successor Operator shall be selected by Parties owning an interest in the Contract Area at the time such successor Operator is selected, excluding the ownership of the retiring or removed Operator. The number of employees used by the Operator in conducting operations hereunder, their selection, and the hours of labor and the compensation for services performed shall be determined by Operator, and all such employees shall be the employees of Operator. ARTICLE V DRILLING AND DEVELOPMENT A. OPERATIONS: Should any party hereto desire to drill additional wells on the Contract Area or rework, deepen or plug back a dry hole or a well not currently producing in paying quantities, the party desiring to perform such operation shall give the other party written notice of the proposed operation and the estimated cost of the operation. The party receiving such a notice shall have thirty (30) days after receipt of the notice within which to notify the party wishing to do the work whether they elect to participate in the cost of the proposed operation. If a rig is on location the notice of a proposed rework, plug back or drill deeper may be given by telephone and the response period shall be limited to forty-eight (48) hours, exclusive of Saturday, Sunday and legal holidays. Failure of a party receiving such notice to reply within the period fixed above shall constitute an election by that party not to participate in the cost of the proposed operation. Any notice or response given by telephone shall be promptly confirmed in writing. If all Parties elect to participate in such a proposed operation, Operator shall, within ninety (90) days after expiration of the notice period (or as promptly as possible after the expiration of the forty-eight (48) hour period when a drilling rig is on location), actually commence the proposed operation and complete it with due diligence at the risk and expense of all the Parties hereto. Said commencement may be extended for thirty (30) days, upon written notice to the other party, if in the Operator's sole opinion such additional time is reasonably necessary to obtain permits, equipment or surface rights. If not commenced within the time periods set forth above, then the Operator shall resubmitt to the other party its proposal as if no prior proposal had been made. If less than all Parties approve any proposed operation, the proposing party, immediately after the expiration of the applicable notice period, shall advise the Consenting Parties of the total interest approving such operation and its recommendation as to whether the Consenting Parties should proceed with the operation as proposed. If the decision is to proceed the entire cost and risk of conducting such operations shall be borne by the Consenting Parties in their adjusted proportions. Upon commencement of operations in accordance with the provisions of this Article, each Non-Consenting Party shall be deemed to have relinquished to Consenting Parties, and the Consenting Parties shall own and be entitled to receive, in proportion to their respective interests, all such Non-Consenting Party's interest in the well and share of production therefrom until the proceed of the sale of such share, calculated at the well shall equal the total of the following: Page 3 4 a) 300% of each Non-Consenting Party's share of the cost of any newly acquired surface equipment beyond the wellhead connections (including, but not limited to, stock tanks, separators, treaters, pumping equipment and piping), plus 100% of each such Non-Consenting Party's share of the cost of operation of the well commencing with first production and continuing until each such Non-Consenting Party's relinquished interest shall revert to it, it being agreed that each Non-Consenting Party's share of such cost and equipment will be that interest which would have been chargeable to such Non-Consenting Party had it participated in the well from the beginning of the operations; and b) 300% of that portion of the cost and expenses of drilling, reworking, deepening, plugging back, testing and completing, and 300% of that portion of the cost of newly acquired equipment in the well (to and including the wellhead connections), which would have been chargeable to such Non-Consenting Party if it had participated therein. An election not to participate in the drilling or the deepening of a well shall be deemed an election not to participate in any reworking or plugging back operation proposed in such well, or portion thereof, to which the initial Non-Consent election applied that is conducted at any time prior to full recovery by the Consenting Parties of the Non-Consenting Parties recoupment account. Any such work during the recoupment period shall be deemed part of the cost of operation of said well and there shall be added to the sums to be recouped by the Consenting Parties 300% of that portion of the costs of the work. Within (60) days after the completion of any operation under this Article, the Operator shall furnish each Non-Consenting Party with an inventory of the equipment in and connected to the well, and an itemized statement of the cost of the operation. Thereafter, at least semi-annually, the Operator shall provide each Non-Consenting Party with a payout statement reflecting costs and revenue attributable to the well from the time of the non-consent election to the date of the statement. If and when the Consenting Parties recover from a Non-Consenting Party's relinquished interest the amounts provided for above, the relinquished interest of such Non-Consenting Party shall automatically revert to it, and from and after such reversion, such Non-Consenting Party shall own the same interest in such well, the material and equipment in or pertaining thereto, and the production therefrom as such Non-Consenting Party would have been entitled had it participated in the operation on said well. B. TAKING OF PRODUCTION: Each Party to this agreement shall be responsible for disposing of and accounting for it proportionate share of the production in accordance with the sales agreement(s) with Ecopetrol or any other purchaser as agreed by the Parties or as required by the appropriate government authority of the Republic of Columbia. C. ACCESS TO CONTRACT AREA AND INFORMATION: Each party shall have access to the Contract Area at all reasonable times, at its sole cost and risk Page 4 5 to inspect or observe operations, and shall have access at reasonable times to information pertaining to the development or operation thereof, including Operator's books and records relating thereto. Operator, upon request, shall furnish each of the other Parties with copies of all forms and reports filed with governmental agencies, daily drilling reports, well logs, tank tables, daily gauge and run tickets and reports of stock on hand at the first of each month, and shall make available samples of any cores or cuttings taken from any well drilled on the Contract Area. The cost of gathering and furnishing information to Non-Operator, other than that specified above, shall be charged to the Non-Operator that requests the information. D. ABANDONMENT OF WELLS: If a well has produced, excluding the interest of any Non-Consenting Party, it shall not be plugged and abandoned without the consent of all Parties. If all Parties consent to the plugging and abandonment, such action shall be at the cost, risk and expense of all the Parties. Should Operator, after diligent effort, be unable to contact any party, or should any party fail to reply within forty-eight (48) hours after receipt of notice of the proposal to plug and abandon such well, such party shall be deemed to have consented to the proposed abandonment. If a well has produced, excluding the interest of any Non-Consenting Party, shall not be plugged and abandoned without the consent of all Parties. If all Parties consent the plugging shall be at the cost, risk and expense of all the Parties. If, within thirty (30) days, after receipt of the notice to plug and abandon, any party elects not to consent to the plugging of the well, then said party shall assume operation of the well and pay the Parties consenting to the plugging and abandonment the estimated salvage value less the estimated cost to plug and abandon the well. Each abandoning party shall assign, without warranty, express or implied, of any kind or nature, all its interest in the well. Thereafter the abandoning Parties shall have no further responsibility, liability, or interest in the operation of or production from the well. All wells shall be plugged and abandoned in accordance with all governmental rules and regulations. ARTICLE VI EXPENDITURES AND LIABILITIES OF PARTIES A. LIABILITY OF PARTIES: The liability of the Parties shall be several, not joint or collective. Each party shall be responsible only for its obligations, and shall be liable only for its proportionate share of the costs of developing and operating the Contract Area. Accordingly, the liens granted among the Parties are given to secure only the debts of each severally. It is not the intention of the Parties to create, nor shall this agreement be construed as creating, a mining or other partnership or association, or to render the Parties liable as partners. B. LIENS AND PAYMENT DEFAULTS: Each Non-Operator grants to Operator, a lien on all of each Non-Operator's right in the Page 5 6 Contract Area, and a security interest in its share of oil and/or gas when extracted and its interest in all equipment, to secure payment of its share of expense, together with interest thereon at the rate shown in Exhibit "B". Operator grants a like lien and security interest to the Non-Operators to secure payment of Operator's proportionate share of expense. C. PAYMENTS AND ACCOUNTING: Except as otherwise specifically provided, Operator shall promptly pay and discharge expenses incurred in the development and operation of the Contract Area pursuant to this agreement and shall charge each of the Parties hereto with their respective proportionate shares upon the expense basis provided in Exhibit B. Operator shall keep an accurate record of the joint account hereunder, showing expenses and charges and credits made and received. Operator may request advance payment estimated expenses. If any party fails to pay its share of said estimated expenses within the time specified, the amount due shall bear interest as provided in Exhibit "B". Such request shall include a detail listing of the expenses to be covered by the advance payment. Exhibit "B" shall detail the accounting procedures for the Contract Area. D. LIMITATION OF EXPENDITURES: Operator shall notify all Parties in writing and an AFE shall be prepared before incurring any item of expense, which is equal to or exceeds US $50,000.00. Such item of expense shall not be incurred unless a majority in interest of the Parties signify their consent thereto in writing within 10 days of the written notice. E. INSURANCE: Operator shall also carry or provide insurance for the benefit of the joint account of the Parties as outline in Exhibit "C", attached to and made a part hereof. Operator shall require all contractors engaged in work on or for the Contract Area to maintain statutorily required insurance and insurance equal to that shown on Exhibit "C". F. ANNUAL BUDGET MEETING: Operator shall, with at least 30 days written notice, call an annual meeting of the Parties for the purpose of approving an annual budget and capital expenditures program. ARTICLE VII MAINTENANCE OF UNIFORM INTEREST For the purpose of maintaining uniformity of ownership of the interests covered by this agreement, no party shall sell, encumber, transfer or make other disposition of its interest in the Contract Area and in the wells, equipment and production unless such disposition covers the entire undivided interest of the party. Page 6 7 ARTICLE VIII CLAIMS AND LAWSUITS Operator may settle any single uninsured third party damage claim or suit arising from operations hereunder if the expenditure does not exceed Twenty Thousand Dollars (US $20,000.00) and if the payment is in complete settlement of such claim or suit. If the amount required for settlement exceeds the above amount, the Parties hereto shall assume and take over further handling of the claim or suit, unless such authority is delegated to Operator. All costs and expenses of handling, settling or otherwise discharging such claim or suit shall be the joint expense of the Parties participating in the operation from which the claim or suit arises. If a claim is made against any party or any party is sued on account of any matter arising from operations hereunder over which such individual has no control because of the rights given Operator by this agreement, such party shall immediately notify all other Parties, and the claim or suit shall be treated as any other claim or suit involving operations hereunder. ARTICLE IX FORCE MAJEURE If any party is rendered unable, wholly or in part, by force majeure to carry out its obligations under this agreement, other than the obligation to make money payments, that party shall give to all other Parties prompt written notice of the force majeure with reasonably full particulars concerning it; thereupon, the obligations of the party giving the notice, so far as they are affected by the force majeure, shall be suspended during, but no longer than, the continuance of the force majeure. The affected party shall use all reasonable diligence to remove the force majeure situation as quickly as practicable. The requirement that any force majeure shall be remedied with all reasonable dispatch shall not require the settlement of strikes, lockouts, or other labor difficulty by the party involved, contrary to its wishes; how all such difficulties shall be handled shall be entirely within the discretion of the party concerned. The term "force majeure", as here employed, shall mean an act of God, strike, lockout, or other industrial disturbance, act of the public enemy, war, blockade, public riot, lightning, fire, storm, flood, explosion, governmental action, governmental delay, restraint or inaction, unavailability of equipment, and any other cause, whether of the kind specifically enumerated above or otherwise, which is not reasonably within the control of the party claiming suspension. ARTICLE X NOTICES All notices authorized or required between the Parties and required by any of the provisions of this agreement, unless otherwise specifically provided, shall be given in writing by mail or telegram, postage or charges prepaid, or by telex or telecopier and addressed to the Parties to whom the notice Page 7 8 is given at the addresses listed in Exhibit "A". The originating notice given under any provision hereof shall be deemed given only when received by the party to whom such notice is directed, and the time for such party to give any notice in response thereto shall run from the date the originating notice is received. The second or any responsive notice shall be deemed given when deposited in the mail or with the telegraph company, with postage or charges prepaid, or sent by telex or telecopier. Each party shall have the right to change its address at any time, and from time to time, by giving written notice thereof to all other Parties. ARTICLE XI TERM OF AGREEMENT This agreement shall remain in full force and effect as to the Contract Area for so long as any wells are producing from the Contract Area. Upon termination of this agreement the Parties shall remain responsible for the proportionate share of any costs attributable to the final plugging and abandonment of the wells and the facilities associated therewith. It is agreed however, that the termination of this agreement shall not relieve any party from any liability which has accrued or attached prior to the date of such termination. ARTICLE XII APPLICABLE LAW This agreement, its meaning and interpretation and the relationship of the Parties hereunder, shall be governed by the laws of the United States of America and all matters arising therefrom shall be brought before and submitted exclusively to the courts of United States. ARTICLE XIII MISCELLANEOUS A. US INTERNAL REVENUE CODE ELECTION It is the express and specific intent of the Parties that a partnership relationship not be created between them or among them and any other co-owner of an interest in the Contract Area. In accordance with the applicable provision of the US Internal Revenue Code of 1954 and regulations promulgated pursuant and further thereto, the Parties do hereby elect not to be treated or considered as partners and further elect that none of the provisions of Sub-Chapter K of said Code shall be applicable with respect to the operation of the Contract Area. The Parties expressly authorize Operator to file with the proper authorities executed copies of this agreement, and such copies when filed, shall be conclusive notice to said authorities of this election pursuant to said Contract Area from all of the provisions of said Sub-Chapter K and said regulations. Operator may in lieu of filing copies hereof, notify said authorities of this election by separate instrument in proper form. Page 8 9 B. HEADINGS: The topic heading used herein are inserted for convenience only and shall not be construed as having any substantive significance or meaning. C. MODIFICATION: There shall be no modification or amendment of this agreement except by written instrument signed by all Parties. D. ASSIGNMENT: Except as otherwise provided herein, this agreement shall be binding upon and inure to the benefit of the Parties, their respective successors and assigns. This instrument may be executed in any number of counterparts, each of which shall be considered an original for all purposes. IN WITNESS WHEREOF, this agreement is executed as of the date first above mentioned WITNESSED: OPERATOR: [SIG] OMIMEX DE COLOMBIA, LTD. - ---------------------------- [SIG] [SIG] - ---------------------------- ---------------------------------- WITNESSED: NON-OPERATOR: [SIG] SABACOL, INC. - ---------------------------- [SIG] [SIG] - ---------------------------- ---------------------------------- Page 9 10 EXHIBIT "A" Attached to and made a part of that certain Operating Agreement covering the Cocorna Concession by and between OMIMEX DE COLOMBIA, LTD. and SABACOL, INC. dated the 11th day of September, 1995, but effective January l, 1995. CONTRACT AREA & INTERESTS OF THE PARTIES ---------------------------------------- CONTRACT AREA: COCORNA CONCESSION Being the Concession Agreement described in Attachment 4 of that certain Purchase and Sale Agreement dated April 20, 1995 by and between Texas Petroleum Company and Omimex de Colombia, Ltd. and Sabacol, Inc. covering the Cocorna Concession. INTERESTS OF THE PARTIES: PERCENT OMIMEX DE COLOMBIA, LTD. 50% 5608 Malvey, Penthouse Suite Carrera 17 No. 93-82 Off. 303 Fort Worth, Texas 76107 Santafe De Bogota, Colombia Phone: (817) 735-1500 Phone: 571-623-5905 Fax: (817) 735-8033 Fax: 571-218-1395 SABACOL, INC. 50% 17512 Von Karman Ave. 109 No. 15- 60 Off. 301 Irvine, California 92714 Santafe De Bogota, Colombia Phone: (714) 724-1112 Phone: 571-612-7185 Fax: (714) 724-1555 Fax: 571-612-3969 11 EXHIBIT "B" JOINT OPERATIONS ACCOUNTING PROCEDURE In the event of a conflict between the provisions of this Accounting Procedure and the provisions of the Agreement to which this Accounting Procedure is attached, the provisions Agreement shall prevail. The purpose of this Accounting Procedure is to establish equitable methods for determining charges and credits applicable to operations under the Agreement. The Parties agree that if any of such methods prove unfair or inequitable to Operator or Non-Operator(s), the Parties will meet and in good faith endeavor to agree on changes in methods deemed necessary to correct any unfairness or inequity. 1- GENERAL PROVISIONS 1.1 Definitions 1.1.1. Agreement means the Joint Operating Agreement to which this Accounting Procedure is attached. 1.1.2. Contract Area shall have the same definition as contained in the Agreement. 1.1.3. Controllable Material shall mean material which the Operator according to good oil field practice, subjects to record control and inventory. A list of types of such material shall be furnished to Non-Operator(s) upon request. 1.1.4. Days shall in all cases mean calendar days. 1.1.5. Field Supervisors as used herein the term "Field Supervisors" shall mean those employees whose primary function in Joint Operations is the direct supervision of other employees and/or contract labor directly employed on the Joint Property in a field operating capacity. 1.1.6. Joint Account shall be the set of accounts maintained by the Operator to record all expenditures and other transactions under the provisions of the Agreement. 1.1.7. Joint Operations shall mean all activities necessary and proper under the provisions of the Agreement. 1.1.8. Joint Property shall mean the real and personal property acquired and held for use in connection with operations under the Agreement. 12 1.1.9. Material shall mean personal property, including supplies and use charge, acquired and held for use in Joint Operations. 1.1.10 Non-Operator(s) shall mean the parties to the Agreement other than the Operator. 1.1.11 operator shall have the same definition as contained in the Agreement. 1.1.12. Party or Parties shall have the same definitions as contained in the Agreement. 1.1.13. Technical Employees as used herein the term "Technical Employees" shall mean those employees having special and specific engineering, geological or other professional skills, and whose primary function in Joint Operations is handling of specific operating conditions and problems for the benefit of the Joint Property. 1.1.14. Operating Committee as used herein shall mean such committee as may be appointed by the parties consisting of one representative of the Operator and one representative of each Non-Operator. 1.2 Statements, Billings and Adjustments 1.2.1. Each Party to the Agreement is responsible for preparing its own accounting, statistical and tax reports to meet Contract Area and any other country or corporate requirements, except that Operator shall be responsible for preparation and filling of any United States Partnership Income Tax Returns that may be required. The parties may elect out of Subchapter K. Operator is required to furnish Non-Operator(s) statements and billings in such form as required to facilitate discharging such responsibilities. 1.2.2. Operator shall bill Non-Operator(s) on or before the last day of each month for their proportionate share of expenditures for the preceding month. Such billings shall be accompanied by statement of charges and credits to the Joint Account summarized by appropriate accounting classifications indicative of the nature thereof, except that items of Controllable Material and unusual charges and credits shall be detailed. Such billings shall indicate the monetary origin (Colombian Pesos or U.S. Dollars) of the charges and credits. 13 1.2.3. Operator shall, upon request by Non-Operator(s), furnish a description of such accounting classifications. 1.2.4. In accordance with Colombian law, operator shall keep the Joint Account in Colombian pesos. The Operator will also maintain these accounts in U.S. dollar equivalency or shall provide the applicable exchange rate(s) monthly so that Non-Operator(s) may convert these Colombian peso accounts to U.S. Dollars each month. The parties shall agree as to the procedure to be used in establishing the exchange rate(s) to be used in making the conversion from Colombian pesos to U.S. dollars or vice-versa. Expenditures made in U.S. Dollars shall be separately identified and reported to Non-Operator(s) on a monthly basis. Accounts maintained for recording property, plant and equipment shall be maintained in both Colombia pesos and U.S. dollars and such accounts shall reflect the monetary origin (pesos or dollars) of each item of property, plant and equipment purchased for the Joint Account. In the conversion of currencies and in accounting for advances of different currencies as provided for in Paragraph 1.3 of this Article, or any other currency transactions affecting the Joint Operations, it is the intent that none of the Parties shall experience gain or loss at the expense of, or to the benefit of, the other Parties. 1.2.5. Payment of the bills referred to in paragraph 1.2.2. of this article shall not prejudice the rights of any Non-Operator(s) to protest or question the correctness thereof; however, all bills and statements rendered to Non-Operator(s) by Operator during any calendar year shall conclusively be presumed to be true and correct after twenty-four (24) months following the end of any such calendar year, unless within the said twenty-four month period a Non-Operator takes written exception thereto and makes claim on Operator for adjustment. No adjustment favorable to operator shall be made unless it is made within the same prescribed period. The provisions of this paragraph shall not prevent adjustments resulting from a physical inventory of the Joint Property acquired for Joint operations. 1.2.6. The accrual method of accounting shall be used for the Joint Account. 14 1.3 Advances and Payment 1.3.1. Non-Operator(s) shall advance by immediately available funds to Operator within 15 days of notice by Operator their share of estimated cash requirements for the succeeding month's Operations in accordance with Article VI of the Agreement. Such advance shall be credited when the actual billings per 1.2.2. above are issued. 1.3.2. Should the operator be required to pay any large (in excess of U.S. $50,000.00) sums of money on behalf of the Joint operation, which were unforeseen at the time of providing the Non-Operator(s) with said monthly estimates of its requirements, the Operator shall make a written request of the Non-Operators(s) for special advances covering the Non-Operators' share of such payments. Non-Operator(s) shall make their proportional special advances within fifteen (15) days after receipt of such notice. 1.3.3. If Non-Operator(s) advances exceed their share of the expenditures, the next succeeding cash advance requirements, after such determination, shall be reduced accordingly or deducted from the next billing, whichever comes first. However, Non-Operator(s) may request that excess advances be refunded. The Operator shall make such refund within fifteen (15) days after receipt of Non-Operator(s) request. Such refund shall be made in the currency so advanced. 1.3.4. If Non-Operator(s) advances are less than their share of actual expenditures, the deficiency shall, at Operator's option, be added to subsequent cash advance requirements or be paid by Non-Operator(s) within thirty (30) days following receipt of Operator(s) for such deficiency. 1.3.5. If Operator does not request Non-Operator(s) to advance their share of estimated cash requirements, Non-Operator(s) shall pay their share of actual expenditures within thirty (30) days following receipt of operator's billing. 1.3.6. Payment of advances or billings shall be made on or before the due date, and if not so paid the unpaid balance shall be treated as provided under Article VI of the Agreement. 15 1.4 Audits 1.4.1. A Non-Operator, upon at least thirty (30) days written notice to Operator and other Non-Operator(s) shall have the right at its sole expense to audit the Joint Account and related records for any calendar year or portion thereof within the twenty-four (24) month period following the end of such calendar year; however, the conducting of an audit shall not extend the time for the taking of written exception to and the adjustment of accounts as provided for in Paragraph 1.2.5. of this Article. Where there are two or more Non-Operators the Non-Operators shall make every reasonable effort to conduct joint or simultaneous audits in a manner which will result in a minimum of inconvenience to the Operator. 1.4.2. Subject to unanimous prior approval of the Parties, the cost of any special audit or verification of the Joint Account that is for the benefit of all Parties shall be chargeable to the Joint Account. 1.4.3. Normal recurring internal audits of the Joint Account made by the Operator to assess internal controls shall be chargeable to the Joint Account and copies thereof shall be furnished to NonOperators upon request. 1.5 Interest 1.5.1 Should interest be accessed per the terms of the Agreement, (1) the rate on non U.S. $ Cash Calls shall be the Colombian Prime Rate as quoted by Banco Ganadero plus 10% and (2) on U.S. $ Cash Calls Prime as quoted by Bank One, Texas, N.A. plus 3%. Should said rate(s) exceed the maximum rate allowed by law, then the maximum lawful rate(s) shall apply. 2- CHARGEABLE COST AND EXPENDITURES Operator shall charge Joint Account for all costs necessary to conduct Joint Operations in or with respect to the Contract Area. Such cost shall include, but are not necessarily limited to: 2.1 Control, License or Permit Payments 2.1.1. All expenditures necessary to acquire and to maintain rights to the Contract Area. 16 2.2 Labor and Related Costs 2.2.1. Salaries. Salaries and wages of operator's field employees directly employed on the Joint Property in the conduct of Joint Operations, salaries and wages of Field Supervisors, and salaries and wages of Technical Employees that perform work and services directly relating to or for the benefit of the Joint Property. 2.2.2. Salary Benefits. Operator's cost of holiday, vacation, sickness and disability benefits and other customary allowances paid to employees whose salaries and wages are chargeable to the Joint Account under Article 2.2.1 above. Such costs under this Article 2.2.2 may be charged on a "when and as paid basis" or by "percentage assessment" on the amount of salaries and wages chargeable to the Joint Account under Article 2.2.1 above. If percentage assessment is used, the rate shall be based on the operator's cost experience and adjusted at least annually to the Operator's actual cost. 2.2.3. Assessments. Expenditures or contributions made pursuant to assessments imposed by governmental authority which are applicable to operator's costs chargeable to the Joint Account under Article 2.2.1 and 2.2.2 above. 2.2.4. Personal Related Expenses including but not limited to the following: travel and other reasonable reimbursable expenses of Operator's employees, hospital and medical expense, schools for employees and their children, insurance policies, and all other reasonable activities applicable to the employee and family, of those employees whose salaries and wages are chargeable to the Joint Account under Article 2.2.1 above. 2.2.5. Employee Benefit Plans. Operator's current cost of established plans for employees' group life insurance, hospitalization, pension, retirement, stock purchase, thrift, bonus, and other customary benefit plans of a like nature provided under operator's usual practices, applicable to operator's labor cost chargeable to the Joint Account under Article 2.2.1 above shall be at operator's actual cost. 17 2.3. Material 2.3.1. Material purchased or furnished by Operator for use in Joint Operations as provided under Article 3 of this Accounting Procedure. 2.4 Transportation and Employee Relocation Costs 2.4.1. Transportation of Material and other related costs such as expediting crating, dock charges, inland and ocean freight, customs duties and taxes and unloading at destination. 2.4.2. Transportation of employees as required in the conduct of Joint Operations. 2.4.3. Relocation costs to the Contract Area vicinity or to other locations in Colombia of employees permanently or temporarily assigned to the Joint Operations. Such costs shall include transportation of employees' families and their personal and household effects and all other relocation costs in accordance with Operator's usual practice. Relocation from Colombia shall not be charged to the Joint Account. 2.5 Services 2.5.1. Contract services, professional consultants, and other services covered by Paragraph 2.8 2.5.2. Technical services for specific projects resulting in a presentation or a written report, such as, but not limited to, laboratory analysis, drafting, geophysical interpretation, engineering, and related data processing, performed by the Operator and its Affiliates for the direct benefit of the Joint Operations, provided such costs shall not exceed those currently prevailing if performed by outside technical service companies. 2.5.3 Use of equipment, services and facilities furnished by operator or Non-Operated(s) or their Affiliates provided such equipment, services or facilities is of a quality and cost commensurate and competitive with that offered by third parties in the general vicinity of the Contract Area. 2.6 Damage and Losses to Joint Property 2.6.1 All costs or expenses necessary for the repair or replacement of Joint Property resulting from 18 damages or losses incurred by fire, flood, storm, theft, accident, or any other cause. operator shall furnish Non-Operator(s) written notice of damages or losses in excess of nominal value as soon as practicable. Any payment(s) by insurance companies shall be deducted in determining the amount due. 2.7 Insurance 2.7.1. Net premiums for insurance are required by the Parties of the Agreement. 2.7.2. Actual expenditures in the settlement of all losses, claims, damages, judgements, and other expenses for the benefit of the Joint Operations as per the Agreement. 2.7.3. Credits for settlements received from the insurance policies and others. 2.8 Legal Expense 2.8.1. All costs or expenses of litigation or legal services otherwise necessary or expedient for the protection of the Joint Property, including but not limited to attorney's fees, court costs, cost of investigation or procuring evidence and amounts paid in settlement or satisfaction of any such litigation of claims. These services may be performed by the operator's legal staff or an outside firm as necessary. Operator shall not incur more than Ten Thousand U.S. Dollar (US $10,000) in costs for legal services in connection with any single, suit, proceeding or matter without first obtaining the prior approval of the other parties. 2.9 Duties and Taxes 2.9.1. All duties and taxes (except taxes based on income, net worth and royalty based on production from the Contract Area and any other taxes for which the Parties are liable severally but not Jointly), fees and governmental assessment of every kind and nature in relation with Joint Operations. 2.10 Offices, Camps and Miscellaneous Facilities 2.10.1. Cost of maintaining and operating any offices, suboffices, camps, warehouses, housing and other facilities directly serving the Joint operations shall be charged to the Joint Account. If such 19 facilities serve operations in addition to the Joint Operations, the costs shall be allocated to the properties served on an equitable basis as may be approved by the Operating Committee which approval shall not be unreasonably withheld. 2.11 Administrative Overhead 2.11.1. An administrative overhead covering services and related office costs of personnel performing administrative, legal, accounting, purchasing, treasury, tax, employee relations, computer services and other functions for the benefit of the operations provided they are not included elsewhere, shall be charged to the Joint Account monthly. 2.11.2. The charge under the foregoing paragraph shall be for services of all personnel and offices of operator who are not directly assigned to Operations and shall be charged each month at the rate of 12% on total expenditures attributable to Joint Operations in the preceding month, except only 5% shall be charged on expenditures for capital expenditure items. 2.11.3. Notwithstanding anything to the contrary which might be stated in the Accounting Procedure, it is understood that no cost or expenditure included under sections 2.2.1 through 2.10 shall be included or duplicated in the administrative overhead rate charged in this Article 2.11. Further, at any party's request, the rates in 2.11.2 above shall be reviewed annually and adjusted if determined to be inadequate or excessive. 2.12 Other Expenditures 2.12.1. Any other expenditures not covered or dealt with in the foregoing provisions which are incurred by the Operator and its Affiliates for the ordinary, necessary and proper conduct of the Joint operations. 3- MATERIALS The cost of material, equipment and supplies purchased or furnished by the Operator for use on the Joint Property shall be charged to the Joint Account on the basis set forth below. So far as it is reasonably practical and consistent with efficient and economical operation, only such material shall be purchased for or transferred to the Joint Property as may be required for immediate use, and the accumulation of surplus stock shall be avoided. 20 Operator shall give thirty (30) days written notice of intention to take such inventories to allow Non-Operator(s) to be represented when any inventory is taken. Failure of any Non-Operator to be represented shall bind such Non-Operator to accept the inventory taken by Operator. 3.3.2. Reconciliation of inventory with the Joint Account shall be made and a list of overages and shortages as well as obsolete and surplus materials shall be furnished to the Non-Operator(s). Inventory adjustments shall be made to the Joint Account in accordance with good accounting practices. 3.3.3. Whenever there is a sale or change of interest in the Joint Property, a special inventory shall be taken by the Operator if required by the seller and/or purchaser and the seller and/or purchaser of such interest shall bear all of the expense thereof. In such cases, both the seller and the purchaser shall be entitled to be represented and shall be governed by the inventories taken. 4- FIXED ASSETS Inventories of Fixed Assets will be taken as determined by the Parties but not less than every five (5) years. Operator shall give thirty (30) days written notice of intention to take such inventories to allow Non-Operator(s) to be represented when any inventory is taken. Failure of any Non-Operator to be represented shall bind such Non-Operator to accept the inventory taken by Operator. 21 EXHIBIT "C" Attached to and made a part of that certain Operating Agreement covering the Cocorna Concession by and between OMIMEX DE COLOMBIA, LTD. and SABACOL, INC. dated the 11th day of September, 1995, but effective January 1, 1995. INSURANCE Operator shall, in the performance of its obligations hereunder, carry statutorily required insurance and Public Liability Insurance in amounts of not less than US $1,000,000.00 per occurance or accident with an aggregate limit of not less than US $2,000,000.00. Operator shall likewise cause all contractors to carry insurance in such amounts commensurate with those set forth above. EX-10.26 8 EXHIBIT 10.26 1 Exhibit 10.26 AETNA LIFE INSURANCE COMPANY Hartford, Connecticut 06156 While this Policy is in force Aetna will pay Proceeds subject to all its provisions. Other rights and benefits are provided as described in this policy. ILYAS CHAUDHARY R2636511 THIS POLICY IS A LEGAL CONTRACT BETWEEN YOU AND AETNA PLEASE READ YOUR POLICY CAREFULLY RIGHT OF POLICY EXAMINATION This Policy may be returned to Aetna or its representative within 10 days after its receipt. Return this Policy to Aetna, Individual Life Insurance, at 151 Farmington Avenue, Hartford, Connecticut 06156. Upon its return, this Policy will be deemed void from its beginning and all premiums paid will be refunded. Signed for Aetna on its Date of Issue. /s/ Lucille M. Nickson /s/ Ronald E. Compton - ---------------------- --------------------- Secretary President /s/ B. Phillips --------------------------- Registrar TEN-YEAR LEVEL PREMIUM RENEWABLE AND CONVERTIBLE TERM LIFE INSURANCE POLICY - - PREMIUMS REMAIN LEVEL FOR FIRST TEN POLICY YEARS AND BECOME ADJUSTABLE BEGINNING IN YEAR 11 SUBJECT TO STATE MAXIMUMS - - BEGINNING IN POLICY YEAR 11, POLICY BECOMES ANNUALLY RENEWABLE TO ATTAINED AGE 100 - - CONVERTIBLE UNTIL THE EARLIER OF THE 10TH POLICY ANNIVERSARY OR THE POLICY ANNIVERSARY NEAREST THE INSURED'S ATTAINED AGE 70 - - CONDITIONAL EXCHANGE AVAILABLE ON THE 10TH POLICY ANNIVERSARY - - PARTICIPATING -- DIVIDENDS MAY BE PAYABLE 2 TABLE OF CONTENTS _______________________________________________________________________________ Page No. Page No. POLICY SPECIFICATIONS.............PS1 DIVIDENDS.........................4 POLICY SUMMARY.....................1 General..........................4 DEFINITIONS........................1 Options..........................4 Attained Age......................1 Dividend at Death................4 Date of Issue.....................1 CHANGES IN INSURANCE COVERAGE.....4 Exchange Date.....................1 Decrease in Face Amount..........4 Expiration Date...................1 RENEWAL AND CONVERSION............5 Face Amount.......................1 Renewal..........................5 Home Office.......................1 Conversion.......................5 Minimum Face Amount...............1 Partial Conversions..............5 Policy Month......................1 CONDITIONAL EXCHANGE..............5 Policy Year/Policy Anniversary....2 SETTLEMENT OPTIONS................6 Subsequent Application(s).........2 Conditions.......................6 We, Our, Us, Company..............2 Income Options...................6 Written Request...................2 Option 1 - Interest..............6 You, Your.........................2 Option 2 - Fixed Period..........6 GENERAL PROVISIONS.................2 Option 3 - Life Income...........6 The Contract......................2 Option 4 - Joint Life Income Assignment........................2 Reducing for Survivor............7 Participating.....................2 Interest Rate....................8 Policy Settlement.................2 Betterment of Payments...........8 Age and/or Sex....................2 Withdrawals and Death Owner.............................2 of the Payee....................8 Beneficiary.......................2 Changes in Owner and Beneficiary..3 Proceeds..........................3 SUICIDE AND INCONTESTABILITY.......3 Incontestability..................3 Suicide Exclusion.................3 PREMIUMS AND REINSTATEMENTS........3 Premiums..........................3 Premium Adjustment................3 Grace Period......................4 Refund on Death...................4 Reinstatement.....................4 _______________________________________________________________________________ ANY RIDERS AND A COPY OF THE APPLICATION(S) ARE AT THE END OF THIS POLICY. 3 POLICY SPECIFICATIONS NAME OF INSURED: ILYAS CHAUDHARY POLICY NUMBER R 2 636 511 DATE OF ISSUE APRIL 5, 1994 SEX: AGE: PREMIUM CLASS: MALE 47 PREFERRED NONSMOKER BENEFICIARY - SABA PETROLEUM COMPANY, IRVINE, CA, A CORPORATION. POLICY OWNER - SABA PETROLEUM COMPANY, IRVINE, CA, A CORPORATION. FACE AMOUNT - $5,000,000 MINIMUM FACE AMOUNT - $250,000 DIVIDEND OPTION: REDUCE PREMIUM
PLAN FACE YEARS QUARTERLY AMOUNT PAYABLE PREMIUM TEN YEAR LEVEL, RENEWABLE AND CONVERTIBLE TERM $5,000,000 10 $3,000.00 LIFE INSURANCE POLICY TERM PERIOD 1 YEAR BEGINNING APRIL 5, 1994 RENEWABLE TO APRIL 5, 2047 CONVERTIBLE BEFORE APRIL 5, 2004 EXCHANGE DATE OF APRIL 5, 2004 POLICY FEE $20.00 TOTAL QUARTERLY PREMIUM $3,020.00
******************************************************************* AUTOMATIC CHECK PLAN SEMI-ANNUAL ANNUAL QUARTERLY $1,006.67 $5,640.00 $10,980.00 $3,020.00 ******************************************************************* METHOD OF PREMIUM ELECTED: QUARTERLY TO DETERMINE THE APPROPRIATE POLICY FEES FOR MONTHLY, QUARTERLY AND SEMI-ANNUAL MODES, DIVIDE THE ANNUAL POLICY FEE OF $80.00 BY 12, 4 AND 2, RESPECTIVELY. WE RESERVE THE RIGHT TO ADJUST THE PREMIUM FOR EACH POLICY YEAR AFTER THIS POLICY HAS BEEN IN FORCE FOR 10 YEARS FROM ITS DATE OF ISSUE. THE ADJUSTED PREMIUM WILL NEVER EXCEED THE GUARANTEED RENEWAL PREMIUM FOR THAT YEAR. IT MAY BE LESS OR GREATER THAN THE PREMIUM FOR THE PRECEDING YEAR. PS 1 4 PS 2 R 2 636 511 ILYAS CHAUDHARY TABLE OF GUARANTEED MAXIMUM RENEWAL PREMIUMS EFFECTIVE DATE OF TABLE: APRIL 5, 1994 THIS TABLE SHOWS THE MAXIMUM AMOUNT OF PREMIUM* FOR EACH RENEWAL TERM OF THIS POLICY, DETERMINED AT THE BEGINNING OF THE TEN YEAR TERM BY THE INSURED'S ISSUE AGE AND BY THE INSURED'S ATTAINED AGE FOR EACH POLICY YEAR, THEREAFTER.
POLICY POLICY QUARTERLY QUARTERLY ATTAINED AGE PREMIUM ATTAINED AGE PREMIUM 48 $3,000.00 74 $145,100.00 49 $3,000.00 75 $162,350.00 50 $3,000.00 76 $178,550.00 51 $3,000.00 77 $197,800.00 52 $3,000.00 78 $216,700.00 53 $3,000.00 79 $236,700.00 54 $3,000.00 80 $261,400.00 55 $3,000.00 81 $288,100.00 56 $3,000.00 82 $320,550.00 57 $25,200.00 83 $356,300.00 58 $28,650.00 84 $395,750.00 59 $31,700.00 85 $442,000.00 60 $34,900.00 86 $491,300.00 61 $38,500.00 87 $543,350.00 62 $42,600.00 88 $597,250.00 63 $47,250.00 89 $663,700.00 64 $52,500.00 90 $713,300.00 65 $58,350.00 91 $782,550.00 66 $64,550.00 92 $854,800.00 67 $71,400.00 93 $931,750.00 68 $78,700.00 94 $1,019,100.00 69 $86,650.00 95 $1,078,450.00 70 $95,650.00 96 $1,137,800.00 71 $106,600.00 97 $1,197,100.00 72 $117,500.00 98 $1,256,450.00 73 $131,000.00 99 $1,315,800.00
* THIS TABLE DOES NOT INCLUDE THE POLICY FEE. 5 POLICY SUMMARY It is important that You understand Your insurance policy. We have tried to use understandable language throughout this Policy. However, should You have any questions after You have read it, please call the representative who sold this Policy to You or call Us. This summary is not a substitute for the detailed policy provisions. This is a ten-year level term life insurance policy continuing as an annually renewable term policy until Attained Age 100 on the life of the Insured named in the Policy Specifications. Premiums must be paid to continue this policy in force. Premium reminder notices will be sent. This Policy may be reinstated. This Policy's premiums remain level until the first day of the eleventh policy year at which time this policy will become annually renewable until the Insured reaches Attained Age 100. Subject to the conditions stated in this Policy, this Policy may be converted to a permanent individual life insurance policy until the earlier of the 10th Policy Anniversary or the Policy Anniversary nearest to the Insured's Attained Age 70. On the tenth Policy Anniversary, this policy may be exchanged for another policy of the same type or a similar policy made available by Us at that time. Other rights and benefits are explained in this Policy. DEFINITIONS ATTAINED AGE Issue age of the Insured as shown in the Policy Specifications, increased by the number of Policy Years elapsed. Issue age is the Insured's age on his/her birthday nearest this Policy's Date of Issue. DATE OF ISSUE The effective date for initial coverage is the Date of Issue shown in the Policy Specifications. The Date of Issue for any change in coverage as well as the effective date of the change will be the Effective Date of Change shown in the supplemental Policy Specifications which will be sent to You. Coverage is conditional on payment of the first premium, if any, and issue of this Policy as provided in the application. EXCHANGE DATE The date this policy can be exchanged for another policy of the same type or a similar policy made available by Us at that time. The Exchange Date is shown in the Policy Specifications. EXPIRATION DATE Subject to the conditions of this policy, this policy will remain in effect until the Expiration Date. The Expiration Date is the same as the renewal date shown in the Policy Specifications. Coverage will terminate on the Expiration Date. FACE AMOUNT The Face Amount of this Policy is shown in the Policy Specifications. HOME OFFICE Our Home Office is located at 151 Farmington Avenue, Hartford, Connecticut 06156. MINIMUM FACE AMOUNT The Face Amount of this Policy cannot be reduced below this amount. The Minimum Face Amount for this Policy is shown in the Policy Specifications. POLICY MONTH The Policy Month begins each month on the same day of the month as the Date of Issue. Page 1 6 POLICY YEAR/POLICY ANNIVERSARY The first Policy Year is the 12 month period beginning on the Date of Issue. Your Policy Anniversary is the Date of Issue plus 1 year, 2 years, etc. SUBSEQUENT APPLICATION(S) Any application after the initial application, initiated by You or by Us. WE, OUR, US, COMPANY Aetna Life Insurance Company, its successors or assigns. WRITTEN REQUEST A request in writing, in a form satisfactory to Us and received by Us at Our Home Office. YOU, YOUR The Owner(s). GENERAL PROVISIONS THE CONTRACT This Policy, the initial application on the Insured, any Subsequent Applications, and any amendment riders constitute the entire contract. Copies of all applications are attached to and made a part of this Policy. Only the President, Executive Vice President or the Corporate Secretary of the Company may agree to a change in this Policy and then only in writing. All statements made by or for the Insured are representations and not warranties. No statement will be used to void this Policy or defend against a claim unless it is contained in the initial application or Subsequent Applications. ASSIGNMENT A copy of an assignment must be filed at the Home Office. Until We receive such notice, We will not be required to take notice of, or be responsible for, any transfer of interest in this Policy by assignment, agreement or otherwise. We will not be responsible for the validity of any assignment. PARTICIPATING This Policy is eligible for payment of dividends. We do not anticipate that any dividends will be payable on this Policy. POLICY SETTLEMENT All amounts payable by Us are payable by the Home Office. We may require return of this Policy. AGE AND/OR SEX If the age/or sex of the Insured is misstated, the Proceeds on death will be that which would have been purchased by the premium actually paid in the year of death if the policy had been issued at the correct age and/or sex. OWNER Unless otherwise stated, this Policy is owned by the Insured. All rights granted by this Policy or allowed by Us belong to the Owner. If this Policy is owned jointly, any request to exercise rights granted by this Policy must be made jointly. BENEFICIARY The Beneficiary for the Proceeds on death is as stated in the application unless later changed. If no designated Beneficiary is living at the time of the death of the Insured, all benefits will be paid to the Owner or the Owner's executors, administrators or assigns. Page 2 7 CHANGES IN OWNER AND BENEFICIARY Unless this Policy states otherwise, the Owner or the Beneficiary, or both, may be changed. Your Written Request must be sent to Us. This may be done as often as desired by the current owner of record before the death of the Insured. When We give Our written acceptance, the change will take effect as of the date Your Written Request was signed. The change will be subject to any action We take before receipt of the written acceptance. PROCEEDS Proceeds on death will equal the Face Amount. All amounts payable by Us are subject to adjustment under the Age and/or Sex, Incontestability, Suicide and Grace period provisions. SUICIDE AND INCONTESTABILITY INCONTESTABILITY With respect to statements made in the initial application for the Insured: - We will not contest this Policy after it has been in force during the lifetime of the Insured for 2 years from its Date of Issue. With respect to statements made in any Subsequent Applications: - We will not contest coverage relating to Subsequent Applications after coverage has been in force during the lifetime of the Insured for 2 years from the Date of Issue of such coverage. If this Policy is contested, Your or the Beneficiary's rights may be affected. SUICIDE EXCLUSION If the Insured dies by suicide, while sane or insane, within 2 years from the Date of Issue of this Policy, We will refund only premiums paid. Proceeds on death will not be paid. PREMIUMS AND REINSTATEMENT PREMIUMS Premium due dates are measured from the Date of Issue. The first premium is due on the Date of Issue. Any premiums after the first premium are payable only at Our Home Office. Each premium is payable on or before its due date. Send Your check or money order, payable to Aetna, to the Home Office. Please be sure to write Your policy number on Your check. Premium reminder notices will be sent annually or at any other frequency to which We agree. Please notify Us of any change in Your address. A receipt signed by an officer of the Company will be given upon request. PREMIUM ADJUSTMENT The premium for the first ten Policy Years is shown in the Policy Specifications. Beginning with the eleventh Policy Year We reserve the right to adjust the premium for each Policy Year. However, the adjusted premium will never exceed the guaranteed maximum premium for that Policy Year as shown in the Policy Specifications. We will send You written notice of the new premium before the beginning of each Policy Year after Policy Year ten. Beginning with the eleventh Policy Year, Premiums will be adjusted when Our expectations for future investment earnings, mortality, experience and expenses vary from the conditions expected at the time of pricing. Any such changes will be done on a prospective basis only; changes will not be such as to recover past losses or to distribute prior profits. Adjustments will be made on a uniform basis for Insureds of the same Attained Age, sex, premium classification, and whose policies have been in force for an equivalent length of time. Page 3 8 GRACE PERIOD We will allow You 31 days of grace from the premium due date for payment of an overdue premium. If the premium is not paid within the Grace Period, this Policy will terminate. Termination will be effective as of the premium due date. During this Grace Period, this Policy will stay in force. If the Insured dies during the grace period, We will deduct from the Proceeds the portion of the overdue premium which applies to the Policy Month in which death occurs. REFUND ON DEATH The portion of any premium paid which is for a period beyond the Policy Month in which the Insured died will be payable in addition to the Proceeds. REINSTATEMENT If this Policy terminates as provided in the Grace Period provision, it may be reinstated within 5 years after the date of termination and before the Expiration Date. We will require satisfactory evidence of insurability on the Insured. All premiums due since termination must be paid. DIVIDENDS GENERAL As a participating contract, this Policy is eligible to share in "divisible surplus" that We apportion to policies issued under this policy form. Any such divisible surplus would be declared annually by Our Board of Directors and would be allocated to this Policy as an annual dividend at the beginning of the Policy Year. Any dividends would apply equitably to all such policies. It is not expected that any divisible surplus will be apportioned for policies issued under this policy form. Therefore, We do not expect to pay any dividends under this Policy. OPTIONS We will pay any dividends under one of the three options that You have elected: 1. Paid in cash; or 2. Used to reduce premiums; or 3. Left on deposit with Us to earn interest at a guaranteed annual rate of 3.5%. The rate credited may be higher. Deposits may be withdrawn at any time; and remaining deposit will be paid in addition to the Proceeds. The option You have chosen is shown in the Policy Specifications. If no dividend option is in effect when a dividend becomes payable, We will pay the dividend in cash to You. You can elect one of the other options within 31 days after the dividend becomes payable. DIVIDEND AT DEATH Upon the death of the Insured, We will pay the portion of any dividend payable to the date of death in addition to the Proceeds. CHANGES IN INSURANCE COVERAGE DECREASE IN FACE AMOUNT You may decrease the Face Amount of this Policy. The decrease will not be effective until the date when the next premium payment required to keep this Policy in force is due. When the Face Amount is decreased, We will change the premium amount payable for the Year in which the change is effective. New premiums will be based on Our table of premiums then in effect for the new Face Amount. New Policy Specifications which reflect the change will be sent to You. Page 4 9 The amount of a decrease cannot reduce this Policy's Face Amount below the Minimum Face Amount. RENEWAL AND CONVERSION RENEWAL Beginning with Policy Year eleven, We will renew this policy annually without evidence of insurability until the Expiration Date. Your premium payment must be sent to Us within 31 days of each Policy Anniversary to renew this Policy. If premiums are in default, this Policy will not be renewed. CONVERSION This Policy may be converted to any permanent plan of life insurance that We make available for such purpose. Your Written Request to convert must be received by Us while this Policy is in force and within 30 days of the first to occur of (1) or (2): 1. the date the insured reaches Attained Age 70, or 2. the first day of the eleventh Policy Year. The date Your conversion period expires is shown in the Policy Specifications. Evidence of Insurability will not be required for the amount being converted. We will credit any unearned premium which is attributable to the amount being converted to the new policy. The new policy will be issued: - - for the Insured's Attained Age and sex at Our current rates at the time of conversion; - - with the same premium class as would have been assigned to the Insured for the new policy had it been issued on this Policy's Date of Issue; - - subject to any limitations of risk or assignments outstanding against this Policy. Extra benefit riders in force on this Policy at the time of conversion can be issued on the new policy without additional evidence of insurability only with Our consent. Extra benefit riders must be currently available for sale with the new policy. This Policy will terminate and the new Policy will begin on the date that Your Written Request and the first premium due for the new Policy are received at Our Home Office. The new Policy will not take effect if the Insured is not living on the Date of Issue on the new Policy. PARTIAL CONVERSIONS A portion of this Policy's Face Amount may be converted according to the terms of the Conversion provision. New Policy Specifications for this Policy will be sent to You. After a Partial Conversion, this Policy's Face Amount must be equal to or greater than the Minimum Face Amount. The minimum amount that may be converted is equal to the minimum face amount available for the new policy. CONDITIONAL EXCHANGE On the tenth Policy Anniversary, You may exchange this policy for a new policy of the same type or a similar one made available by Us at that time. All premiums on this policy due before the Exchange Date must be paid. The new policy is subject to the following terms. 1. You must complete and submit a new application and the first premium to Us within 90 days prior to the Exchange Date. 2. You must submit evidence of insurability satisfactory to Us. 3. Coverage under this policy will terminate when coverage under the new Policy begins. 4. The new policy will be issued on the life of the Insured under this policy. Page 5 10 5. The Issue Age on the new policy will be the Insured's Attained Age on the birthday nearest the Exchange Date. 6. The Insured's Issue Age cannot exceed 70. 7. Any extra benefit riders in this policy can be included in the new policy provided those extra benefit riders are available for sale with the new policy at the time of exchange. Any extra benefit rider is subject to the rules and premium rates we are using on the Date of Issue of the new policy. 8. The Date of Issue of the new policy will be the Exchange Date. 9. Premium rates for the new policy will be based on the premium rates in effect on the Exchange Date. SETTLEMENT OPTIONS CONDITIONS All or part of the Proceeds of this Policy may be applied under one or more of the options described below or in any manner to which We agree. An election shall be made by Written Request filed with the Home Office. The payee of Proceeds may make this election if no prior election has been made. Payments will be made at intervals of 1, 3, 6 or 12 months in equal amounts as elected. Our consent to the election of an option is required if: 1. The payee is not a natural person receiving payments in his or her own right; 2. the payee is an assignee of this Policy; or, 3. payments would be less than $25 each or totalling less than $120 in a year. INCOME OPTIONS The rates for these Income Options are based on the 1983 Blended Individual Annuity mortality table with 60% female and 40% male lives and a pivotal age of 55. For purposes of calculating payments, the Adjusted Ages of the payees will be used. The Adjusted Age is the payee's age on his or her birthday nearest the commencement date of the annuity and then reduced by one year for annuities commencing in the 1990's, reduced two years for annuities beginning during 2000-2009, and so on. Rates for ages and intervals not shown for any of the following income options will be furnished upon request. OPTION 1 - INTEREST Payment of interest on Proceeds left with Us, Proceeds held under this option may be left with Us after the death of the payee only with Our consent. By Written Request, the payee may later elect to: 1. Receive all of a portion of the amount held under this option; or 2. apply all or a portion of this amount to options 2, 3 or 4 as described below. OPTION 2 - FIXED PERIOD Payment for a stated number of years, not longer than 30 years, as elected from the following table.
PAYMENT PER $1,000 PROCEEDS YEARS OF SEMI- YEARS OF SEMI- FIXED PERIOD ANNUAL ANNUAL QUARTERLY MONTHLY FIXED PERIOD ANNUAL ANNUAL QUARTERLY MONTHLY - ---------------------------------------------------------------------------------------------------------------- 3 $343.23 $172.88 $86.76 $28.99 15 $81.33 $40.96 $20.56 $6.87 4 251.19 131.56 66.02 22.06 20 65.26 32.87 16.50 5.51 6 211.99 106.78 53.59 17.91 25 55.76 28.08 14.09 4.71 10 113.82 57.33 28.77 9.61 30 49.53 24.95 12.52 4.18
OPTION 3 - LIFE INCOME Payments for the lifetime of the payee. If also chosen, We will guarantee payments for 60, 120, 180 or 240 months. No payment will be due after death, except payment for any remaining fixed period. Page 6 11
- ---------------------------------------------------------------------------------------------- MONTHLY LIFE INCOME PER $1,000 PROCEEDS - ---------------------------------------------------------------------------------------------- WITH FIXED PERIOD -------------------------------------------------------------- WITHOUT AGE 10 YEARS 15 YEARS 20 YEARS FIXED PERIOD NEAREST ---------------------------------------------------------------------------------- BIRTHDAY MALE FEMALE MALE FEMALE MALE FEMALE MALE FEMALE - ---------------------------------------------------------------------------------------------- 50 $4.22 $3.89 $4.17 $3.86 $4.08 $3.82 $4.27 $3.90 51 4.30 3.95 4.23 3.92 4.14 3.88 4.34 3.97 52 4.37 4.01 4.30 3.98 4.20 3.93 4.43 4.03 53 4.45 4.08 4.37 4.04 4.26 3.99 4.51 4.10 54 4.54 4.15 4.45 4.11 4.32 4.04 4.60 4.18 55 4.62 4.22 4.53 4.18 4.39 4.11 4.70 4.25 56 4.72 4.30 4.61 4.25 4.45 4.17 4.80 4.34 57 4.82 4.38 4.69 4.32 4.51 4.23 4.91 4.42 58 4.92 4.47 4.78 4.40 4.58 4.30 5.03 4.52 59 5.03 4.56 4.87 4.48 4.65 4.37 5.15 4.61 60 5.14 4.66 4.96 4.57 4.71 4.44 5.28 4.72 61 5.27 4.76 5.06 4.66 4.78 4.51 5.43 4.83 62 5.39 4.87 5.16 4.75 4.84 4.58 5.58 4.95 63 5.53 4.98 5.26 4.85 4.90 4.65 5.74 5.08 64 5.66 5.10 5.36 4.95 4.96 4.72 5.91 5.21 65 5.81 5.22 5.46 5.05 5.02 4.79 6.10 5.36 66 5.96 5.36 5.56 5.16 5.08 4.86 6.30 5.51 67 6.12 5.50 5.66 5.26 5.13 4.93 6.51 5.67 68 6.28 5.65 5.77 5.37 5.18 5.00 6.73 5.85 69 6.44 5.80 5.86 5.49 5.23 5.06 6.97 6.04 70 6.61 5.97 5.96 5.60 5.27 5.12 7.23 6.25 71 6.79 6.14 6.05 5.71 5.31 5.18 7.51 6.47 72 6.96 6.32 6.14 5.83 5.34 5.23 7.80 6.71 73 7.14 6.50 6.23 5.94 5.37 5.28 8.12 6.98 74 7.32 6.69 6.31 6.04 5.40 5.32 8.46 7.26 75 7.50 6.89 6.38 6.14 5.42 5.35 8.82 7.57 - ----------------------------------------------------------------------------------------------
OPTION 4 - JOINT LIFE INCOME REDUCING FOR SURVIVOR Payments during the joint lifetimes of two payees. At the death of either, payments will continue to the survivor. When this option is chosen, a choice must be made of: 1. 100% of the payment to the survivor; 2. 66 2/3% of the payment to continue to the survivor; 3. 50% of the payment to continue to the survivor; 4. payments for a minimum of 120 months, with 100% of the payment to continue to the survivor; or 5. 100% of the payment to continue to the survivor if the survivor is the original payee, and 50% of the payment to continue to the survivor is the second payee. No payment will become due after the death of the surviving payee. The following table illustrates the applicable rates if number (3) of Option 4 is chosen.
- ---------------------------------------------------------------------------------------------- MONTHLY JOINT INCOME WITH 1/2 TO SURVIVOR PER $1,000 PROCEEDS - ---------------------------------------------------------------------------------------------- AGE OF AGE OF FEMALE ANNUITANT MALE --------------------------------------------------------------------------------- ANNUITANT 50 55 60 65 70 75 80 85 - ---------------------------------------------------------------------------------------------- 50 $4.08 $4.26 $4.48 $4.75 $5.07 $5.46 $ 5.90 $ 6.36 55 4.27 4.47 4.71 5.01 5.37 5.80 6.30 6.83 60 4.49 4.71 4.99 5.32 5.73 6.22 6.80 7.42 65 4.76 5.01 5.32 5.70 6.17 6.75 7.44 8.19 70 5.07 5.36 5.71 6.15 6.70 7.40 8.23 9.16 75 5.41 5.74 6.15 6.66 7.32 8.15 9.16 10.34 80 5.77 6.15 6.62 7.22 7.99 8.99 10.24 11.73 85 6.12 6.54 7.08 7.77 8.67 9.86 11.40 13.27 - ---------------------------------------------------------------------------------------------- Page 7
12 INTEREST RATE The guaranteed interest rate is 3.5% per year compounded annually. This rate applies to funds held under options 1, 2 and 3 during any fixed period. As to these funds, We will allow such excess interest as We may declare each year. As to Option 1, from time to time We may offer higher interest rates with certain conditions on withdrawal as are then published by Us. BETTERMENT OF PAYMENTS If option 2, 3 or 4 is chosen and if the guaranteed payments are less than those of Our current single premium immediate annuity on the same plan, those larger amounts will be paid instead. WITHDRAWALS AND DEATH OF THE PAYEE As to funds held under option 1, withdrawals and changes of options may be made if the payee makes the election or if the election so permits. No withdrawals or changes of option may be made under Options 2, 3 and 4. Upon the death of the payee, the current value of funds held under option 1 or the present value of any guaranteed payments not yet paid will be paid in one lump sum to the beneficiary. The beneficiary may elect to continue the remaining payments instead of receiving the lump sum amount. If no beneficiary exists, the present value of any remaining payments will be paid in one sum to the estate of the payee. The interest rate used to determine the first payment will be used to calculate the present value of any remaining payments. Page 8 13 [AETNA LOGO] LIFE INSURANCE APPLICATION [ ] Aetna Life Insurance Company [ ] Aetna Life Insurance and Annuity Company 151 Farmington Avenue, Hartford, CT 06156 member Companies of AETNA LIFE & CASUALTY =============================================================================== [X] New Insurance [ ] Increase in Amount $ ------------------ Policy No. ANSWER ALL QUESTIONS ------------- [ ] Term Conversion/Guaranteed Option $ . --------------------- Continue $ as term insurance. ----------------------- ANSWER QUESTIONS 1,4 (if applicable), 5, 6, 22, 23, 24 & 25 [ ] Other Policy Change ANSWER APPLICABLE QUESTIONS. ----------------------------- [ ] Policy No. to be changed/converted ----------------------------------------- =============================================================================== STATE OF DELIVERY [ ] - ------------------------------------------------------------------------------- 1. (PROPOSED) INSURED A (Print full legal name) --------------------------------------------------------------------------- First Middle Last ILYAS CHAUDHARY --------------------------------------------------------------------------- Residence Address (No., Street) P.O. Box 151 TOBY LANE --------------------------------------------------------------------------- City State Zip Code ANAHEIM CA 92807 --------------------------------------------------------------------------- Sex Birth Date (Mo-Day-Yr) Place of Birth M 02-09-47 Pakistan --------------------------------------------------------------------------- 2a. Occupation (Title & Give Exact Duties) SELF EMPLOYED PRESIDENT, SABA PETROLEUM --------------------------------------------------------------------------- 2b. Employer's Name and Address SELF EMPLOYED --------------------------------------------------------------------------- 2c. Annual Income $ 300,000 ------------------------------------------------------------ 2d. Amount of life insurance presently in force or applied for: (Aetna) $ 5,000,000.00 ADB $ ------------------- ------------------- (Other Companies) $ 1,000,000.00 ADB $ ------------------- ------------------- 3. Will life insurance or annuity in any company be replaced or changed if insurance applied for is issued? [ ] Yes [X] No Explain -------------------------------------------------------------------- 4. In the past 12 months, have you smoked cigarettes, cigars, pipes or used tobacco in any form? If YES, describe usage. [ ] Yes [X] No =============================================================================== Complete For Spouse, Other Insured Rider, Joint Applications (Relationship to Proposed Insured A) - ------------------------------------------------------------------------------- 1. (PROPOSED) INSURED B (Additional insured) --------------------------------------------------------------------------- First Middle Last --------------------------------------------------------------------------- Residence Address (No., Street) P.O. Box --------------------------------------------------------------------------- City State Zip Code --------------------------------------------------------------------------- Sex Birth Date (Mo-Day-Yr) Place of Birth --------------------------------------------------------------------------- 2a. Occupation (Title & Give Exact Duties) --------------------------------------------------------------------------- 2b. Employer's Name and Address --------------------------------------------------------------------------- 2c. Annual Income $ ----------------------------------------------------------- 2d. Amount of life insurance presently in force or applied for: (Aetna) $ ADB $ ------------------- ------------------- (Other Companies) $ ADB $ ------------------- ------------------- 3. Will life insurance or annuity in any company be replaced or changed if insurance applied for is issued? [ ] Yes [ ] No Explain -------------------------------------------------------------------- 4. In the past 12 months, have you smoked cigarettes, cigars, pipes or used tobacco in any form? If YES, describe usage. [ ] Yes [ ] No =============================================================================== 5. POLICY INFORMATION: Basic Plan 10 YEARS TERM AMOUNT 5,000,000 -------------------------------------- ----------- If Universal Life [ ] Option 1 [ ] Option 2 If Mortgage Ins. Years Rate (%) ------ ------ Dividend Option: [ ] Pay in Cash [X] Reduce Premium (not for salary deduction) [ ] Other -- Specify --------------------- If available, Automatic Premium Loan will be operative unless otherwise requested. Supplemental Benefits Disability Waiver? [ ] Yes [X] No Accidental Death Benefit? Ins. A. [ ] Yes $ [X] No --------- Ins. B. [ ] Yes $ [ ] No --------- Riders*: $ ------------------------------ ------------------------- $ ------------------------------ ------------------------- $ ------------------------------ ------------------------- $ ------------------------------ ------------------------- *For CIR--Submit application supplement =============================================================================== 6. BENEFICIARY -- (PROPOSED) INSURED A a. Primary-First, Middle, Last Relationship SABA PETROLEUM COMPANY --------------------------------------------------------------------------- b. Secondary-First, Middle, Last Relationship --------------------------------------------------------------------------- c. FINAL: Unless otherwise requested below: The executors or administrators of the insured. --------------------------------------------------------------------------- =============================================================================== 6. BENEFICIARY -- (PROPOSED) INSURED B a. Primary-First, Middle, Last Relationship --------------------------------------------------------------------------- b. Secondary-First, Middle, Last Relationship --------------------------------------------------------------------------- c. FINAL: Unless otherwise requested below: The executors or administrators of the insured. --------------------------------------------------------------------------- Special instructions: ------------------------------------------------------ --------------------------------------------------------------------------- 14 PART II -- NON MEDICAL QUESTIONS 7-21 SHOULD NOT BE COMPLETED FOR TERM CONVERSIONS OR EXERCISE OF GUAR- ANTEED INSURABILITY OPTION. Proposed Insured 7. HAVE YOU WITHIN 2 YEARS: (If Yes, explain) A B a. Flown as a pilot or crew member or Yes No Yes No intend to do so? (If YES, furnish Aviation Supplement) .................................. / / /X/ / / / / b. Engaged in motor vehicle or boat racing, rock or mountain climbing, hang gliding, or sky, skin or scuba diving or intend such activities? (If Yes, furnish Avocation Supplement) .................................. / / /X/ / / / / c. Had your license suspended or revoked, had 3 or more moving violations, or been charged with driving under the influence of alcohol or drugs?.......................... / / /X/ / / / / d. Frequently travelled outside of the United States or intend to do so?.................... /X/ / / / / / / 8. HAVE YOU EVER: a. Had insurance refused, or offered only with an extra premium?........................ / / /X/ / / / / b. Been arrested and convicted for a felony offense? ..................................... / / /X/ / / / / 9. HAVE YOU IN THE LAST 5 YEARS: (If Yes, explain) a. Used hallucinogenic or narcotic drugs not prescribed by a doctor? ...................... / / /X/ / / / / b. Used alcoholic beverages? (Note type, quan- tity and frequency) .......................... / / /X/ / / / / c. Had or been advised to have counseling for alcohol or drug use? ..................... / / /X/ / / / / 10. a. What is your current height? ................. -------- -------- b. What is your current weight? ................. -------- -------- c. If under age 2, birth weight? ................ -------- -------- 11. Name, address and phone number of personal physician, date and reason last seen, results: Ins. A Ins. B ------------------------------------------------------------------------ DR. H. REHMAN ------------------------------------------------------------------------ ------------------------------------------------------------------------ ------------------------------------------------------------------------ PHONE (716) 931-3800 ------------------------------------------------------------------------ 12. Have you had a history of heart, lung or liver Yes No Yes No disorder, stroke, diabetes or cancer? ............ / / /X/ / / / / If yes, an a exam is required, submit M.D. exam. (Not Para-Med) QUESTIONS 13-18 NOT REQUIRED FOR EXAMINED BUSINESS. Proposed Insured 13. HAVE YOU EVER HAD OR BEEN TREATED A B FOR: (If Yes, explain) Yes No Yes No a. Mental or nervous disorder? .................. / / /X/ / / / / b. Disease of the nervous system or brain? ...... / / /X/ / / / / c. Fainting, seizures, paralysis or stroke? ..... / / /X/ / / / / d. Shortness of breath, persistent cough? ....... / / /X/ / / / / e. Emphysema or other lung disease? ............. / / /X/ / / / / f. Chest pain, high blood pressure, heart attack, heart murmur, disease of the heart or blood vessels? ............................ / / /X/ / / / / g. Hepatitis, cirrhosis, or other disease of the liver or pancreas? ........................... / / /X/ / / / / h. Ulcer, colitis, chronic diarrhea, or other disorder of the stomach or intestine? ........ / / /X/ / / / / i. Sugar, albumin, blood or pus in urine? ....... / / /X/ / / / / j. Disease of the kidneys, reproductive organs or sexually transmitted disease? ...... / / /X/ / / / / k. Diabetes, thyroid or glandular disease? ...... / / /X/ / / / / l. Arthritis, disease or injury of the muscles, bones or joints? ............................. / / /X/ / / / / m. Cancer, tumor, cyst, disease of skin or lymph glands? ................................ / / /X/ / / / / 14. Have you in the last 10 years had or been treated for immune deficiency, anemia, other blood disorder, recurrent fever, fatigue or unex- plained weight loss? (If Yes, explain) ........... / / /X/ / / / / 15. Have you in the last 10 years been diagnosed or treated for AIDS/ARC by a member of the medical profession? .............................. / / /X/ / / / / 16. OTHER THAN ABOVE, HAVE YOU WITHIN THE PAST 5 YEARS: (If Yes, explain) a. Had a checkup, consultation, illness, injury, surgery or diagnostic test? .......... /X/ /X/ / / / / b. Been advised to have any diagnostic test, hospitalization of surgery which was not completed? ................................... / / /X/ / / / / c. Been a patient at any medical facility? ...... / / /X/ / / / / 17. a. Are you now under observation or treatment? ................................... / / /X/ / / / / b. Do you need assistance, supervision or use of medical appliances of any kind? ....... / / /X/ / / / / 18. Do you have a family history of diabetes, heart disease, or hereditary disease? .................. / / /X/ / / / / 19. EXPLANATIONS: Number, nature and severity of condition, frequency of attacks, treatments received, medication, dates, name, address & phone number of medical attendants and hospitals. - -------------------------------------------------------------------------------- QUES (PROPOSED) INSURED A QUES (PROPOSED) INSURED B - -------------------------------------------------------------------------------- 7 - d HAVE TO TRAVEL OUTSIDE - -------------------------------------------------------------------------------- THE U.S. REGARDING BUSINESS - -------------------------------------------------------------------------------- MATTERS (ESPECIALLY TO CANADA) - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 16 - a HAD APPENDECTOMY BY DR. R. AT - -------------------------------------------------------------------------------- LANNIGILL SASKATCHUAN CANADA. NO - -------------------------------------------------------------------------------- COMPLICATIONS, FULL RECOVERY - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 15
[AETNA APPLICATION [ ] AETNA LIFE INSURANCE COMPANY LOGO] PART 2 MEDICAL/ [ ] AETNA LIFE INSURANCE AND ANNUITY COMPANY PARAMEDICAL EXAM Hartford, Connecticut 06156 member Companies of AETNA LIFE & CASUALTY - --------------------------------------------------------------------------------------------------------------------------------- Proposed Insured (Print Name -- First, Initial, Last) Date of Birth (Mo.-Day-Yr.) Ilyas Chaudhary 2-9-47 - --------------------------------------------------------------------------------------------------------------------------------- a. Name, address and phone no. of your personal physician Dr. Hameed Rahman, Santa Ana, CA --------------------------------------------------------------------- b. Date and reason last consulted 1993 --------------------------------------------------------------------------------------------- c. What treatment was given or medication prescribed? None ------------------------------------------------------------------------- d. Present status? Healthy ------------------------------------------------------------------------------------------------------------ - --------------------------------------------------------------------------------------------------------------------------------- 13. HAVE YOU EVER HAD OR BEEN TREATED FOR: 19. DETAILS OF YES ANSWERS, IDENTIFY (If Yes, explain) YES NO QUESTION NUMBER, CIRCLE APPLI- a. Mental or nervous disorder? ........................................... [ ] [X] CABLE ITEMS. (Include diagnoses, b. Disease of the nervous system or brain? ............................... [ ] [X] dates, treatments received, c. Fainting, seizures, paralysis or stroke? .............................. [ ] [X] medication, results and name, d. Shortness of breath, persistent cough? ................................ [ ] [X] address and phone number of all e. Emphysema or other lung disease? ...................................... [ ] [X] attending physicians and medical f. Chest pain, high blood pressure, heart attack, heart murmur, facilities.) disease of heart or blood vessels? .................................... [ ] [X] ------------------------------------- g. Hepatitis, cirrhosis or other disease of the liver or pancreas? ....... [ ] [X] # Details h. Ulcer, colitis, chronic diarrhea or other disorder of the stomach ------------------------------------- or intestines? ........................................................ [ ] [X] 16a Insurance Physical for i. Sugar, albumin, blood or pus in the urine? ............................ [ ] [X] Kemper Life in 1992, Normal j. Disease of the kidneys, reproductive organs or sexually Results transmitted disease? .................................................. [ ] [X] k. Diabetes, thyroid or glandular disease? ............................... [ ] [X] l. Arthritis, disease or injury of the muscles, bones or joints? ......... [ ] [X] m. Cancer, tumor, cyst, disease of skin or lymph glands? ................. [ ] [X] 14. Have you in the last 10 years had or been treated for immune deficiency, anemia, other blood disorder, recurrent fever, fatigue or unexplained weight loss? (If Yes, explain) ........................................... [ ] [X] 15. Have you in the last 10 years been diagnosed or treated for AIDS/ARC by a member of the medical profession? .......................... [ ] [X] 16. OTHER THAN ABOVE, HAVE YOU WITHIN THE PAST 5 YEARS: (If Yes, explain) a. Had a checkup, consultation, illness, injury, surgery or diagnostic test? ...................................................... [X] [ ] b. Been advised to have any diagnostic test, hospitalization or surgery which was not completed? ...................................... [ ] [X] c. Been a patient at any medical facility? ............................... [ ] [X] 17. a. Are you now under observation or treatment? ........................... [ ] [X] b. Do you need assistance, supervision or use of medical appliances of any kind? ............................................... [ ] [X] - ----------------------------------------------------------------------------------------- 18. Family History: include heart or kidney disease, high blood pressure, stroke, diabetes, cancer, mental illness or suicide. None - ----------------------------------------------------------------------------------------- Living Dead Age Health Status Age Cause of Death - ----------------------------------------------------------------------------------------- Father 66 good -- -- - ----------------------------------------------------------------------------------------- Mother 70 good -- -- - ----------------------------------------------------------------------------------------- P M I 1 Brothers 41 good -- -- 2 CITY BLVD. EAST, #238 - ----------------------------------------------------------------------------------------- ORANGE, CA 92668 2 Sisters 44 good -- -- 38 - -------------------------------------------------------------------------------------------------------------------------------- The above answers and statements are true and complete to the best of my knowledge and belief. Signed at Irvine, CA on March 8th, 1994 ---------------------------- -------------------------------------------------------------------------------------- (City, State) (Mo.-Day-Yr.) In Presence of /s/ x /s/ ---------------------------------------------- --------------------------------------------------------------
16 COMPLETE ONLY IF PAYMENT IS TO BE MADE WITH APPLICATION. 20. Have you within 90 days had or been advised to have surgery or to be admitted to a medical facility or within 2 years consulted a physician for heart disease, stroke, immune disorder or cancer? Proposed Insured A / / Yes /X/ No B / / Yes / / No PAYMENT CANNOT BE ACCEPTED OR TEMPORARY INSURANCE OFFERED IF OVER AGE 65, AMOUNT AT RISK EXCEEDS $500,000 OR QUESTION 20 IS ANSWERED, YES. ANY PAYMENT IS SUBJECT TO TERMS OF THE TEMPORARY INSURANCE AGREEMENT. THE PAYMENT RECEIVED MUST BE AT LEAST ONE MODAL PREMIUM. 21a. Has payment been made? / / YES. Amt. $_____________ / / NO b. Has Temporary Insurance Agreement been provided and explained? / / YES / / NO - -------------------------------------------------------------------------------- 22. POLICYOWNER: THE (PROPOSED) INSURED IS POLICYOWNER UNLESS UNDER AGE 15 OR OTHERWISE REQUESTED. OTHER: Provide full name and relationship First Middle Last (If Business, provide name, city & state) SABA PETROLEUM COMPANY 17512 VONKARMAN AVE. IRVINE, CA 92714 - -------------------------------------------------------------------------------- 23. (PROPOSED) INSURED UNDER AGE 15: Unless otherwise requested, the person who signs as policyowner shall be the policyowner until the insured is age of majority in the state of policy delivery, at which time the insured becomes policyowner. OTHER: Provide full name and relationship: First Middle Last - -------------------------------------------------------------------------------- 24. SECONDARY POLICYOWNER: THE INSURED UNLESS OTHERWISE REQUESTED. OTHER: Provide full name and relationship First Middle Last (If Business, provide name, city & state) - -------------------------------------------------------------------------------- 25. POLICYOWNER TAXPAYER IDENTIFICATION NUMBER (MUST BE COMPLETED) / / Individual / / Partnership /X/ Corporation / / Trustee / / Other 47-0617589 Certification. -- Under penalties of perjury, I certify that: (1) The number shown above is my correct taxpayer identification number (or I am waiting for a number to be issued to me), and (2) I am not subject to backup withholding because: (a) I am exempt from backup withholding, or (b) I have not been notified by the Internal Revenue Service (IRS) that I am subject to backup withholding as a result of a failure to report all interest or dividends, or (c) the IRS notified me that I am no longer subject to backup withholding (does not apply to real estate transactions, mortgage interest paid, the acquisition or abandonment of secured property, contributions to an individual retirement arrangement (IRA), and payments other than interest and dividends). CERTIFICATION INSTRUCTIONS. -- You must cross out item (2) above if you have been notified by IRS that you are currently subject to backup withholding because of underreporting interest or dividends on your tax return. - -------------------------------------------------------------------------------- The answers above are true and complete to the best of my knowledge and belief. Unless I have a Temporary Insurance Agreement, I agree that coverage can take effect only if the proposed insured is alive, and all answers material to the risk are still true and complete, when the policy is delivered and the entire first premium is paid for. I agree that no agent may alter the terms of the application, the Temporary Insurance Agreement or the policy. No agent may waive any of Aetna's rights or requirements. If this is a request to exercise an option in an existing policy, the request will become effective in accordance with the terms of that option. If this is a request for change, any and all values may be used to pay for the change and to repay any loan indebtedness. The changed policy will be subject to any loan indebtedness not repaid. Any assignment in effect prior to this request will apply to any new insurance issued. Signature of (Proposed) Insured A_____/s/____________________Date 2-15-94 Signature of (Proposed) Insured B____________________________Date______________ Signature of Applicant/Policyowner /s/ William James Hickey Date 2-15-94 if other than proposed insured_____________________________Date______________ Signature of Assignee, if applicable_________________________Date______________ City Irvine State California Signature of Agent _________/s/______________________________Date 2-15-94 17 TEN-YEAR LEVEL PREMIUM RENEWABLE AND CONVERTIBLE TERM LIFE INSURANCE POLICY - - PREMIUMS REMAIN LEVEL FOR FIRST TEN POLICY YEARS AND BECOME ADJUSTABLE BEGINNING IN YEAR 11 SUBJECT TO STATED MAXIMUMS - - BEGINNING IN POLICY YEAR 11, POLICY BECOMES ANNUALLY RENEWABLE TO ATTAINED AGE 100 - - CONVERTIBLE UNTIL THE EARLIER OF THE 10TH POLICY ANNIVERSARY OR THE POLICY ANNIVERSARY NEAREST THE INSURED'S ATTAINED AGE 70 - - CONDITIONAL EXCHANGE AVAILABLE ON THE 10TH POLICY ANNIVERSARY - - PARTICIPATING - DIVIDENDS MAY BE PAYABLE EX-10.27 9 EXHIBIT 10.27 1 Exhibit 10.27 AETNA LIFE INSURANCE AND ANNUITY COMPANY Hartford, Connecticut 06156 While this Policy is in force Aetna will pay Proceeds subject to all its provisions. Other rights and benefits are provided ILYAS CHAUDHARY as described in this policy. W4309819 THIS POLICY IS A LEGAL CONTRACT BETWEEN YOU AND AETNA PLEASE READ YOUR POLICY CAREFULLY RIGHT OF POLICY EXAMINATION This Policy may be returned to Aetna or its representative within 10 days after its receipt. Return this Policy to Aetna, Individual Life Insurance, at 151 Farmington Avenue, Hartford, Connecticut 06156. Upon its return, this Policy will be deemed void from its beginning and all premiums paid will be refunded. Signed for Aetna on its Date of Issue. /s/ /s/ Dan Kearney Secretary President /s/ ------------------------------- Registrar TEN-YEAR LEVEL PREMIUM RENEWABLE AND CONVERTIBLE TERM LIFE INSURANCE POLICY - - PREMIUMS REMAIN LEVEL FOR FIRST TEN POLICY YEARS AND BECOME ADJUSTABLE BEGINNING IN YEAR 11 SUBJECT TO STATED MAXIMUMS - - BEGINNING IN POLICY YEAR 11, POLICY BECOMES ANNUALLY RENEWABLE TO ATTAINED AGE 100 - - CONVERTIBLE UNTIL THE EARLIER OF THE 10th POLICY ANNIVERSARY OR THE POLICY ANNIVERSARY NEAREST THE INSURED'S ATTAINED AGE 70 - - CONDITIONAL EXCHANGE AVAILABLE ON THE 10TH POLICY ANNIVERSARY - - NON-PARTICIPATING - NO DIVIDENDS PAYABLE 2
TABLE OF CONTENTS PAGE NO. POLICY SPECIFICATIONS......................................... PS1 POLICY SUMMARY................................................ 1 DEFINITIONS................................................... 1 Attained Age................................................ 1 Date of Issue............................................... 1 Exchange Date............................................... 1 Expiration Date............................................. 1 Face Amount................................................. 1 Home Office................................................. 1 Minimum Face Amount......................................... 1 Policy Month................................................ 1 Policy Year/Policy Anniversary.............................. 2 Subsequent Application(s)................................... 2 We, Our, Us, Company........................................ 2 Written Request............................................. 2 You, Your................................................... 2 GENERAL PROVISIONS............................................ 2 The Contract................................................ 2 Assignment.................................................. 2 Non-Participating........................................... 2 Policy Settlement........................................... 2 Age and/or Sex.............................................. 2 Owner....................................................... 2 Beneficiary................................................. 2 Changes in Owner and Beneficiary............................ 3 Proceeds.................................................... 3 SUICIDE AND INCONTESTABILITY.................................. 3 Incontestability............................................ 3 Suicide Exclusion........................................... 3 PREMIUMS AND REINSTATEMENTS................................... 3 Premiums.................................................... 3 Premium Adjustment.......................................... 3 Grace Period................................................ 4 Refund on Death............................................. 4 Reinstatement............................................... 4 CHANGES IN INSURANCE COVERAGE................................. 4 Decrease in Face Amount..................................... 4 RENEWAL AND CONVERSION........................................ 4 Renewal..................................................... 4 Conversion.................................................. 4 Partial Conversions......................................... 5 CONDITIONAL EXCHANGE.......................................... 5 SETTLEMENT OPTIONS............................................ 5 Conditions.................................................. 5 Income Options.............................................. 6 Option 1 - Interest......................................... 6 Option 2 - Fixed Period..................................... 6 Option 3 - Life Income...................................... 7 Option 4 - Joint Life Income Reducing for Survivor.......... 7 Interest Rate............................................... 8 Betterment of Payments...................................... 8 Withdrawals and Death of the Payee.......................... 8
ANY RIDERS AND A COPY OF THE APPLICATION(S) ARE AT THE END OF THIS POLICY. 3 P O L I C Y S P E C I F I C A T I O N S NAME OF INSURED: ILYAS CHAUDHARY POLICY NUMBER W 4 308 819 DATE OF ISSUE JULY 18, 1995 SEX: AGE: PREMIUM CLASS: MALE 48 PREFERRED NONSMOKER BENEFICIARY - SABA PETROLEUM COMPANY, IRVINE, CA, A CORPORATION. POLICY OWNER - SABA PETROLEUM COMPANY, IRVINE, CA, A CORPORATION. FACE AMOUNT - $5,000,000 MINIMUM FACE AMOUNT - $250,000
FACE YEARS ANNUAL PLAN AMOUNT PAYABLE PREMIUM TEN YEAR LEVEL PREMIUM, RENEWABLE AND $5,000,000 10 $11,800.00 CONVERTIBLE TERM LIFE INSURANCE POLICY TERM PERIOD BEGINNING JULY 18, 1995 RENEWABLE TO JULY 18, 2047 CONVERTIBLE BEFORE JULY 18, 2005 EXCHANGE DATE OF JULY 18, 2005 POLICY FEE $80.00 TOTAL ANNUAL PREMIUM $11,880.00
******************************************************************************** AUTOMATIC CHECK PLAN QUARTERLY SEMI-ANNUAL ANNUAL $1,056.67 $3,270.00 $6,140.00 $11,880.00 ******************************************************************************** METHOD OF PREMIUM ELECTED: ANNUAL TO DETERMINE THE APPROPRIATE POLICY FEES FOR MONTHLY, QUARTERLY AND SEMI- ANNUAL MODES, DIVIDE THE ANNUAL POLICY FEE OF $80.00 BY 12, 4 AND 2, RESPECTIVELY. WE RESERVE THE RIGHT TO ADJUST THE PREMIUM FOR EACH POLICY YEAR AFTER THIS POLICY HAS BEEN IN FORCE FOR 10 YEARS FROM ITS DATE OF ISSUE. THE ADJUSTED PREMIUM WILL NEVER EXCEED THE GUARANTEED RENEWAL PREMIUM FOR THAT YEAR. IT MAY BE LESS OR GREATER THAN THE PREMIUM FOR THE PRECEDING YEAR. PS 1 4 PS 2 W 4 309 819 ILYAS CHAUDHARY TABLE OF GUARANTEED MAXIMUM RENEWAL PREMIUMS EFFECTIVE DATE OF TABLE: JULY 18, 1995 THIS TABLE SHOWS THE MAXIMUM AMOUNT OF PREMIUM* FOR EACH RENEWAL TERM OF THIS POLICY, DETERMINED AT THE BEGINNING OF THE TEN YEAR TERM BY THE INSURED'S ISSUE AGE AND BY THE INSURED'S ATTAINED AGE FOR EACH POLICY YEAR, THEREAFTER.
POLICY POLICY ANNUAL ANNUAL ATTAINED AGE PREMIUM ATTAINED AGE PREMIUM - ------------ ------- ------------ ------- 49 $ 11,800.00 75 $ 590,450.00 50 $ 11,800.00 76 $ 652,950.00 51 $ 11,800.00 77 $ 719,350.00 52 $ 11,800.00 78 $ 787,950.00 53 $ 11,800.00 78 $ 860,800.00 54 $ 11,800.00 80 $ 950,550.00 55 $ 11,800.00 81 $1,051,200.00 56 $ 11,800.00 82 $1,165,650.00 57 $ 11,800.00 83 $1,295,550.00 58 $104,150.00 84 $1,439,000.00 59 $115,200.00 85 $1,607,300.00 60 $126,900.00 86 $1,786,600.00 61 $139,950.00 87 $1,975,800.00 62 $154,850.00 88 $2,171,750.00 63 $171,800.00 89 $2,377,000.00 64 $190,950.00 90 $2,593,850.00 65 $212,150.00 91 $2,845,550.00 66 $235,050.00 92 $3,108,650.00 67 $259,700.00 93 $3,388,200.00 68 $286,250.00 94 $3,705,800.00 69 $315,100.00 95 $3,921,650.00 70 $347,700.00 96 $4,137,400.00 71 $387,700.00 97 $4,353,150.00 72 $427,350.00 98 $4,588,900.00 73 $476,350.00 99 $4,784,700.00 74 $531,350.00
* THIS TABLE DOES NOT INCLUDE THE POLICY FEE. 5 POLICY SUMMARY It is important that You understand Your insurance policy. We have tried to use understandable language throughout this Policy. However, should You have any questions after You have read it, please call the representative who sold this Policy to You or call us. This summary is not a substitute for the detailed policy provisions. This is a ten-year level premium life insurance policy continuing as an annually renewable term policy until Attained Age 100 on the life of the Insured named in the Policy Specifications. Premiums must be paid to continue this Policy in force. Premium reminder notices will be sent. This Policy may be reinstated. This Policy's premiums remain level until the first day of the eleventh policy year at which time this policy will become annually renewable until the Insured reaches Attained Age 100. Subject to the conditions stated in this Policy, this Policy may be converted to a permanent individual life insurance policy until the earlier of the 10th Policy Anniversary or the Policy Anniversary nearest to the Insured's Attained Age 70. On the tenth Policy Anniversary, this policy may be exchanged for another policy of the same type or a similar policy made available by Us at that time. Other rights and benefits are explained in this Policy. DEFINITIONS ATTAINED AGE Issue age of the Insured as shown in the Policy Specifications, increased by the number of Policy Years elapsed. Issue age is the Insured's age on his/her birthday nearest this Policy's Date of Issue. DATE OF ISSUE The effective date for initial coverage is the Date of Issue shown in the Policy Specifications. The Date of Issue for any change in coverage as well as the effective date of the change will be the Effective Date of Change shown in the supplemental Policy Specifications which will be sent to You. Coverage is conditional on payment of the first premium, if any, and issue of this Policy as provided in the application. EXCHANGE DATE The date this policy can be exchanged for another policy of the same type or a similar policy made available by Us at that time. The Exchange Date is shown in the Policy Specifications. EXPIRATION DATE Subject to the conditions of this policy, this policy will remain in effect until the Expiration Date. The Expiration Date is the same as the renewal date shown in the Policy Specifications. Coverage will terminate on the Expiration Date. FACE AMOUNT The Face Amount of this Policy is shown in the Policy Specifications. HOME OFFICE Our Home Office is located at 151 Farmington Avenue, Hartford, Connecticut 06156. MINIMUM FACE AMOUNT The Face Amount of this Policy cannot be reduced below this amount. The Minimum Face Amount for this Policy is shown in the Policy Specifications. POLICY MONTH The Policy Month begins each month on the same day of the month as the Date of Issue. Page 1 6 POLICY YEAR/POLICY ANNIVERSARY This first Policy Year is the 12 month period beginning on the Date of Issue. Your Policy Anniversary is the Date of Issue plus 1 year, 2 years, etc. SUBSEQUENT APPLICATION(S) Any application after the initial application, initiated by You or by Us. WE, OUR, US, COMPANY Aetna Life Insurance Company, its successors or assigns. WRITTEN REQUEST A request in writing, in a form satisfactory to Us and received by Us at Our Home Office. YOU, YOUR The Owner(s). GENERAL PROVISIONS THE CONTRACT This Policy, the initial application on the Insured, any Subsequent Applications, and any amendment riders constitute the entire contract. Copies of all applications are attached to and made a part of this Policy. Only the President, Executive Vice President or the Corporate Secretary of the Company may agree to a change in this Policy and then only in writing. All statements made by or for the Insured are representations and not warranties. No statement will be used to void this Policy or defend against a claim unless it is contained in the initial application or Subsequent Applications. ASSIGNMENT A copy of an assignment must be filed at the Home Office. Until We receive such notice, We will not be required to take notice of, or be responsible for, any transfer of interest in this Policy by assignment, agreement or otherwise. We will not be responsible for the validity of any assignment. NON-PARTICIPATING No dividends will be paid. POLICY SETTLEMENT All amounts payable by Us are payable by the Home Office. We may require return of this Policy. AGE AND/OR SEX If the age and/or sex of the Insured is misstated, the Proceeds on death will be that which would have been purchased by the premium actually paid in the year of death if the policy had been issued at the correct age and/or sex. OWNER Unless otherwise stated, this Policy is owned by the Insured. All rights granted by this Policy or allowed by Us belong to the Owner. If this Policy is owned jointly, any request to exercise rights granted by this Policy must be made jointly. BENEFICIARY The Beneficiary for the Proceeds on death is as stated in the application unless later changed. If no designated Beneficiary is living at the time of the death of the Insured, all benefits will be paid to the Owner or the Owner's executors, administrators or assigns. 70165-94 Page 2 7 CHANGES IN OWNER AND BENEFICIARY Unless this Policy states otherwise, the Owner or the Beneficiary, or both, may be changed. Your Written Request must be sent to Us. This may be done as often as desired by the current owner of record before the death of the Insured. When We give Our written acceptance, the change will take effect as of the date Your Written Request was signed. The change will be subject to any action We take before receipt of the written acceptance. PROCEEDS Proceeds on death will equal the Face Amount. All amounts payable by Us are subject to adjustment under the Age and/or Sex, Incontestability, Suicide and Grade Period provisions. SUICIDE AND INCONTESTABILITY INCONTESTABILITY With respect to statements made in the initial application for the Insured: - - We will not contest this Policy after it has been in force during the lifetime of the Insured for 2 years from its Date of Issue. With respect to statements made in any Subsequent Applications: - - We will not contest coverage relating to Subsequent Applications after coverage has been in force during the lifetime of the Insured for 2 years from the Date of Issue of such coverage. If this Policy is contested, Your or the Beneficiary's rights may be affected. SUICIDE EXCLUSION If the Insured dies by suicide, while sane or insane, within 2 years from the Date of Issue of this Policy, We will refund only premiums paid. Proceeds on death will not be paid. PREMIUMS AND REINSTATEMENT PREMIUMS Premium due dates are measured from Date of Issue. The first premium is due on the Date of Issue. Any premiums after the first premium are payable only at Our Home Office. Each premium is payable on or before its due date. Send Your check or money order, payable to Aetna, to the Home Office. Please be sure to write Your policy number on Your check. Premium reminder notices will be sent annually or at any other frequency to which We agree. Please notify Us of any change in Your address. A receipt signed by an officer of the Company will be given upon request. PREMIUM ADJUSTMENT The premium for the first ten Policy Years is shown in the Policy Specifications. Beginning with the eleventh Policy Year We reserve the right to adjust the premium for each Policy Year. However, the adjusted premium will never exceed the guaranteed maximum premium for that Policy Year as shown in the Policy Specifications. We will send You written notice of the new premium before the beginning of each Policy Year after Policy Year ten. Beginning with the eleventh Policy Year, Premiums will be adjusted when Our expectations for future investment earnings, mortality, experience and expenses vary from the conditions expected at the time of pricing. Any such changes will be done on a prospective basis only; changes will not be such as to recover past losses or to distribute prior profits. Adjustments will be made on a uniform basis for Insureds of the same Attained Age, sex, premium classification, and whose policies have been in force for an equivalent length of time. Page 3 8 GRACE PERIOD We will allow You 31 days of grace from the premium due date for payment of an overdue premium. If the premium is not paid within the Grace Period, this Policy will terminate. Termination will be effective as of the premium due date. During the Grace Period, this Policy will stay in force. If the Insured dies during the grace period, We will deduct from the Proceeds the portion of the overdue premium which applies to the Policy Month in which death occurs. REFUND ON DEATH The portion of any premium paid which is for a period beyond the Policy Month in which the Insured died will be payable in addition to the Proceeds. REINSTATEMENT If this Policy terminates as provided in the Grace Period provision, it may be reinstated within 5 years after the date of termination and before the Expiration Date. We will require satisfactory evidence of insurability on the Insured. All premiums due since termination must be paid. CHANGES IN INSURANCE COVERAGE DECREASE IN FACE AMOUNT You may decrease the Face Amount of this Policy. The decrease will not be effective until the date when the next premium payment required to keep this Policy in force is due. When the Face Amount is decreased, We will change the premium amount payable for the Year in which the change is effective. New premiums will be based on Our table of premiums then in effect for the new Face Amount. New Policy Specifications which reflect the change will be sent to You. The amount of a decrease cannot reduce this Policy's Face Amount below the Minimum Face Amount. RENEWAL AND CONVERSION RENEWAL Beginning with Policy Year eleven, We will renew this policy annually without evidence of insurability until the Expiration Date. Your premium payment must be sent to Us within 31 days of each Policy Anniversary to renew this Policy. If premiums are in default, this Policy will not be renewed. CONVERSION This Policy may be converted to any permanent plan of life insurance that We make available for such purpose. Your Written Request to convert must be received by Us while this Policy is in force and within 30 days of the first to occur of (1) or (2): 1. the date the Insured reaches Attained Age 70, or 2. the first day of the eleventh Policy Year. The date Your conversion period expires is shown in the Policy Specifications. Evidence of Insurability will not be required for the amount being converted. We will credit any unearned premium which is attributable to the amount being converted to the new policy. The new policy will be issued: - - for the Insured's Attained Age and sex at Our current rates at the time of conversion: Page 4 9 - - with the same premium class as would have been assigned to the Insured for the new policy had it been issued on this Policy's Date of Issue; - - subject to any limitations of risk or assignments outstanding against this Policy. Extra benefit riders in force on this Policy at the time of conversion can be issued on the new policy without additional evidence of insurability only with Our consent. Extra benefit riders must be currently available for sale with the new policy. This Policy will terminate and the new Policy will begin on the date that Your Written Request and the first premium due for the new Policy are received at Our Home Office. The new Policy will not take effect if the Insured is not living on the Date of Issue of the new Policy. PARTIAL CONVERSIONS A portion of this Policy's Face Amount may be converted according to the terms of the Conversion provision. New Policy Specifications for this Policy will be sent to You. After a Partial Conversion, this Policy's Face Amount must be equal to or greater than the Minimum Face Amount. The minimum amount that may be converted is equal to the minimum face amount available for the new policy. CONDITIONAL EXCHANGE On the tenth Policy Anniversary, You may exchange this policy for a new policy of the same type or a similar one made available by Us at that time. All premiums on this policy due before the Exchange Date must be paid. The new policy is subject to the following terms. 1. You must complete and submit a new application and the first premium to Us within 90 days prior to the Exchange Date. 2. You must submit evidence of insurability satisfactory to Us. 3. Coverage under this policy will terminate when coverage under the new policy begins. 4. The new policy will be issued on the life of the Insured under this policy. 5. The Issue Age on the new policy will be the Insured's Attained Age on the birthday nearest the Exchange Date. 6. The Insured's Issue Age cannot exceed 70. 7. Any extra benefit riders in this policy can be included in the new policy provided those extra benefit riders are available for sale with the new policy at the time of exchange. Any extra benefit rider is subject to the rules and premium rates we are using on the Date of Issue of the new policy. 8. The Date of Issue of the new policy will be the Exchange Date. 9. Premium rates for the new policy will be based on the premium rates in effect on the Exchange Date. SETTLEMENT OPTIONS CONDITIONS All or part of the Proceeds of this Policy may be applied under one or more of the options described below or in any manner to which We agree. An election shall be made by Written Request filed with the Home Office. The payee of Proceeds may make this election if no prior election has been made. Payments will be made at intervals of 1, 3, 6 or 12 months in equal amounts as elected. Our consent to the election of an option is required if: 1. The payee is not a natural person receiving payments in his or her own right; 2. the payee is an assignee of this Policy; or, 3. payments would be less than $25 each or totalling less than $120 in a year. Page 5 10 INCOME OPTIONS The rates for these Income Options are based on the 1983 Individual Annuity Mortality Table, Male or Female. For purposes of calculating payments, the Adjusted Ages of the payees will be used. The Adjusted Age is the payee's age on his or her birthday nearest the commencement date of the annuity and then reduced by one year for annuities commencing in the 1990's, reduced two years for annuities beginning during 2000-2009, and so on. Rates for ages and intervals not shown for any of the following income options will be furnished upon request. OPTION 1 - INTEREST Payment of interest on Proceeds left with Us. Proceeds held under this option may be left with Us after the death of the payee only with Our consent. By Written Request, the payee may later elect to: 1. Receive all or a portion of the amount held under this option; or 2. apply all or a portion of this amount to options 2, 3 or 4 as described below. OPTION 2 - FIXED PERIOD Payment for a stated number of years, not longer than 30 years, as elected from the following table. - -------------------------------------------------------------------------------- PAYMENT PER $1,000 PROCEEDS - --------------------------------------------------------------------------------
YEARS OF SEMI- FIXED PERIOD ANNUAL ANNUAL QUARTERLY MONTHLY - -------------------------------------------------------------------------------- 3 $343.23 $172.88 $86.76 $28.99 4 261.19 131.56 66.02 22.06 5 211.99 106.78 53.59 17.91 10 113.82 57.33 28.77 9.61 15 81.33 40.96 20.56 6.87 20 65.25 32.87 16.50 5.51 25 55.76 28.08 14.09 4.71 30 49.53 24.95 12.52 4.18
- -------------------------------------------------------------------------------- Page 6 11 OPTION 3 - LIFE INCOME Payments for the lifetime of the payee. If also chosen, We will guarantee payments for 60, 120, 180 or 240 months. No payment will be due after death, except payment for any remaining fixed period.
- ----------------------------------------------------------------------------------------------------- MONTHLY LIFE INCOME PER $1,000 PROCEEDS - ----------------------------------------------------------------------------------------------------- WITH FIXED PERIOD -------------------------------------------------------------- WITHOUT AGE 10 YEARS 15 YEARS 20 YEARS FIXED PERIOD NEAREST -------------- -------------- -------------- ------------- BIRTHDAY Male Female Male Female Male Female Male Female - -------- ---- ------ ---- ------ ---- ------ ---- ------ 50 $4.22 $3.89 $4.17 $3.86 $4.08 $3.82 $4.27 $3.90 51 4.30 3.95 4.23 3.92 4.14 3.86 4.34 3.97 52 4.37 4.01 4.30 3.98 4.20 3.93 4.43 4.03 53 4.45 4.08 4.37 4.04 4.26 3.99 4.51 4.10 54 4.54 4.15 4.45 4.11 4.32 4.04 4.60 4.18 55 4.62 4.22 4.53 4.18 4.39 4.11 4.70 4.25 56 4.72 4.30 4.61 4.25 4.45 4.17 4.80 4.34 57 4.82 4.38 4.69 4.32 4.51 4.23 4.91 4.42 58 4.92 4.47 4.78 4.40 4.58 4.30 5.03 4.52 59 5.03 4.56 4.87 4.48 4.65 4.37 5.15 4.61 60 5.14 4.66 4.96 4.57 4.71 4.44 5.28 4.72 61 5.27 4.76 5.06 4.66 4.78 4.51 5.43 4.83 62 5.39 4.87 5.16 4.75 4.84 4.58 5.58 4.95 63 5.53 4.98 5.26 4.85 4.90 4.65 5.74 5.08 64 5.66 5.10 5.36 4.95 4.96 4.72 5.91 5.21 65 5.81 5.22 5.46 5.05 5.02 4.79 6.10 5.36 66 5.96 5.36 5.56 5.16 5.08 4.86 6.30 5.51 67 6.12 5.50 5.66 5.26 5.13 4.93 6.51 5.67 68 6.28 5.65 5.77 5.37 5.18 5.00 6.73 5.85 69 6.44 5.80 5.86 5.49 5.23 5.06 6.97 6.04 70 6.61 5.97 5.96 5.60 5.27 5.12 7.23 6.25 71 6.79 6.14 6.05 5.71 5.31 5.18 7.51 6.47 72 6.96 6.32 6.14 5.83 5.34 5.23 7.80 6.71 73 7.14 6.50 6.23 5.94 5.37 5.28 8.12 6.98 74 7.32 6.69 6.31 6.04 5.40 5.32 8.46 7.26 75 7.50 6.89 6.38 6.14 5.42 5.35 8.82 7.57
OPTION 4 - JOINT LIFE INCOME REDUCING FOR SURVIVOR Payments during the joint lifetimes of two payees. At the death of either, payments will continue to the survivor. When this option is chosen, a choice must be made of: 1. 100% of the payment to the survivor; 2. 66 2/3% of the payment to continue to the survivor; 3. 50% of the payment to continue to the survivor; 4. payments for a minimum of 120 months, with 100% of the payment to continue to the survivor; or 5. 100% of the payment to continue to the survivor if the survivor is the original payee, and 50% of the payment to continue to the survivor if the survivor is the second payee. No payment will become due after the death of the surviving payee. The following table illustrates the applicable rates if number (3) of Option 4 is chosen. Page 7 12 MONTHLY JOINT INCOME WITH 1/2 TO SURVIVOR PER $1,000 PROCEEDS
- ----------------------------------------------------------------------------------------------- AGE OF AGE OF FEMALE ANNUITANT MALE ---------------------------------------------------------------------------------- ANNUITANT 50 55 60 65 70 75 80 85 - ----------------------------------------------------------------------------------------------- 50 $4.08 $4.26 $4.48 $4.75 $5.07 $5.46 $ 5.90 $ 6.36 55 4.27 4.47 4.71 5.01 5.37 5.80 6.30 6.83 60 4.49 4.71 4.99 5.32 5.73 6.22 6.80 7.42 65 4.76 5.01 5.32 5.70 6.17 6.75 7.44 8.19 70 5.07 5.36 5.71 6.15 6.70 7.40 8.23 9.16 75 5.41 5.74 6.15 6.66 7.32 8.15 9.16 10.34 80 5.77 6.15 6.62 7.22 7.99 8.99 10.24 11.73 85 6.12 6.54 7.08 7.77 8.67 9.86 11.40 13.27 - -----------------------------------------------------------------------------------------------
INTEREST RATE The guaranteed interest rate is 3.0% per year compounded annually. This rate applies to funds held under options 1, 2 and 3 during any fixed period. As to these funds, We will allow such excess interest as We may declare each year. As to Option 1, from time to time We may offer higher interest rates with certain conditions on withdrawal as are then published by Us. BETTERMENT OF PAYMENTS If option 2, 3 or 4 is chosen and if the guaranteed payments are less than those of Our current single premium immediate annuity on the same plan, those larger amounts will be paid instead. WITHDRAWALS AND DEATH OF THE PAYEE As to the funds held under option 1, withdrawals and changes of options may be made if the payee makes the election or if the election so permits. No withdrawals or changes of option may be made under Options 2, 3 and 4. Upon the death of the payee, the current value of funds held under option 1 or the present value of any guaranteed payments not yet paid in one lump sum to the beneficiary. The beneficiary may elect to continue the remaining payments instead of receiving the lump sum amount. If no beneficiary exists, the present value of any remaining payments will be paid in one sum to the estate of the payee. The interest rate used to determine the first payment will be used to calculate the present value of any remaining payments. Page 8 13 [AETNA Aetna Life Insurance and Annuity Company LOGO] 151 Farmington Avenue Hartford, CT 06156 AMENDMENT TO APPLICATION FOR LIFE INSURANCE - -------------------------------------------------------------------------------- Name Date of Application Policy Number ILYAS CHAUDHARY MAY 24, 1995 W4309819 Aetna is authorized to amend the application as follows. The answers to the original questions on the application, as amended below, should now read as follows: - -------------------------------------------------------------------------------- Question # Answer 11 OTHER THAN 3/94 INSURANCE EXAM FOR AETNA-HAVE NOT CONSULTED DR REHMAN OR ANY OTHER PHYSICIAN IN MANY YEARS The Undersigned agree(s) these changes and statements shall be a part of the application referred to above, they shall be subject in all respects to the agreements contained in the application. - -------------------------------------------------------------------------------- Signed at (City, State) on (Mo.-Day-Yr.) /s/ 7/27/95 - -------------------------------------------------------------------------------- Signature of Proposed Insured A Witness to Proposed Insured A /s/ Rachael Y. Giardine - -------------------------------------------------------------------------------- Signature of Proposed Insured B Witness to Proposed Insured B - -------------------------------------------------------------------------------- Signature of Applicant A/Policyowner Witness to Applicant A/Policyowner if other than the Proposed Insured(s) /s/ Saba Petroleum Company /s/ Rachael Y. Giardine by W.C. Vance Vice President - -------------------------------------------------------------------------------- Signature of Applicant B/Policyowner Witness to Applicant B/Policyowner if other than the Proposed Insured(s) - -------------------------------------------------------------------------------- All signatures required if Applicant and Proposed Insured(s) are different persons, unless Proposed Insured(s) is/are under age 15. If Applicant(s) is/are a corporation or partnership, signatures of two officers or partners other than the Proposed Insured(s) are required. The officers must sign and state title. - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - INSTRUCTIONS TO POLICYOWNER (RETAIN THIS COPY FOR YOUR RECORDS) The Policyowner and Agent's copies must be signed. 14 [AETNA LOGO] LIFE INSURANCE APPLICATION [ ] Aetna Life Insurance Company [ ] Aetna Life Insurance and Annuity Company 151 Farmington Avenue, Hartford, CT 06156 member Companies of AETNA LIFE & CASUALTY =============================================================================== [X] New Insurance [ ] Increase in Amount $ ------------------ Policy No. ANSWER ALL QUESTIONS ------------- [ ] Term Conversion/Guaranteed Option $ . --------------------- Continue $ as term insurance. ----------------------- ANSWER QUESTIONS 1, 4 (if applicable), 5, 6, 22, 23, 24 & 25 [ ] Other Policy Change ANSWER APPLICABLE QUESTIONS. ----------------------------- [ ] Policy No. to be changed/converted ----------------------------------------- =============================================================================== STATE OF DELIVERY California - ------------------------------------------------------------------------------- 1. (PROPOSED) INSURED A (Print full legal name) --------------------------------------------------------------------------- First Middle Last ILYAS CHAUDHARY --------------------------------------------------------------------------- Residence Address (No., Street) P.O. Box 151 TOBY LN --------------------------------------------------------------------------- City State Zip Code ANAHEIM HILLS CA 92507 --------------------------------------------------------------------------- Sex Birth Date (Mo-Day-Yr) Place of Birth M 02.09.1947 PAKISTAN --------------------------------------------------------------------------- 2a. Occupation (Title & Give Exact Duties) PRESIDENT AND CHIEF EXECUTIVE OFFICER --------------------------------------------------------------------------- 2b. Employer's Name and Address SABA PETROLEUM COMPANY --------------------------------------------------------------------------- 2c. Annual Income $------------------------------------------------------------ 2d. Amount of life insurance presently in force or applied for: (Aetna) $ ADB $ ------------------- ------------------- (Other Companies) $ ADB $ ------------------- ------------------- 3. Will life insurance or annuity in any company be replaced or changed if insurance applied for is issued? [ ] Yes [X] No Explain -------------------------------------------------------------------- 4. In the past 12 months, have you smoked cigarettes, cigars, pipes or used tobacco in any form? If YES, describe usage. [ ] Yes [X] No =============================================================================== Complete For Spouse, Other Insured Rider, Joint Applications (Relationship to Proposed Insured A) - ------------------------------------------------------------------------------- 1. (PROPOSED) INSURED B (Additional insured) --------------------------------------------------------------------------- First Middle Last --------------------------------------------------------------------------- Residence Address (No., Street) P.O. Box --------------------------------------------------------------------------- City State Zip Code --------------------------------------------------------------------------- Sex Birth Date (Mo-Day-Yr) Place of Birth --------------------------------------------------------------------------- 2a. Occupation (Title & Give Exact Duties) --------------------------------------------------------------------------- 2b. Employer's Name and Address --------------------------------------------------------------------------- 2c. Annual Income $------------------------------------------------------------ 2d. Amount of life insurance presently in force or applied for: (Aetna) $ ADB $ ------------------- ------------------- (Other Companies) $ ADB $ ------------------- ------------------- 3. Will life insurance or annuity in any company be replaced or changed if insurance applied for is issued? [ ] Yes [ ] No Explain -------------------------------------------------------------------- 4. In the past 12 months, have you smoked cigarettes, cigars, pipes or used tobacco in any form? If YES, describe usage. [ ] Yes [ ] No - ------------------------------------------------------------------------------- 5. POLICY INFORMATION: Basic Plan 10 YEARS TERM AMOUNT 5,000,000.00 ----------------------------------- -------------- If Universal Life [ ] Option 1 [ ] Option 2 If Mortgage Ins. Years Rate (%) ------ ------ Dividend Option: [ ] Pay in Cash [ ] Reduce Premium (not for salary deduction) [ ] Other -- Specify --------------------- If available, Automatic Premium Loan will be operative unless otherwise requested. Supplemental Benefits Disability Waiver? [ ] Yes [ ] No Accidental Death Benefit? Ins. A. [ ] Yes $ [ ] No --------- Ins. B. [ ] Yes $ [ ] No --------- Riders*: $ ------------------------------ ------------------------- $ ------------------------------ ------------------------- $ ------------------------------ ------------------------- $ ------------------------------ ------------------------- *For CIR--Submit application supplement =============================================================================== 6. BENEFICIARY -- (PROPOSED) INSURED A a. Primary-First, Middle, Last Relationship SABA PETROLEUM COMPANY --------------------------------------------------------------------------- b. Secondary-First Middle, Last Relationship --------------------------------------------------------------------------- c. FINAL: Unless otherwise requested below: The executors or administrators of the insured. --------------------------------------------------------------------------- =============================================================================== 6. BENEFICIARY -- (PROPOSED) INSURED B a. Primary-First, Middle, Last Relationship --------------------------------------------------------------------------- b. Secondary-First Middle, Last Relationship --------------------------------------------------------------------------- c. FINAL: Unless otherwise requested below: The executors or administrators of the insured. --------------------------------------------------------------------------- Special instructions: ------------------------------------------------------ --------------------------------------------------------------------------- 15 PART II -- NON MEDICAL QUESTIONS 7-21 SHOULD NOT BE COMPLETED FOR TERM CONVERSIONS OR EXERCISE OF GUAR- ANTEED INSURABILITY OPTION. Proposed Insured 7. HAVE YOU WITHIN 2 YEARS: (If Yes, explain) A B a. Flown as a pilot or crew member or Yes No Yes No intend to do so? (If YES, furnish Aviation Supplement) .................................. / / /X/ / / / / b. Engaged in motor vehicle or boat racing, rock or mountain climbing, hang gliding, or sky, skin or scuba diving or intend such activities? (If Yes, furnish Avocation Supplement) .................................. / / /X/ / / / / c. Had your license suspended or revoked, had 3 or more moving violations, or been charged with driving under the influence of alcohol or drugs?.......................... / / /X/ / / / / d. Frequently travelled outside of the United States or intend to do so?.................... /X/ / / / / / / 8. HAVE YOU EVER: a. Had insurance refused, or offered only with an extra premium?........................ / / /X/ / / / / b. Been arrested and convicted for a felony offense? ..................................... / / /X/ / / / / 9. HAVE YOU IN THE LAST 5 YEARS: (If Yes, explain) a. Used hallucinogenic or narcotic drugs not prescribed by a doctor? ...................... / / /X/ / / / / b. Used alcoholic beverages? (Note type, quan- tity and frequency) .......................... / / /X/ / / / / c. Had or been advised to have counseling for alcohol or drug use? ..................... / / /X/ / / / / 10. a. What is your current height? ................. -------- -------- b. What is your current weight? ................. -------- -------- c. If under age 2, birth weight? ................ -------- -------- 11. Name, address and phone number of personal physician, date and reason last seen, results: Ins. A Ins. B ------------------------------------------------------------------------ DR. HAMID UR. REHMAN ------------------------------------------------------------------------ (719) 751-0101 ------------------------------------------------------------------------ ------------------------------------------------------------------------ ------------------------------------------------------------------------ 12. Have you had a history of heart, lung or liver Yes No disorder, stroke, diabetes or cancer? ............ / / /X/ / / / / If yes, and exam is required, submit M.D. exam. (Not Para-Med) QUESTIONS 13-18 NOT REQUIRED FOR EXAMINED BUSINESS. Proposed Insured 13. HAVE YOU EVER HAD OR BEEN TREATED A B FOR: (If Yes, explain) Yes No Yes No a. Mental or nervous disorder? .................. / / /X/ / / / / b. Disease of the nervous system or brain? ...... / / /X/ / / / / c. Fainting, seizures, paralysis or stroke? ..... / / /X/ / / / / d. Shortness of breath, persistent cough? ....... / / /X/ / / / / e. Emphysema or other lung disease? ............. / / /X/ / / / / f. Chest pain, high blood pressure, heart attack, heart murmur, disease of the heart or blood vessels? ............................ / / /X/ / / / / g. Hepatitis, cirrhosis, or other disease of the liver or pancreas? ........................... / / /X/ / / / / h. Ulcer, colitis, chronic diarrhea, or other disorder of the stomach or intestines? ....... / / /X/ / / / / i. Sugar, albumin, blood or pus in urine? ....... / / /X/ / / / / j. Disease of the kidneys, reproductive organs or sexually transmitted disease? ...... / / /X/ / / / / k. Diabetes, thyroid or glandular disease? ...... / / /X/ / / / / l. Arthritis, disease or injury of the muscles, bones or joints? ............................. / / /X/ / / / / m. Cancer, tumor, cyst, disease of skin or lymph glands? ................................ / / /X/ / / / / 14. Have you in the last 10 years had or been treated for immune deficiency, anemia, other blood disorder, recurrent fever, fatigue or unex- plained weight loss? (If Yes, explain) ........... / / /X/ / / / / 15. Have you in the last 10 years been diagnosed or treated for AIDS/ARC by a member of the medical profession? .............................. / / / / / / / / 16. OTHER THAN ABOVE, HAVE YOU WITHIN THE PAST 5 YEARS: (If Yes, explain) a. Had a checkup, consultation, illness, injury, surgery or diagnostic test? .......... /X/ / / / / / / b. Been advised to have any diagnostic test, hospitalization or surgery which was not completed? ................................... / / /X/ / / / / c. Been a patient at any medical facility? ...... / / /X/ / / / / 17. a. Are you now under observation or treatment? ................................... / / /X/ / / / / b. Do you need assistance, supervision or use of medical appliances of any kind? ....... / / /X/ / / / / 18. Do you have a family history of diabetes, heart disease, or hereditary disease? .................. / / /X/ / / / / 19. EXPLANATIONS: Number, nature and severity of condition, frequency of attacks, treatments received, medication, dates, name, address & phone number of medical attendants and hospitals. - -------------------------------------------------------------------------------- QUES (PROPOSED) INSURED A QUES (PROPOSED) INSURED B - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 16 COMPLETE ONLY IF PAYMENT IS TO BE MADE WITH APPLICATION. 20. Have you within 90 days had or been advised to have Proposed Insured surgery or to be admitted to a medical facility or A B within 2 years consulted a physician for heart Yes No Yes No disease, stroke, immune disorder or cancer? .......... / / /X/ / / / / PAYMENT CANNOT BE ACCEPTED OR TEMPORARY INSURANCE OFFERED IF OVER AGE 65, AMOUNT AT RISK EXCEEDS $500,000 OR QUESTION 20 IS ANSWERED, YES. ANY PAYMENT IS SUBJECT TO TERMS OF THE TEMPORARY INSURANCE AGREEMENT. THE PAYMENT RECEIVED MUST BE AT LEAST ONE MODAL PREMIUM. 21a. Has payment been made? / / YES. Amt. $________ / / NO. b. Has Temporary Insurance Agreement been provided and explained? / / YES / / NO _______________________________________________________________________________ 22. POLICYOWNER: THE (PROPOSED) INSURED IS POLICYOWNER UNLESS UNDER AGE 15 OR OTHERWISE REQUESTED. OTHER: Provide full name and relationship First Middle Last(If Business,provide name, city, & state) SABA PETROLEUM COMPANY 17512-VONKARMAN AVE IRVINE CA. 92714 (KEY MAN) _______________________________________________________________________________ 23. (PROPOSED) INSURED UNDER AGE 15: Unless otherwise requested, the person who signs as policyowner shall be the policyowner until the insured is age of majority in the state of policy delivery, at which time the insured becomes policyowner. OTHER: Provide full name and relationship: First Middle Last _______________________________________________________________________________ 24. SECONDARY POLICYOWNER: THE INSURED UNLESS OTHERWISE REQUESTED. OTHER: Provide full name and relationship First Middle Last(If Business,provide name, city, & state) _______________________________________________________________________________ 25. POLICYOWNER TAXPAYER IDENTIFICATION NUMBER (MUST BE COMPLETED) / / Individual [ ][ ][ ]-[ ][ ]-[ ][ ][ ] / / Partnership /X/ Corporation / / Trustee / / Other 47-0617589 Certification - Under penalties of perjury, I certify that: (1) The number shown above is my correct taxpayer identification number (or I am waiting for a number to be issued to me), and (2) I am not subject to backup withholding because: (a) I am exempt from backup withholding, or (b) I have not been notified by the Internal Revenue Service (IRS) that I am subject to backup withholding as a result of a failure to report all interest or dividends, or (c) the IRS notified me that I am no longer subject to backup withholding (does not apply to real estate transactions, mortgage interest paid, the acquisition or abandonment of secured property, contributions to an individual retirement arrangement (IRA), and payments other than interest and dividends). CERTIFICATION INSTRUCTIONS - You must cross out item (2) above if you have been notified by IRS that you are currently subject to backup withholding because of underreporting interest or dividends on your tax return. _______________________________________________________________________________ The answers above are true and complete to the best of my knowledge and belief. Unless I have a Temporary Insurance Agreement, I agree that coverage can take effect only if the proposed insured is alive, and all answers material to the risk are still true and complete, when the policy is delivered and the entire first premium is paid for. I agree that no agent may alter the terms of the application, the Temporary Insurance Agreement or the policy. No agent may waive any of AEtna's rights or requirements. If this is a request to exercise an option in an existing policy, the request will become effective in accordance with the terms of that option. If this is a request for change, any and all values may be used to pay for the change and to repay any loan indebtedness. The changed policy will be subject to any loan indebtedness not repaid. Any assignment in effect prior to this request will apply to any new insurance issued. Signature of (Proposed) Insured A /s/ Date 05-24-95 - -------------------------------------------------------------------------------- Signature of (Proposed) Insured B Date - -------------------------------------------------------------------------------- Signature of Applicant/Policyowner /s/ (Executive Date Secretary) --------------------------------------------- if other than proposed insured Date - -------------------------------------------------------------------------------- Signature of Assignee, if applicable Date 05-25-95 - -------------------------------------------------------------------------------- City Irvine State CA - -------------------------------------------------------------------------------- Signature of Agent /s/ Masood E. Khan (Masood E. Khan) Date 05-25-95 - -------------------------------------------------------------------------------- 17 [AETNA APPLICATION [ ] AETNA LIFE INSURANCE COMPANY LOGO] PART 2 MEDICAL/ [ ] AETNA LIFE INSURANCE AND ANNUITY COMPANY PARAMEDICAL EXAM Hartford, Connecticut 06156-0007 - --------------------------------------------------------------------------------------------------------------------------------- Proposed Insured (Print Name -- First, Initial, Last) Date of Birth (Mo.-Day-Yr.) Ilyas Chaudhary 2-9-47 - --------------------------------------------------------------------------------------------------------------------------------- a. Name, address and phone no. of your personal physician Dr. Shubes -- Anaheim, CA --------------------------------------------------------------------- b. Date and reason last consulted Never Consulted --------------------------------------------------------------------------------------------- c. What treatment was given or medication prescribed? Never Consulted ------------------------------------------------------------------------- d. Present status? -- ------------------------------------------------------------------------------------------------------------ - --------------------------------------------------------------------------------------------------------------------------------- 13. HAVE YOU EVER HAD OR BEEN TREATED FOR: 19. DETAILS OF YES ANSWERS, IDENTIFY (If Yes, explain) YES NO QUESTION NUMBER, CIRCLE APPLI- a. Mental or nervous disorder? ........................................... [ ] [X] CABLE ITEMS. (Include diagnoses, b. Disease of the nervous system or brain? ............................... [ ] [X] dates, treatments received, c. Fainting, seizures, paralysis or stroke? .............................. [ ] [X] medication, results and name, d. Shortness of breath, persistent cough? ................................ [ ] [X] address and phone number of all e. Emphysema or other lung disease? ...................................... [ ] [X] attending physicians and medical f. Chest pain, high blood pressure, heart attack, heart murmur, facilities.) disease of heart or blood vessels? .................................... [ ] [X] ------------------------------------- g. Hepatitis, cirrhosis or other disease of the liver or pancreas? ....... [ ] [X] # Details h. Ulcer, colitis, chronic diarrhea or other disorder of the stomach ------------------------------------- or intestines? ........................................................ [ ] [X] 18 Father has had stroke i. Sugar, albumin, blood or pus in the urine? ............................ [ ] [X] --------------------- Insurance Physical for j. Disease of the kidneys, reproductive organs or sexually Aetna in 1994 transmitted disease? .................................................. [ ] [X] Normal Results k. Diabetes, thyroid or glandular disease? ............................... [ ] [X] l. Arthritis, disease or injury of the muscles, bones or joints? ......... [ ] [X] m. Cancer, tumor, cyst, disease of skin or lymph glands? ................. [ ] [X] 14. Have you in the last 10 years had or been treated for immune deficiency, anemia, other blood disorder, recurrent fever, fatigue or unexplained weight loss? (If Yes, explain) ........................................... [ ] [X] 15. Have you in the last 10 years been diagnosed or treated for AIDS/ARC by a member of the medical profession? .......................... [ ] [X] 16. OTHER THAN ABOVE, HAVE YOU WITHIN THE PAST 5 YEARS: (If Yes, explain) a. Had a checkup, consultation, illness, injury, surgery or diagnostic test? ...................................................... [ ] [X] b. Been advised to have any diagnostic test, hospitalization or surgery which was not completed? ...................................... [ ] [X] c. Been a patient at any medical facility? ............................... [ ] [X] 17. a. Are you now under observation or treatment? ........................... [ ] [X] b. Do you need assistance, supervision or use of medical appliances of any kind? ............................................... [ ] [X] - ----------------------------------------------------------------------------------------- 18. Family History: include heart or kidney disease, high blood pressure, stroke, diabetes, cancer, mental illness or suicide. - ----------------------------------------------------------------------------------------- Living Dead Age Health Status Age Cause of Death - ----------------------------------------------------------------------------------------- Father 76 good - stroke -- -- - ----------------------------------------------------------------------------------------- Mother 75 good -- -- - ----------------------------------------------------------------------------------------- 1 Brothers 41 good -- -- - ----------------------------------------------------------------------------------------- 2 Sisters 46 good -- -- 39 good - -------------------------------------------------------------------------------------------------------------------------------- The above answers and statements are true and complete to the best of my knowledge and belief. Signed at Irvine, CA on June 30th, 1995 ---------------------------- -------------------------------------------------------------------------------------- (City, State) (Mo.-Day-Yr.) In Presence of /s/ x /s/ ---------------------------------------------- --------------------------------------------------------------
18 TEN-YEAR LEVEL PREMIUM RENEWABLE AND CONVERTIBLE TERM LIFE INSURANCE POLICY - - PREMIUMS REMAIN LEVEL FOR FIRST TEN POLICY YEARS AND BECOME ADJUSTABLE BEGINNING IN YEAR 11 SUBJECT TO STATED MAXIMUMS - - BEGINNING IN POLICY YEAR 11, POLICY BECOMES ANNUALLY RENEWABLE TO ATTAINED AGE 100 - - CONVERTIBLE UNTIL THE EARLIER OF THE 10TH POLICY ANNIVERSARY OR THE POLICY ANNIVERSARY NEAREST THE INSURED'S ATTAINED AGE 70 - - CONDITIONAL EXCHANGE AVAILABLE ON THE 10TH POLICY ANNIVERSARY - - NON-PARTICIPATING - NO DIVIDENDS PAYABLE EX-10.29 10 EXHIBIT 10.29 1 Exhibit 10.29 CAPCO RESOURCES, LTD. 950, 444 FIFTH AVENUE S.W. DAYON BUILDING CALGARY, ALBERTA, CANADA T2P 2TB April 2, 1997 Saba Petroleum Company 3201 Skyway Drive, Suite 201 Santa Maria, Ca. 93455 Attention: Mr. Alex Cathcart Executive Vice President Gentlemen: Please refer to that certain indemnity agreement between the undersigned ("Capco") and you ("Saba") pursuant to which Capco has agreed to indemnify Saba from any loss which may result from the assertion by a shareholder of Saba that he was entitled to acquire shares of the common stock of Saba by reason of preemptive rights held by such person and the failure of Saba to accord such person the ability to exercise such rights. Saba has requested that Capco provide certificates endorsed in blank representing 150,000 shares of the common stock of Saba held by Capco as security for the performance of the indemnity and that such shares be deposited into an escrow or trust of Saba's selection to further collateralize such performance. This constitutes Capco agreement to deposit such shares, provided that Saba agrees the following terms: 1. The term of the escrow or trust shall end on September 1, 1998, at which time all shares deposited shall be returned to Capco, unless prior to such time a covered claim has been asserted, in which case those shares not required to provide indemnity to Saba with respect to such claim and any other covered claims that may theretofore have been discharged out of such deposit, shall be returned to Capco and when such asserted claim shall have been discharged, the remaining shares held with respect to it shall be returned to Capco and the trust or escrow shall terminate. 2. The terms of the escrow or trust shall be consistent with the indemnity agreement and this letter of agreement. 3. Capco shall retain the right to vote all shares deposited into the trust or escrow and the right to receive all distributions made with respect thereto, save only shares released to discharge a covered claim. 2 4. Capco shall have the right to approve any settlement of a claim that purports to be a covered claim and no settlement thereof shall be made without the written concurrence of Capco. 5. Nothing herein shall modify the terms of the indemnity agreement which shall continue in effect in accordance with its original tenor, it being the agreement of the parties that this agreement is only to provide collateral for the indemnity agreement's performance by Capco. If the foregoing is acceptable to you, please so indicate by signing and returning one copy of this letter to the undersigned. Very truly yours, CAPCO RESOURCES, LTD. by ---------------------------- ACCEPTED AND AGREED this _ day of April 1997, SABA PETROLEUM COMPANY by --------------------------------------- Alex Cathcart, Executive Vice President EX-10.30 11 EXHIBIT 10.30 1 EXHIBIT 10.30 PURCHASE AND SALE AGREEMENT This Agreement (the "Agreement") for the sale and purchase of MV VENTURES, G.P., (herein called the "Partnership"), which owns the properties listed on Exhibit "A," attached hereto, together with all wells, fixtures, facilities and/or other improvements (other than any compressor, pipeline or gathering system) located thereon (herein collectively called the "Properties") is entered into on October 8, 1996 (herein called the "Contract Date") by and between DuBose Ventures, Inc. and Rockbridge Oil & Gas, Inc., as sole partners in the Partnership, located at 1200 Smith Street, Suite 2250, Houston, Texas 77002 (herein called "Seller") and SABA ENERGY OF TEXAS, INCORPORATED, 1603 SE 19th Street, Suite 203, Edmond, Oklahoma 73013 and ENERGY ASSET MANAGEMENT CORPORATION, P.O. Box 1714, El Dorado, Arkansas 71731, (herein collectively called "Purchaser"). Pursuant to the following terms and conditions, Seller shall convey to Purchaser all of Seller's right, title and interest in and to the Partnership for the purchase price of Four Million Dollars ($4,000,000 US) (the "Purchase Price"). 1. EFFECTIVE DATE AND TIME OF SALE AND PURCHASE AGREEMENT. Unless otherwise agreed to in writing by Seller and Purchaser, the effective date and time ("Effective Date") of this sale and purchase of the Properties ("Sale/Purchase") is October 1, 1996 at 7:00 am C.S.T. 2. PERFORMANCE DEPOSIT/DOWN PAYMENT. As evidence of good faith, Purchaser has deposited or will deposit with Seller a performance deposit of One-Hundred-Fifty-Thousand ($150,000 US), applicable to the above unadjusted Purchase Price, which deposit is non-refundable, except as provided subsequently herein. On the closing date, Purchaser shall pay and deliver to Seller the remaining unpaid portion of the Purchase Price, adjusted as provided for herein. 3. ACCESS TO PROPERTIES AND DATA. Notwithstanding Purchaser's prior opportunity to inspect and inventory, promptly after execution of this Agreement by both parties and upon request of Purchaser, Seller shall endeavor to provide Purchaser and Purchaser's authorized representatives, at any reasonable time(s) before the closing date as set forth below, (i) physical access to the wells, equipment, and facilities included in whole or in part in the Properties that are Seller-operated and to the Property and associated facilities, at Purchaser's sole risk, cost and expense for the purpose of inspecting the same, and (ii) access, with copying privileges, at Purchaser's sole cost, to all raw geological, production, engineering, and other technical data and records, and to all contract, land, lease, and permit records, to the extent such data and records are in Seller's possession and relate to the Properties; provided, however, Seller shall have no obligation to provide Purchaser access to any interpretative or predictive data or information which Seller considers confidential or proprietary to it or which access Seller cannot lawfully provide Purchaser because of third-party restrictions on Seller. 4. CLOSING. Upon satisfaction of all the terms and conditions contained herein, Seller and Purchaser shall close this Sale/Purchase on or before November 1, 1996 (the "Closing Date") unless otherwise agreed to by both parties in writing. Closing shall take place at Seller's office. A one time extension to the closing date of no more than 60 days shall not be unreasonably withheld, if requested in writing. At closing, the following shall occur: a. Seller shall deliver to Purchaser a copy of the Partnership agreement, resolutions, certificates of good standing, and other documents as reasonably requested by Purchaser to show Seller's authority and good standing to make this sale. b. Seller shall deliver possession of the Partnership (subject to the terms of applicable operating agreements, if any, and the other provisions hereof), including all of Seller's rights, title and interest in and to all inventories of oil in stock tanks situated on said Properties, at the time of closing. c. Seller shall transfer custody of all information and original documents (or copies thereof) in Seller's possession or within Seller's control pertaining to the Properties and Partnership, together with all operating bank accounts, including the River Oaks Escrow Account. d. Purchaser shall pay the Purchase Price as provided below in Section 6. 1 2 5. PURCHASE PRICE. This is a cash sale with the Purchase Price, adjusted if necessary as provided hereinbelow, to be paid by wire transfer at closing. a. Adjustments, if any, due to title failure or problems with leases or other agreements, casualty losses, discrepancies in Seller's cash flow representations, and/or environmental problems affecting the Properties as described in Sections 6 and 16 hereinbelow, shall be handled as provided herein. b. All revenues received from gas or oil produced after the Effective Date, but prior to the Closing Date, will be subtracted from the Purchase Price. Revenues received from oil and gas produced prior to the Effective Date shall remain the property of Seller. c. The unpaid balance owed by Seller and secured by liens affecting Properties shall be subtracted from the Purchase Price unless Seller has obtained a release of any such lien prior to closing. d. Estimated ad valorem taxes for the period of time from the January 1, 1996 through the Effective Date shall be subtracted from the Purchase Price in accordance with Section 13 herein. e. Funds received as a performance deposit ("Performance Deposit") pursuant to the terms of this Agreement shall be subtracted from the Purchase Price. f. A One-Hundred-Fifty-Thousand ($150,000 US) sum will be subtracted from the Purchase Price in the event Seller is unable to obtain written authorization by November 1, 1996, from the state of Louisiana for a one year extension to the January 1, 1997 deadline to treat and dispose produced water pursuant to Section 7b described hereinbelow. g. The value of salable oil in the tanks located on said Properties as of the Effective Date shall be added to the Purchase Price. The value shall be calculated using the net volume of oil in the tanks on the Effective Date and the market price prevailing on the Effective Date for the Properties. h. All reasonable and necessary direct operating expenditures, bond and insurance premiums which shall have actually been incurred for the Properties and for which bills have been received and paid by Seller, together with those charges as set forth in Section 10 for operations after the Effective Date but prior to closing, shall be added to the Purchase Price. i. The balance of the River Oaks escrow account at the time of closing shall be added to the Purchase Price. THERE SHALL BE NO POST-CLOSING SETTLEMENT. All revenues attributable to production from the Properties after the Effective Date and received by Seller after closing shall be remitted to Purchaser within ten (10) days of receipt. Any operating expenses that were incurred from the Properties after the effective date, but for which invoices were not received until on or after closing shall be forwarded to Purchaser within five (5) days after receipt of such information. Purchaser shall have, at its election and expense, at any time within one (1) year from the date of closing, the right to audit the books and records of Seller to verify the accuracy of revenues and expenses which are allocated at closing and/or remitted post-closing. During this period, Seller agrees to furnish copies of appropriate documentation of such revenues and expenses or, at Seller's election, to make originals of the books and records available at Seller's place of business. If any errors in the revenues and expenses allocated are determined, then such errors shall be promptly rectified by Purchaser or Seller, whichever is the applicable party. 6. WARRANTIES, TITLES AND EXAMINATIONS OF DOCUMENTS. Seller does not warrant title to Properties, including both possessory and non-possessory. The sale shall be for all of Seller's rights, titles and interests in the Properties. The indication of particular fractions of working interests and/or net revenue interests in Exhibit "A", hereto, in no way implies or creates a general warranty, covenant or other undertaking regarding any quantity of interest. Seller confirms that there are no reserves of the Properties for which payment has been received for production which has not been delivered. If assignment of any of Seller's interest in the Properties is subject to consent by any third party, then Seller shall obtain and produce documentation of such necessary consent on or before closing. 2 3 THIS SALE/PURCHASE SHALL BE WITHOUT ANY WARRANTY OF FITNESS OR CONDITION OR MERCHANTABILITY OF THE MATERIAL, EQUIPMENT OR FACILITIES CONVEYED. ALL SUCH PROPERTY WILL BE CONVEYED ON AN "AS IS" AND "WHERE IS" BASIS. Purchaser shall have no less than 15 days from the Contract Date to examine title, confirm represented revenue and expense information, review all contracts affecting the Properties and to notify Seller of any significant title defects and/or contracts that materially or adversely affect the value or use of the Properties, or discrepancies in cash flow representations. Notwithstanding anything to the contrary contained herein, unless the value of title defects, adverse contracts and/or cash flow discrepancies affecting any property is in excess of 5% of the allocated value set forth in Exhibit "B", it will not be considered by Seller and Purchaser that there are significant title defects, cash flow discrepancies, and/or contracts that materially or adversely affect the value of the Properties and no adjustment shall be made to the Purchase Price as set forth in Section 6.a. hereof. Seller shall have an additional ten (10) days to correct any such significant title defect or terminate contracts to the satisfaction of Purchaser. Purchaser's approval of corrections of title defects shall not be unreasonably withheld. If, after the total of twenty-five (25) days of the two periods specified above have elapsed, the significant title defects have not been cured to Purchaser's reasonable satisfaction, or contracts have not been terminated, then Purchaser shall have, at its option, the right to either (i) withdraw its offer with no further obligation to consummate the Purchase with no liability to seller; or (ii) reasonably negotiate in good faith, the value defect of the Properties with Seller. If Purchaser withdraws its offer pursuant to this provision, seller shall refund to Purchaser the total Performance Deposit. Seller and Purchaser have all licenses, permits, certificates, approvals and other authorizations necessary in order to enable them to own and operate the Properties for their respective periods of operatorship. 7. SELLER'S REPRESENTATIONS. Seller hereby represents and warrants to Purchaser as follows: a. SELLER'S ORGANIZATION AND AUTHORITY RELATIVE TO THIS AGREEMENT. Seller is a partnership duly organized, validly existing and in good standing as a domestic partnership under the laws of the State of Texas and has full power and authority to enter into, deliver and perform this Agreement and to consummate the transactions contemplated hereby. The execution and delivery of this Agreement by Seller and the consummation by Seller of the transactions contemplated hereby have been duly authorized by all requisite action, and no other corporate proceedings on the part of Seller are necessary to authorize this Agreement or the transactions contemplated hereby. This Agreement has been duly executed and delivered by Seller and constitutes a legally valid and binding obligation of Seller, enforceable in accordance with its terms. b. LEGAL AND REGULATORY PROCEEDINGS. With the exception of the actions listed below, there is no suit, action, proceeding or investigation pending or, to the knowledge of Seller, threatened, against or affecting Seller, its respective businesses or any of the Properties, in any court or before or by any governmental or regulatory authority or agency, domestic or foreign, or any arbitrator, which if adversely determined could materially and adversely affect the Properties or Purchaser's use of the same or the ability of Seller to perform its obligations under this Agreement or any instrument to be delivered pursuant hereto. I) Declaratory Judgment Action filed by two minority interest owners contesting the election of MV Ventures, GP as operator. II) MV is currently pursuing an extension of the January 1, 1997 deadline to treat produced water and not discharge same into the Manilla Village field bayou. Notwithstanding the foregoing and based on legal opinion of outside counsel, Seller represents that if there are any suits currently pending that involve Seller and its operations of, or interests in the Properties, any judgment in these existing suits, except for the stare decisis effect of such decision, will not adversely affect Purchaser. IN THE EVENT THE STATE OF LOUISIANA DOES NOT ISSUE WRITTEN AUTHORIZATION ON OR BEFORE NOVEMBER 1, 1996 GRANTING AN EXTENSION TO THE JANUARY 1, 1997 DEADLINE TO TREAT AND DISPOSE PRODUCED WATER, THE PURCHASE PRICE SHALL BE REDUCED BY A SUM OF ONE-HUNDRED-FIFTY- THOUSAND DOLLARS ($150,000 US). 3 4 8. PURCHASER'S REPRESENTATIONS. Purchaser hereby represents and warrants to seller as follows: a. PURCHASER'S ORGANIZATION AND AUTHORITY RELATIVE TO THIS AGREEMENT. Purchaser is a corporation, is duly organized, validly existing and in good standing as a corporation under the laws of the State of Texas and has full corporate power and authority to enter into, deliver and perform this Agreement and to consummate the transactions contemplated hereby; the execution and delivery of this Agreement by Purchaser and the consummation by Purchaser of the transactions contemplated hereby have been duly authorized by all requisite action and no other corporate proceedings on the part of Purchaser are necessary to authorize this Agreement and the transactions contemplated hereby. This agreement has been duly executed and delivered by Purchaser and constitutes a legally valid and binding obligation of Purchaser, enforceable in accordance with its terms. b. EVALUATION. Purchaser represents that by reason of Purchaser's knowledge and experience in the evaluation, acquisition, and operation of oil and gas properties, Purchaser has evaluated the merits and risks of purchasing the Properties from seller and has formed an opinion based upon Purchaser's knowledge and experience and upon historical production and accounting data provided by Seller. 9. GAS IMBALANCES. Not Applicable. 10. PRIOR TO CLOSING. Seller shall, prior to closing, timely disburse proceeds, pay all royalties and other leases obligations, and pay expenses relating to the Properties and shall operate the Properties as a reasonably prudent operator and in a good and workmanlike manner for a fee equal to the COPAS overhead charge charged to the joint account for the Properties. Seller shall not abandon any part of the Properties. Seller further agrees not to convey, dispose or encumber any part of the Properties. During this period, Seller shall not remove any facilities except to replace defective components or to repair and return them. Seller shall not make any major capital expenditures in excess of Twenty-Five Thousand Dollars ($25,000.00) after the Effective Date but prior to closing, without Purchaser's prior written consent. In no event shall Seller have any obligation or duty to perform any re-completion, workover or other remedial work on the Properties after the Effective Date. 11. If prior to the closing, all or any substantial part of the Properties shall be destroyed by fire or other casualty, or if any substantial part of the Properties shall be destroyed by fire or other casualty, or if any substantial part of the Properties shall be taken in condemnation or under the right of eminent domain, or if proceedings for such purposes shall be pending or threatened, or if any other event shall occur that materially impairs the value of the Properties (any of the foregoing being hereinafter referred to as a "Casualty Loss") ("Casualty Loss" shall be defined to mean a loss in value of the Properties in excess of Fifty-Thousand and No/100 Dollars ($50,000.00), there shall be no adjustment to the Purchase Price, Purchaser or Seller may elect to terminate this Agreement. If this Agreement is not so terminated, then this Agreement shall remain in full force and effect and the Purchase Price shall be negotiated downward in an amount equal to the loss resulting from the Casualty Loss; provided, however, if no adjustment in Price can be agreed to by Seller and Purchaser, this Agreement shall terminate. Seller shall not voluntarily compromise, settle or adjust any amounts payable by reason of a Casualty Loss without first obtaining the written consent of Purchaser. If this Agreement is terminated due to Casualty Loss, Seller shall refund the total Performance Deposit. 12. OTHER DOCUMENTS AND CONTRACTS. The bill of sale and assignment will be made subject to any and all existing operating agreements, unit agreements, gas purchase or sale contracts, as well as any and all other agreements to which the Properties are subject, including, but not limited to, any applicable farmin agreement. Purchaser shall assume and be responsible for all obligations accruing under such agreements as of the Effective Date. Seller shall make all contract files available to Purchaser prior to closing. Purchaser shall be liable for compliance with the terms of contracts which were provided or are of record. 13. PRORATION OF TAXES. All applicable taxes on the Properties shall be prorated between Seller and Purchaser as of the Effective Date. If actual taxes or tax liabilities are not known at closing, tax liabilities shall be estimated (and the Purchase Price adjusted therewith), and reimbursements by Seller or refunds by Purchaser, as appropriate, shall be made at such date(s) as actual taxes are levied. Seller agrees to pay when due any severance, ad valorem, or other taxes or fees payable after the effective date hereof where the basis or valuation for such taxes is production which actually occurred during the time in which Seller owned the Properties and/or received proceeds from the production attributable thereto. 4 5 All documentary, stamp and transfer taxes of any kind arising out of or in connection with the sale of the Properties hereunder shall be paid by Purchaser, and all charges for or in connection with the recording of any document or instrument herein provided shall be paid by Purchaser. All other federal, state and local taxes arising out of or in connection with the sale of the Properties hereunder shall be paid by Purchaser. 14. INDEMNITIES. If the Sale/Purchase is consummated, Purchaser agrees to defend and indemnify Seller against any claims, suits, and other liabilities to third parties under the leases and other agreements related to the Properties and/or resulting from operations thereon or activities or events related thereto after the Effective Date (including, but not limited to, any liability resulting from any failure to properly plug and abandon any wells located on the Properties), except to the extent such liabilities result from the negligence or willful misconduct of Seller. If any claim is made by a party that would give rise to a right of indemnification under this Agreement, the party entitled to indemnification (the "Indemnified Party") will promptly give notice thereof to the party required to provide indemnification (the "Indemnifying Party"). The Indemnified Party will permit the Indemnifying Party to assume the defense of any such claim or litigation resulting therefrom. Counsel for the Indemnifying Party, which will conduct the defense of such claim or litigation, must be approved by the Indemnified Party, whose approval will not be unreasonably withheld. The Indemnified Party may participate in such defense at the Indemnified Party's expense. Neither party will consent to the entry of any judgment or enter into any settlement without the written consent of the other party, which consent will not be unreasonably withheld. The Indemnified Party will cooperate fully with the Indemnifying Party and make available to the Indemnifying Party all pertinent information under its control. 15. PLUGGING AND ABANDONMENT OF WELLS; REMOVAL OF FACILITIES. After the Effective Date, Purchaser recognizes and specifically assumes the obligation to properly plug and abandon any and all wells; remove all equipment and facilities, including, but not limited to, pipelines; close all pits, and restore the surface associated with the Properties when appropriate and in accordance with the rules, regulations, and requirements of any governmental authority having jurisdiction thereof, whether or not any such obligations arise prior to the Effective Date. Purchaser agrees to pay all costs and expenses associated with any such plugging and abandoning, removal, closing, or restoration. 16. ENVIRONMENTAL CONDITIONS. a. PHYSICAL CONDITION OF THE PROPERTIES. The properties have been used for oil and gas drilling and production operations, related oil field operations and possibly for the storage and disposal of waste materials or hazardous substances. Physical changes in or under the Properties or adjacent lands may have occurred as a result of such uses. The Properties also may contain buried pipelines and other equipment, whether or not of a similar nature, the locations of which may not now be known by Seller or be readily apparent by a physical inspection of the Properties. Purchaser understands that Seller foes not have the requisite information with which to determine the exact nature or condition of the Properties nor the effect any such use has had on the physical condition of the Properties. Pursuant to the Safe Water Drinking and Toxic Enforcement Act of 1986, Purchaser is hereby notified and assumes the risk that detectable amounts of chemicals known to cause cancer, birth defects and other reproductive harm may be found in, on or around the Properties. As of the Closing Date, Purchaser shall assume the risk that the Properties may contain waste or contaminants and that adverse physical conditions, including the presence of waste or contaminants, may not have been revealed by Purchaser's investigation. As of the Closing Date, all responsibility and liability related to disposal, spills, waste or contamination on or below the Properties shall be transferred from Seller to Purchaser, only to the extent that such occurrences occurred after the period of Seller's ownership of the Properties. In addition, Purchaser acknowledges that some oil field production equipment located on the Properties may contain asbestos and/or naturally-occurring radioactive material (NORM). In this regard, Purchaser expressly understands that NORM may affix or attach itself to inside of wells, materials and equipment as scale or in other forms, and that wells, materials and equipment located on the Properties described herein may contain NORM and that NORM-containing materials may be buried or have been otherwise disposed of on the Properties. b. ENVIRONMENTAL ASSESSMENT AND INDEMNIFICATION. Purchaser shall have the right to make any environmental assessment of the Properties during the title examination period set forth in Section 6., hereof, or not less than fifteen (15) days prior to closing, whichever is greater. Purchaser and its agents shall have the right to enter 5 6 upon and inspect the Properties and all buildings and other improvements thereon, conduct soil and water tests and borings, and generally conduct such tests, examinations, investigations and studies as may be necessary or appropriate for the preparation of appropriate engineering and other reports and judgment relating to the Properties, their condition, and the presence of waste or contaminants. Purchaser agrees to immediately provide to Seller a copy of such environmental assessment, including any reports, data and conclusions. Purchaser shall keep any data or information acquired by all such examinations and the results of all analyses of such data and information strictly confidential and not disclose same to any person or agency without the prior written approval of Seller. If Purchaser, in its sole discretion, determines that hazardous waste materials located on any Property substantially violates an existing law, rule or regulation of any federal, state or local governmental body for purposes of this Agreement, a substantial violation is any violation which would require Purchaser to expend more than 5% of the allocated value to rectify the violation then, by so notifying Seller within fifteen (15) days of closing, Seller may elect to remediate any such violation or adjust the Purchase Price in an amount equal to the cost of the remediation. Should Seller not elect to adjust the Purchase Price or remediate, Purchaser may remove the property from this Agreement or terminate this Agreement and it shall be null and void, and Purchaser and Seller shall have no further obligation or liability of any kind hereunder or with respect hereto, and the cash Performance Deposit shall be returned to Purchaser. Purchaser is hereby granted access to the Properties to conduct its environmental assessment upon the following conditions: Purchaser waives and releases all claims against Seller, its directors, officers, employees and agents and parent or subsidiary companies, for injury to or death of persons, or damage to property, arising in any way from the exercise of rights, granted to Purchaser hereby or the activities of Purchaser or its employees, agents or contractors on the Properties. Purchaser shall indemnify Seller, its directors, officers, employees, and agents against and hold each and all of said indemnitees harmless from any and all loss, cost, damage, expense or liability, including attorney's fees, whatsoever arising out of (i) any and all statutory or common law liens or other encumbrances for labor or materials furnished in connection with such tests, samplings, studies or surveys as Purchaser may conduct with respect to the Properties; and (ii) any injury to or death of persons or damage to property occurring in, on or about the Properties as a result of such exercise or activities (except for any such injuries or damages caused solely by the active negligence or willful misconduct of any said indemnitees). The foregoing obligation of indemnity shall survive closing. c. INDEMNIFICATION AND ASSUMPTION OF ENVIRONMENTAL RISK. Notwithstanding anything contained herein to the contrary, Purchaser assumes full responsibility for, and agrees to indemnify, hold harmless and defend Seller from and against all loss, liability, claims, fines, expenses, costs (including attorney's fees and expenses) and causes of action caused by or arising out of any federal, state or local laws, rules, orders and regulations applicable to any waste material or hazardous substances on or included with the Properties or the presence, disposal, releases or threatened release of all waste material or hazardous substance from the Properties, into the atmosphere or into or upon land or any water course or body of water, including ground water, attributable to Purchaser's activities or the activities of third parties after the period of Seller's ownership of the Properties. 17. CONTINUING OBLIGATIONS. If the Sale/Purchase is consummated, with the exception of Sections 6, 14, 15 and 16c, which will survive and continue, the terms and conditions contained herein shall survive closing to the extent of two (2) years from the Contract Date and shall apply to and bind the successors and assigns of Seller and Purchaser. 18. NOTICES. All communications required or permitted under this Agreement shall be in writing. Any communication or delivery hereunder shall be deemed to have been fully made if actually delivered, sent by facsimile machine, or if mailed by registered or certified mail, postage prepaid, to the applicable address as set forth below: Seller: Purchaser: MV VENTURES, G.P. SABA ENERGY OF TEXAS, INCORPORATED 1200 Smith Street, Suite 2250 1603 S.E. 19th Street, Suite 202 Houston, TX 77002 Edmond, OK 73013 ATTN: A.C. DuBose ATTN: Brad Katzung, President Telephone: (713) 652-5700 Telephone: (405) 340-3600 Facsimile: (713) 652-5720 Facsimile: (405) 340-3691 6 7 19. FURTHER ASSURANCES. Each of the parties shall execute acknowledge and deliver to the other such further instruments, and take such other actions as may be reasonably necessary to carry out the provisions of this Agreement. 20. CONDITIONS TO PURCHASER'S OBLIGATIONS. Each and every obligation of Purchaser under this Agreement to be performed on or before the closing shall be subject to the satisfaction, on or before the Closing Date, of the following conditions: a. The representations and warranties of Purchaser contained in this Agreement shall be in all material respects true and accurate as of the date when made and at and as of the Closing Date. b. Purchaser shall have performed and complied in all material respects with each and every covenant, agreement and condition required by this Agreement to be performed or complied with by it prior to or on the Closing Date. c. Except as provided in Section 7b, no order of any court or administrative agency shall be in effect which restrains or prohibits the transactions contemplated hereby. No suit, action, investigation, inquiry or proceeding by any governmental body or other person, or legal or administrative proceeding shall have been instituted or threatened that questions the validity or legality of the transactions contemplated hereby or seeks to impose any liability on Purchaser as a result of the transactions contemplated hereby. d. All approvals of any private person, and all approvals or the absence of disapprovals within applicable time periods, from public authorities, federal, state, foreign or local (or exemptions from the requirements therefor), the granting or absence of which is necessary for the consummation of the transactions contemplated by this Agreement, shall have been obtained. e. On the Closing Date, there shall be no effective injunction, writ or temporary restraining order or any order of any nature issued by a court or governmental agency or competent jurisdiction directing the transactions provided for herein not be consummated as herein provided. 21. PURCHASER'S DEFAULT. If Purchaser defaults on or prior to Closing in a material way on Purchaser's obligations, including but not limited to Purchaser's absence at the designated time and place for Closing, Seller shall retain the performance deposit under Section 2. hereof as liquidated damages. Further, Seller shall be free immediately to sell the Properties to any third party without any restriction under or by reason of this Agreement. 22. ENTIRE AGREEMENT. This Agreement constitutes the entire understanding between the parties and it may not be amended nor any rights hereunder waived except by an instrument in writing signed by the party to be charged with such amendment or waiver and delivered by such party to the party claiming the benefit of such amendment or waiver. If any provision of this Agreement, or the application thereof to any person or circumstances, shall, to any extent, be held in any proceeding to be invalid or unenforceable, the remainder of this Agreement, and the application of such provisions to persons or circumstances other than those to which it is held to be invalid or unenforceable, shall not be affected thereby, and shall be valid and enforceable to the fullest extend permitted by law, but only if and to the extend such enforcement would not materially and adversely frustrate the parties' essential objectives as expressed herein. No party to this Agreement may assign its rights or obligations hereunder without the written consent of all parties hereto; provided, however, that Purchaser may assign its rights to any one of its wholly-owned affiliates, partnerships, joint venture partners, partners, etc., for the purpose of raising capital funding. Subject to the foregoing, this Agreement shall be binding upon the parties hereto, their respective successors and assigns, and nothing contained in this Agreement, express or implied, is intended to confer upon any other person or entity any benefits, rights, or remedies. 23. CHOICE OF LAW. THIS AGREEMENT AND ITS PERFORMANCE SHALL BE CONSTRUED IN ACCORDANCE WITH AND GOVERNED BY THE INTERNAL LAWS OF THE STATE OF TEXAS. 7 8 24. COUNTERPARTS. This Agreement may be executed by Purchaser and Seller in any number of counterparts, each of which shall be deemed an original instrument, but all of which together shall constitute but one and the same instrument. 25. COSTS. Except as otherwise agreed upon, each party shall pay its own costs, including fees and expenses of its own counsel and accountants, in connection with the purchase and sale of the Properties. AGREED AND ACCEPTED SELLER: DUBOSE VENTURES, INC. ROCKBRIDGE OIL & GAS, INC. By: /s/ A.C. DUBOSE By: /s/ JOHN DEAN ------------------- ------------- Name: A.C. DuBose Name: John Dean Title: General Partner Title: President PURCHASER: SABA ENERGY OF TEXAS, INCORPORATED ENERGY ASSET MANAGEMENT CORPORATION By: /s/ BRADLEY T. KATSUNG By: /s/ ROBERT M. THOMMASON ---------------------- ------------------------ Name: Bradley T. Katzung Name: Robert M. Thommason Title: President Title: Vice President 8 9 EXHIBIT "A" Attached to and made a part of that certain Letter of Understanding dated September 18, 1996, executed by and between MV VENTURES, G.P., as SELLER and SABA PETROLEUM COMPANY/ENERGY ASSET MANAGEMENT CORP., as BUYER, covering and pertaining to the Manila Village Field, Jefferson Parish, Louisiana. I. Oil, Gas and Mineral Leases that are the subject of the Letter of Understanding to which this exhibit "A" is attached: A) That certain Lease for Oil, Gas and Other Liquid or Gaseous Minerals dated August 16, 1982, by and between the State Mineral Board or the State of Louisiana (State Lease No. 10394), as Lessor, and James A. Whitson, Jr., as Lessee, filed for record in Entry No. 1027740 Mineral Book 38, Folio 436 of the records of Jefferson Parish, Louisiana; and as amended by that certain Correction of State Mineral Lease No. 10394 dated March 17, 1983, filed for record in Entry No. 83-22790 of the records of Jefferson Parish, Louisiana. B) That certain Oil and Gas Lease dated May 1, 1982 by and between The Louisiana Land and Exploration Company, as Lessor, and James A. Whitson, Jr., as Lessee, to which a recording memorandum entitled Declaration has been filed for record in Entry No. 1015347, Mineral Book 38, Folio 255 of the records of Jefferson Parish, Louisiana. C) That certain Leases for Oil, Gas and Other Liquid or Gaseous Minerals dated June 13, 1983, by and between the State Mineral Board of the State of Louisiana (State Lease No.10808), as Lessor, and Primary Fuels, Inc., as Lessee, filed for record in Mineral Book 39, Folio 576 of the records of Jefferson Parish, Louisiana and in CO5 Book 571, Folio 664 of the records of Plaquemines Parish, Louisiana. D) That certain Oil and Gas Lease dated April 15, 1983, by and between The Louisiana Land and Exploration Company, as Lessor, and James A. Whitson, Jr., as Lessee, to which a recording memorandum entitled Declaration has been filed for record in Entry No.8318074, Mineral Book 39, Folio 146 of the records of Jefferson Parish, Louisiana and in CO5 Book 565, Folio 941 of the records of Plaquemines Parish, Louisiana. E) That certain Oil, Gas and Other Hydrocarbon Standard Development Lease dated November 7, 1991, by and between Frederick E. Purcell, et al., as Lessor, and Wm. Bullen, Inc., as Lessee, filed for record in Entry No. 9104193, CO5 Book 2930, Folio 213 of the records of Jefferson Parish, Louisiana, as amended by that certain Lease Amendment and extension Agreement dated August 11, 1994 filed for record in Entry No. 09449744, CO5 Book 2902, Folio 396 of records of Jefferson Parish, Louisiana. F) That certain Oil and Gas Lease dated July 1, 1991, by and between The Louisiana Land and Exploration Company, as Lessor, and Corpus Christi Hydrocarbons Company, as Lessee, to which a recording memorandum entitled Declaration has been filed for record in Entry No. 9138700, Mineral Book 119, Folio 323 of the records of Jefferson Parish, Louisiana. 10 10 EXHIBIT "A" II. Wells covered by this Agreement, all of which are located in Jefferson Parish, Louisiana:
Lease or Unit Name Serial Well Name ------------------ Well Number Code No. Active Wells Number API Number - ------ ----------- ------------------ ------- ---------- 192432 047228 9800' RA VUB*:LL&E 10 1705120694 184580 040556 9400' RA SUD: LL&E 1 1705120641 185662 040558 9400' RA SUC: LL&E 3 1705120650 198096 039522 9800' RA VUB*:LL&E 9 1705120689 191924 047248 8900' RA VUA: LL&E 12 1705120691 214271 039522 LL&E 14 1705120826 214451 039522 9800' RA VUC*:LL&E 14D 1705120826 215844 039522 11,100' RA VUB*:LL&E 16D 1705120845 215573 11,000' RA SUB*: LL&E 16 1705120845 Inactive Wells - Temporarily Abandoned or Shut-in 185661 040557 9400' RA SUE: LL&E 2 1705120649 187188 040559 9400' RA SUE: LL&E 4 1705120656 198822 039522 LL&E 9D 1705120689 188743 039522 LL&E 7 1705120667 187189 042799 LL&E 5 1705120657 194423 042801 LL&E 12D 1705120691
III. Interests of SELLER on a Lease or Unit basis:
Serial Well Name Well CCHC CCHC Number Code No. Lease or Unit Name Number WI NRI - ------ ----------- ------------------ ------ --------- -------- 192432 047228 9800' RA VUB*:LL&E 10 50.678350% 35.474846% 184580 040556 9400' RA SUD:LL&E 1 50.678350% 34.548310% 185662 040558 9400'RA SUC: LL&E 3 50.678350% 34.802970% 198096 039522 9800' RA VUB*:LL&E 9 50.678350% 35.474846% 191924 047248 8900' RA VUA:LL&E 12 50.678350% 35.130910% 214271 039522 LL&E 14 50.678350% 35.474846% 214451 039522 9800' RA VUC*:LL&E 14D 50.678350% 35.474846% 215844 039522 11,100' RA VUB*:LL&E 16D 50.678350% 34.331602% 215573 11,000' RA SUB*:LL&E 16 50.678350% 35.474846%
* Voluntary Unit currently being formed. WI and NRI for these units only are approximations pending actual unit surveys and units becoming effective. ** Currently in process of having LL&E #16 well recognized as the unit well for the 11,000' RA SUB. 11 EX-10.31 12 EXHIBIT 10.31 1 EXHIBIT 10.31 EMPLOYMENT AGREEMENT WALTON C. VANCE THIS AGREEMENT, effective as of this 1st day of July, 1993, by and between SABA PETROLEUM COMPANY, a Colorado corporation (hereinafter referred to as the "Company"), and WALTON C. VANCE, an individual (hereinafter referred to as the "Employee"), the following terms and conditions. RECITALS A. It is in the best interest of the Company to employ the services of Employee as Vice-President and Chief Financial Officer of the Company, subject to and in accordance with the terms and provisions set forth below. B. After independent review and consideration of the Agreement, Employee desires to accept such employment subject to, and in accordance with, the terms and provisions set forth below. NOW, THEREFORE, for good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties agree as follows: 1. EMPLOYMENT RELATIONSHIP; TERM; RENEWAL Subject to the other terms, conditions and provisions of this Agreement, the Company hereby employs Employee and Employee hereby accepts such employment for a period of five (5) years, commencing on the Effective Date of this Agreement, as that term is defined below, and subject to the termination provisions as provided herein below in Paragraphs 6 and 8. 2. COMPENSATION 2.1 Signing Bonus The Company shall pay, or cause to be paid to Employee, a signing bonus in the amount of Ten Thousand and 00/100 Dollars ($10,000). 2.2 Annual Compensation Subject to the terms and provisions hereof, the Company shall pay or -1- 2 cause to be paid to Employee during the term hereof an annual salary as described in Exhibit A hereto. Cash compensation shall be paid in equal semi-monthly installments commencing on the Effective Date hereof and provided only that such installments shall be pro-rated in the event of any partial employment period hereunder. 2.2 ADDITIONAL COMPENSATION Employee may be further entitled to additional compensation in the form of stock options in amounts and subject to the conditions as set forth in Exhibit B attached hereto and incorporated herein, by reference. 2.3 EMPLOYMENT TAXES All compensation and benefits shall be subject to customary withholding taxes and other employment taxes as from time to time are required by any governmental statute, ordinance, or regulation with respect to such compensation paid by the Company to an employee. 3. EMPLOYEE BENEFITS AND REIMBURSEMENTS A. MEDICAL AND LIFE INSURANCE: During the term of this Agreement and the employment described herein, the Company will make a contribution towards standard medical benefits consistent with existing Company policy. Such contribution to begin with the Effective Date. B. REIMBURSEMENT FOR OUT-OF-POCKET EXPENSES: Company shall, not less frequently than monthly, reimburse Employee with respect to all ordinary out-of-pocket expenses which, in the sole judgment of the Company, were incurred by Employee in the course of and/or in the conduct of Company business by Employee, provided Employee follows and complies with Company reporting and receipts submission procedures. C. OTHER BENEFITS: In addition to the foregoing, Employee shall also be provided any other benefits of whatever kind or nature or shall be permitted to participate in such other benefits or programs which may, from time to time, be adopted or provided by the Company and otherwise made available by -2- 3 the Company to other employees or officers of Company under substantially the same restrictions and limitations, if any and as applicable. D. RELOCATION: Company will reimburse Employee for reasonable and necessary moving costs incurred in the course of Employee relocation. Company will make the final determination whether items of moving costs are "reasonable and necessary." 4. SERVICES AND DUTIES OF EMPLOYEE Employee agrees that, expressly in his capacity as an officer of the Company, Employee will at all times loyally and conscientiously perform all of the following duties, responsibilities, and obligations: (A) Those duties and responsibilities expressly or implicitly contained in this Agreement; (B) Those duties and responsibilities customarily incident to or required of such position(s) and/or office(s) as may, from time to time, be assigned to Employee by the Board of Directors; (C) Such other services, acts, or things necessary, prudent, or advisable in the exercise of Employee's reasonable judgment for the benefit of the Company and (D) Such additional duties, responsibilities and obligations and such other services, acts, and things as, from time to time, may be designated by the Board of Directors of the Company. Without in any manner limiting the foregoing, Employee agrees to devote such time as may be necessary to or for the business of the Company. By entering into this Agreement, it is the mutual intention of the parties that Employee shall devote all of his productive time, ability, and attention to the business of the Company. 5. NO OUTSIDE EMPLOYMENT By entering into this Agreement, it is the mutual intention of the parties that Employee shall devote all of his productive time, ability, and attention to the -3- 4 business of the Company and shall not, without the prior written consent of the Board, which may be withheld for any reason whatsoever, otherwise actively engage in other business endeavors or pursuits, including, without limitation, the direct or indirect rendition of any services of a business, commercial, or professional nature to any other person or organization, whether for compensation or otherwise. 6. CONFIDENTIALITY AND TRADE SECRETS Employee acknowledges and agrees that, in prior meetings with other employees, representatives, officers and directors of the Company, Employee will, during the term of employment, have access to, become acquainted with, and/or develop or invent various Trade Secrets and proprietary information consisting of and including, without limitation, formulas, processes, plans, charts, concepts, procedures, compilations, lists of data and information, records, specifications, documents, contracts, reports, forms, manuals, names, addresses, and telephone numbers and other information of customers, lenders, investors, or identified prospective customers, lenders, or investors (all of the foregoing sometimes collectively referred to as "Trade Secrets") which are owned or have been or subsequently are developed, compiled, organized or invented by the Company, the Employee, or the Company's other employees. Employee, for the benefit of the Company and as a condition of this Agreement, expressly agrees that Employee shall not disclose any of the Trade Secrets, directly or indirectly; use them in any way; or claim proprietary ownership interest therein, either during or after the term of this Agreement except as required in the performance of Employee's duties hereunder or as expressly authorized by the written consent and permission of the Company after full explanation and disclosure of any such proposed use or disclosure by the Employee to the Company. Employee further acknowledges and agrees that all Trade Secrets, as defined above, whether now existing or hereafter developed, are and shall at all times be owned solely and exclusively by the Company and Employee shall have no ownership interest therein or rights thereto. 7. EFFECTIVE DATE The Effective Date of this Agreement shall be the day, month, and year first set forth above. -4- 5 8. TERMINATION UPON EVENT OF TERMINATION 8.1. EVENTS OF TERMINATION This Agreement shall terminate immediately upon the occurrence of any of the following events: (A) Whenever the Company and Employee shall mutually agree in writing to terminate this Agreement; (B) Whenever the Company delivers written notice to Employee terminating the Agreement for "cause" including, among other things, Employee's material gross negligence or intentional misconduct under the terms of this Agreement, unless waived in writing and signed by the Company in the Company's sole and absolute discretion (C) Upon the death of Employee; (D) Upon the permanent incapacity of Employee because of illness, physical injury, other physical or mental disability, or any reason such that it reasonably appears that Employee will be unable to perform or complete Employee's duties and responsibilities under this Agreement. If, for any reason other than those set forth immediately above, the Company for any reason terminates this Agreement, then upon such termination, in addition to the other provisions contained herein, the Company shall pay to Employee as a severance allowance an amount equal to the Employee's then annual salary. 8.2 POST-TERMINATION DUTIES AND OBLIGATIONS Upon termination for any of the foregoing Events; (A) Employee or the representative of Employee's estate, in the event of the death of the Employee, shall be entitled to receive that compensation earned by Employee that Employee would otherwise be entitled to up to the date of termination less such amounts as are required by law to be withheld and deducted; and -5- 6 (B) Employee or the representative of Employee's estate, in the event of the death of the Employee, shall deliver to the Company all records, reports, files, schedules, lists, equipment, tools, and any other property in his possession or under his control belonging to the Company and, as appropriate, in good condition and repair, ordinary wear and tear excepted. 9. COMPANY'S AUTHORITY The Company expressly reserves the right to adopt and promulgate from time to time, orally or in writing, Company rules, rules, regulations, directives and policies with respect to Company operations and systems, business expense reimbursements, general employee standard, and employee performance requirements and evaluation criteria (all of the foregoing collectively referred to as "Company Policies"). Employee agrees at all times to observe and comply with all Company Policies, whether oral or in writing, as stated and as reasonably interpreted by the Board of Directors. 10. PAID VACATION AND SICK LEAVE (A) PAID VACATION: Employee shall be entitled to a paid vacation each year pursuant to the then current policy of the Company. (B) SICK LEAVE: As determined by the Company, Employee shall be entitled to a reasonable number of days of sick leave with full compensation as specified in the current policy of the Company during each calendar year. In determining what is a reasonable number of days, the Company shall take into account previous periods of illness or disability, the number of days of sick leave taken in the current and preceding years, and any other relevant factors it deems pertinent. 11. INDEMNIFICATION The Company shall indemnify the Employee and hold him harmless for and with respect to all costs and expenses incurred by Employee resulting from any acts or decisions made by him in good faith while performing services for the Company within the scope of his position and authority hereunder. -6- 7 12. NON-TRANSFERABILITY This Agreement is personal to Employee and the services to be provided by Employee are personal to and uniquely capable of performance by Employee. Consequently, neither this Agreement nor any right, duties, or obligations hereunder, or interests herein, shall be transferred, assigned, conveyed, hypothecated, delegated or pledged, in whole or in part, voluntarily or involuntarily, by operation of law or otherwise. Any attempted transfer, assignment or delegation shall be null and void. 13. NOTICES All notices provided in or permitted pursuant to this Agreement shall be in writing and shall be deemed to have been duly given when delivered or mailed by United States certified mail, return receipt requested, postage prepaid, addressed to Company at its principal office address and to Employee at Employee's residence address on the records of the Company or at such other addresses either party may have furnished to the other party in writing in accordance herewith. 14. VALIDITY The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement, which shall remain in full force and effect. 15. AMENDMENTS Any modification to or amendment of this Agreement shall be effective only if: (A) It is in writing; (B) It expressly refers to this Agreement; and (C) It is signed by all parties hereto. -7- 8 16. CONSTRUCTION This Agreement shall be construed without regard to any presumption or other rule requiring construction against the party drafting a document. It shall be construed neither for nor against any party, but each provision shall be given reasonable interpretation in accordance with the plain meaning of its terms and the expressed intent of the parties. 17. ENTIRE AGREEMENT This Agreement supersedes any and all prior agreements between the parties thereto, if any, whether oral or written, with respect to the employment of Employee by the Company and contains all of the covenants, conditions, and agreements between the parties with respect to the rendition of such services as herein contemplated or to be performed hereunder. Each party acknowledges for the benefit of the other; (A) That no representations, inducements, promises, or agreements, orally or in writing, have been made by any party, or any person acting or claiming to be acting on behalf of the other party; and (B) That no other agreement, statement, or promise with respect to such employment which is not set forth herein shall be valid or binding. 18. ATTORNEYS' FEES In the event of any dispute or disagreement under this Agreement whether or not suit is instituted, or if any action is instituted, at law or in equity, including, without limitation, an action for declaratory or injunctive relief to enforce or interpret the provisions of this Agreement, the prevailing party shall be entitled to be reimbursed for all costs and expenses, including, without limitation, reasonable attorneys' fees, which may be set by the court in the same action if any action has been so commenced or in a separate action brought for that purpose. Such right of reimbursement shall be in addition to any other relief to which that party may be entitled. -8- 9 19. GOVERNING LAW AND VENUE Irrespective of the place of execution or performance, this Agreement will be governed by and construed in accordance with the laws of the State of California. The venue of any and all such actions brought under or pursuant to this Agreement shall be Orange County, California. 20. WAIVER No provision of this Agreement may be modified, waived or discharged unless such waiver modification or discharge is agreed to in writing and signed by Employee and such Officer as may be authorized by the Board. No waiver by either party thereto at any time of any breach of any condition or provision of this Agreement shall be deemed a waiver of or to the subsequent enforcement of each term and provision of this Agreement. IN WITNESS WHEREOF, the parties have executed this Agreement as of the day, month, and year first set forth above. "COMPANY" "EMPLOYEE" SABA PETROLEUM COMPANY, a Colorado Corporation BY: /s/ ILYAS CHAUDHARY /s/ WALTON C. VANCE ------------------- ------------------- ILYAS CHAUDHARY WALTON C. VANCE ITS: Chairman of the Board and Chief Executive Officer EXHIBIT A ANNUAL COMPENSATION EXHIBIT B ADDITIONAL COMPENSATION -9- 10 EXHIBIT "A" ANNUAL COMPENSATION
Exercise Price Number of Year Salary Per Share Option Shares - --------------------------------------------------------------------------------------------- 1 $80,000 $2.50 5,000 2 88,000 2.50 8,000 3 96,800 2.50 10,000 4 106,500 2.50 13,000 5 117,200 2.50 16,000 ------ 52,000
* The Employee may exercise the Option Shares in whole or in part at any time on or after the Employment Anniversary date of the Employee in each of the five (5) years of employment. For example: the option to purchase 5,000 shares of the Company's common stock @ $2.50 may be exercised by the Employee giving the Company written notice of the Employee's intention to do so at any time on or after July 1, 1994. Similarly, the second year option could not be exercised until on or after July 1, 1995. The right to exercise Option Shares shall vest on respective Employment Anniversary Dates, and shall accumulate. In the event the employment of the Employee is terminated for any reason, by the Employee or by the Company, with or without cause, Employee's rights hereunder shall be limited to those Option Shares which have vested. 11 If there shall be any capital reorganization or consolidation or merger of the Company with another corporation or corporations, in which the Company is not the surviving entity, or upon change of "control" of the Company, as that term is defined in Reg. 260.0-2(f) of the Securities Exchange Act of 1934, any and all Option Shares shall immediately vest. The Company will prepare, or cause to be prepared and filed with the appropriate regulatory agencies a registration statement(s) which will cause the Employee's Option Shares to be registered under Section 12(g) of the Securities Act of 1933; to be freely transferable; and, to be represented by stock certificates without any restrictive legends. -2- 12 EXHIBIT "B" ADDITIONAL COMPENSATION The Company grants to the Employee as additional compensation the Option to purchase up to 72,000 shares of the Company's common stock at the price of $2.50 per share, such option rights to vest on the following basis:
Number Year of Shares ---- --------- 1 15,000 2 12,000 3 10,000 4 7,000 5 4,000 ----- 48,000
* The Employee may exercise the Option Shares in whole or in part at any time on or after the Employment Anniversary date of the Employee in each of the five (5) years of employment. For example: the option to purchase 20,000 shares of the Company's common stock @ $2.50 may be exercised by the Employee giving the Company written notice of the Employee's intention to do so at any time on or after July 1, 1994. Similarly, the second year option could not be exercised until on or after July 1, 1995. The right to exercise Option Shares shall vest on respective Employment Anniversary Dates, and shall accumulate. In the event of voluntary termination of the employment of Employee, vested shares from preceding years shall become due and exercisable within one year from the date of termination, and any and all non-vested Option shares shall be cancelled. In the event of involuntary termination, all option shares will vest and will be exercisable during the five year period. -1- 13 If there shall be any capital reorganization or consolidation or merger of the Company with another corporation or corporations, in which the Company is not the surviving entity, or upon change of "control" of the Company, as that term is defined in Reg. 260.0-2(f) of the Securities Exchange Act of 1934, any and all Option Shares shall immediately vest. The Company will prepare, or cause to be prepared and filed with the appropriate regulatory agencies a registration statement(s) which will cause the Employee's Option Shares to be registered under Section 12(g) of the Securities Act of 1933; to be freely transferable; and, to be represented by stock certificates without any restrictive legends. -2- EX-10.32 13 EXHIBIT 10.32 1 EXHIBIT 10.32 AMENDED EMPLOYMENT AGREEMENT THIS AMENDED EMPLOYMENT AGREEMENT (the "Agreement"), effective as of the first day of January 1, 1996, by and between SABA PETROLEUM, INC. and SABA EXPLORATION COMPANY, California corporations (hereinafter referred to as the "Companies"), and LARRY R. BURROUGHS, an individual (hereinafter referred to as the "Employee"), the following terms and conditions. RECITALS A. It is in the best interest of the Companies to employ the services of Employee as President and Chief Operating Officer of the Companies, subject to and in accordance with the terms and provisions set forth below. B. Whereas Saba Petroleum, Inc. and Employee previously executed an Employment Agreement effective August 1, 1994 (the "Effective Date") which was first amended on July 18, 1995 to substitute Saba Exploration Company for Saba Petroleum, Inc. and change certain other terms of Employee's employment. Whereas the parties now desire to expand Employee's responsibilities to include executive supervision of both Companies, and therefore desire to amend the Employment Agreement again in its entirety. C. After independent review and consideration of the Agreement, Employee desires to accept such revised employment responsibilities subject to, and in accordance with, the terms and provisions set forth below. NOW, THEREFORE, for good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties agree as follows: 1. EMPLOYMENT RELATIONSHIP; TERM; RENEWAL Subject to the other terms, conditions and provisions of this Agreement, the Companies hereby employ Employee and Employee hereby accepts such employment for a period of five (5) years, commencing on the Effective Date of this Agreement, as that term is defined above, and subject to the termination provisions as provided herein below in Paragraph 8. 2. COMPENSATION 2.1 ANNUAL COMPENSATION Subject to the terms and provisions hereof, the Companies shall pay or cause to be paid to Employee during the term hereof an annual salary as described in Exhibit A hereto. Cash compensation shall be paid in equal semi-monthly installments provided only that such installments shall be pro-rated in the event of any partial employment period hereunder. 2 2.2 ADDITIONAL COMPENSATION Employee shall be further entitled to additional compensation in the form of stock options in Saba Petroleum Company subject to the conditions as set forth in Exhibit A attached hereto and incorporated herein by reference. Additionally, Employee will be eligible to receive bonus payments in the discretion of the Board of Directors of Saba Petroleum Company and/or the Companies. The option previously granted to Employee to acquire up to twenty percent (20%) of the common stock of Saba Exploration Company is hereby cancelled as of January 1, 1996 and the prior Exhibit B to this Agreement regarding said option is deleted from this Agreement in its entirety. 2.3 EMPLOYMENT TAXES All compensation and benefits shall be subject to customary withholding taxes and other employment taxes as from time to time are required by any governmental statute, ordinance, or regulation with respect to such compensation paid by the Companies to an employee. 3. EMPLOYEE BENEFITS AND REIMBURSEMENTS A. MEDICAL INSURANCE During the term of this Agreement and the employment described herein, the Companies will pay the premium for standard medical benefits for Employee. Dependent coverage is available but at Employee expense. B. REIMBURSEMENT FOR OUT-OF-POCKET EXPENSES The Companies shall, not less frequently than monthly, reimburse Employee with respect to all ordinary out-of-pocket expenses which, in the sole judgment of the Companies, were incurred by Employee in the course of and/or in the conduct of the Companies' business by Employee, provided Employee follows and complies with the Companies' reporting and receipts submission procedures. C. OTHER BENEFITS In addition to the foregoing, Employee shall also be provided any other benefits of whatever kind or nature or shall be permitted to participate in such other benefits or programs which may, from time to time, be adopted or provided by Saba Petroleum Company or the Companies and otherwise made available by Saba Petroleum Company or the Companies to other employees or officers of Saba Petroleum Company or the Companies under substantially the same restrictions and limitations, if any and as applicable, including Saba Petroleum Company's 401(K) Plan. D. USE OF AUTOMOBILE Employee will be provided with a vehicle to be used while on official business of the Companies. 3 E. RELOCATION The Companies will reimburse Employee for reasonable and necessary moving costs incurred in the course of Employee relocation. The Companies will make the final determination whether items of moving costs are "reasonable and necessary." 4. SERVICES AND DUTIES OF EMPLOYEE Employee agrees that, expressly in his capacity as an officer of the Companies, Employee will at all times loyally and conscientiously perform all of the following duties, responsibilities, and obligations: A. Those duties and responsibilities expressly or implicitly contained in this Agreement; B. Those duties and responsibilities customarily incident to or required of such position(s) and/or office(s) as may, from time to time, be assigned to Employee by the Board of Directors of the Companies or of Saba Petroleum Company; C. Such other services, acts, or things necessary, prudent, or advisable in the exercise of Employee's reasonable judgment for the benefit of the Companies and; D. Such additional duties, responsibilities and obligations and such other services, acts, and things as, from time to time, may be designated by the Board of Directors of the Companies or of Saba Petroleum Company. Without in any manner limiting the foregoing, Employee agrees to devote such time as may be necessary to or for the business of the Companies. By entering into this Agreement, it is the mutual intention of the parties that Employee shall devote all of his productive time, ability, and attention to the business of the Companies. 5. NO OUTSIDE EMPLOYMENT By entering into this Agreement, it is the mutual intention of the parties that Employee shall devote all of his productive time, ability, and attention to the business of the Companies and shall not, without the prior written consent of the Board, which may be withheld for any reason whatsoever, otherwise actively engage in other business endeavors or pursuits, including, without limitation, the direct or indirect rendition of any services of a business, commercial, or professional nature to any other person or organization, whether for compensation or otherwise. Notwithstanding the foregoing, the Companies recognize the following exceptions to this full-time commitment: (i) President, Phillips Oil & Gas, Inc., a 4 Tennessee corporation; and (ii) Director, Stangrid PLC (owner of the shares of Phillips Oil & Gas). 6. CONFIDENTIALITY AND TRADE SECRETS Employee acknowledges and agrees that, in prior meetings with other employees, representatives, officers and directors of the Companies, Employee has or will, during the term of employment, have access to, become acquainted with, and/or develop or invent various Trade Secrets and proprietary information consisting of and including, without limitation, formulas, processes, plans, charts, concepts, procedures, compilations, lists of data and information, records, specifications, documents, contracts, reports, forms, manuals, names, addresses, and telephone numbers and other information of customers, lenders, investors, or identified prospective customers, lenders, or investors (all of the foregoing sometimes collectively referred to as "Trade Secrets") which are owned or have been or subsequently are developed, compiled, organized or invented by the Companies, the Employee, or the Companies' other employees. Employee, for the benefit of the Companies and as a condition of this Agreement, expressly agrees that Employee shall not disclose any of the Trade Secrets, directly or indirectly; use them in any way; or claim proprietary ownership interest therein, either during or after the term of this Agreement except as required in the performance of Employee's duties hereunder or as expressly authorized by the written consent and permission of the Companies after full explanation and disclosure of any such proposed use or disclosure by the Employee to the Companies. Employee further acknowledges and agrees that all Trade Secrets, as defined above, whether now existing or hereafter developed are and shall at all times be owned solely and exclusively by the Companies and Employee shall have no ownership interest therein or rights thereto. 7. EFFECTIVE DATE The Effective Date of this Agreement shall be the day, month, and year first set forth above. The effective date of this Agreement, as amended, shall be January 1, 1996. 8. TERMINATION UPON EVENT OF TERMINATION 8.1 EVENTS OF TERMINATION This Agreement shall terminate immediately upon the occurrence of any of the following events: A. Whenever the Companies and Employee shall mutually agree in writing to terminate this Agreement; B. Whenever the Companies deliver written notice to Employee terminating the Agreement for "cause" including, among other things, Employee's material gross negligence or intentional misconduct under the terms of this Agreement, unless waived in 5 writing and signed by the Companies in the Companies' sole and absolute discretion; C. Upon the death of Employee; D. Upon the permanent incapacity of Employee because of illness, physical injury, other physical or mental disability, or any reason such that it reasonably appears that Employee will be unable to perform or complete Employee's duties and responsibilities under this Agreement. If, the Companies terminate this Agreement without cause, then upon such termination, in addition to the other provisions contained herein, the Companies shall pay to Employee as a severance allowance an amount equal to the Employee's then annual salary. 8.2 POST-TERMINATION DUTIES AND OBLIGATIONS Upon termination for any of the foregoing Events; A. Employee or the representative of Employee's estate, in the event of the death of the Employee, shall be entitled to receive that compensation earned by Employee that Employee would otherwise be entitled to up to the date of termination less such amounts as are required by law to be withheld and deducted and; B. Employee or the representative of Employee's estate, in the event of the death of the Employee, shall deliver to the Companies all records, reports, files, schedules, lists, equipment, tools, and any other property in his possession or under his control belonging to the Companies and, as appropriate, in good condition and repair, ordinary wear and tear excepted. C. Employee shall have such other post-termination responsibilities as Employee and the Companies shall mutually agree. 9. COMPANIES' AUTHORITY The Companies expressly reserve the right to adopt and promulgate from time to time, orally or in writing, Companies rules, regulations, directives and policies with respect to the Companies' operations and systems, business expense reimbursements, general employee standards, and employee performance requirements and evaluation criteria (all of the foregoing collectively referred to as the "Companies' Policies"). Employee agrees at all times to observe and comply with the Companies' Policies, whether oral or in writing, as stated and as reasonably interpreted by the Board of Directors. 10. PAID VACATION AND SICK LEAVE 6 A. PAID VACATION Employee shall be entitled to two weeks' paid vacation each year, subject to increase based upon the then current policy of the Companies. B. SICK LEAVE As determined by the Companies, Employee shall be entitled to a reasonable number of days of sick leave with full compensation as specified in the current policy of the Companies during each calendar year. In determining what is a reasonable number of days, the Companies shall take into account previous periods of illness or disability, the number of days of sick leave taken in the current and preceding years, and any other relevant factors it deems pertinent. 11. INDEMNIFICATION The Companies shall indemnify the Employee and hold him harmless for and with respect to all costs and expenses incurred by Employee resulting from any acts or decisions made by him in good faith while performing services for the Companies within the scope of his position and authority hereunder. 12. NON-TRANSFERABILITY This Agreement is personal to Employee and the services to be provided by Employee are personal to and uniquely capable of performance by Employee. Consequently, neither this Agreement nor any right, duties, or obligations hereunder, or interests herein, shall be transferred, assigned, conveyed, hypothecated, delegated or pledged, in whole or in part, voluntarily or involuntarily, by operation of law or otherwise. Any attempted transfer, assignment or delegation shall be null and void. 13. NOTICES All notices provided in or permitted pursuant to this Agreement shall be in writing and shall be deemed to have been duly given when delivered or mailed by United States certified mail, return receipt requested, postage prepaid, addressed to the Companies at their principal office address and to Employee at Employee's residence address on the records of the Companies or at such other addresses either party may have furnished to the other party in writing in accordance herewith. 14. VALIDITY The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement, which shall remain in full force and effect. 7 15. AMENDMENTS Any modification to or amendment of this Agreement shall be effective only if: A. It is in writing; B. It expressly refers to this Agreement; and C. It is signed by all parties hereto. 16. CONSTRUCTION This Agreement shall be construed without regard to any presumption or other rule requiring construction against the party drafting a document. It shall be construed neither for nor against any party, but each provision shall be given reasonable interpretation in accordance with the plain meaning of its terms and the expressed intent of the parties. 1 7. ENTIRE AGREEMENT This Agreement supersedes any and all prior agreements between the parties thereto, if any, whether oral or written, with respect to the employment of Employee by the Companies and contains all of the covenants, conditions, and agreements between the parties with respect to the rendition of such services as herein contemplated or to be performed hereunder. Each party acknowledges for the benefit of the other; A. That no representations, inducements, promises, or agreements, orally or in writing, have been made by any party, or any person acting or claiming to be acting on behalf of the other party and; B. That no other agreement, statement, or promise with respect to such employment which is not set forth herein shall be valid or binding. 18. ATTORNEY'S FEES In the event of any dispute or disagreement under this Agreement whether or not suit is instituted, or if any action is instituted, at law or in equity, including, without limitation, an action for declaratory or injunctive relief to enforce or interpret the provisions of this Agreement, the prevailing party shall be entitled to be reimbursed for all costs and expenses, including, without limitation, reasonable attorneys' fees, which may be set by the court in the same action if any action has been so commenced or in a separate action brought for that purpose. Such right of reimbursement shall be in addition to any other relief to which that party may be entitled. 8 19. GOVERNING LAW AND VENUE Irrespective of the place of execution or performance, this Agreement will be governed by and construed in accordance with the laws of the State of California. The venue of any and all such actions brought under or pursuant to this Agreement shall be Orange County, California. 20. WAIVER No provision of this Agreement may be modified, waived or discharged unless such waiver modification or discharge is agreed to in writing and signed by Employee and such Officer as may be authorized by the Board. No waiver by either party thereto at any time of any breach of any condition or provision of this Agreement shall be deemed a waiver of or to the subsequent enforcement of each term and provision of this Agreement. 9 IN WITNESS WHEREOF, the parties have executed this Agreement as of the day, month, and year first set forth above. "COMPANIES" "EMPLOYEE" SABA PETROLEUM, INC. a California Corporation BY:_____________________________ BY:_____________________________ ILYAS CHAUDHARY LARRY R. BURROUGHS ITS: Chairman of the Board President and Chief Operating Officer SABA EXPLORATION COMPANY a California Corporation BY:_____________________________ BY:_____________________________ ILYAS CHAUDHARY LARRY R. BURROUGHS ITS: Chairman of the Board President and Chief Operating Officer EXHIBIT A: COMPENSATION/OPTIONS GRANTED 10 - ------------------------------------------------------------------------------- EXHIBIT "A" - ------------------------------------------------------------------------------- ANNUAL COMPENSATION
EXCERISE PRICE NUMBER OF YEAR SALARY PER SHARE OPTION SHARES 1 $75,000.00 $3.00 20,000 2 $78,750.00 $3.00 20,000 3 $82,687.50 $3.00 20,000 4 $86,821.88 $3.00 20,000 5 $91,162.97 $3.00 20,000 ----------- 100,000
The Employee may exercise the Option Shares in whole or in part at any time on or after the Employment Anniversary date of the Employee in each of the five (5) years of employment. For example: the option to purchase 20,000 shares of Saba Petroleum Company's common stock @ $3.00 may be exercised by the Employee giving the Companies written notice of the Employee's intention to do so at any time on or after August 1, 1995. Similarly, the second year option could not be exercised until on or after August 1, 1996. The right to exercise Option Shares shall vest on respective Employment Anniversary Dates, and shall accumulate. In the event the employment of the Employee is terminated for any reason, by the Employee or by the Companies, with or without cause, Employee's rights hereunder shall be limited to those Option Shares which have vested, and all non-vested Option Shares shall be cancelled immediately. Upon termination by the Employee or by the Companies all vested Option Shares must be exercised within one (1) year from the date of termination, or they will be cancelled. If there shall be any capital reorganization or consolidation or merger of Saba Petroleum Company with another corporation or corporations, in which Saba Petroleum Company is not the surviving entity, or upon change of "control" of Saba Petroleum Company, as that term is defined in Reg. 260.0-2(f) of the Securities Exchange Act of 1934, any and all Option Shares shall immediately vest. Saba Petroleum Company will prepare, or cause to be prepared and filed with the appropriate regulatory agencies a registration statement(s) which will cause the Employee's Option Shares to be registered under Section 12(g) of the Securities Act of 1933; to be freely transferable; and, to be represented by stock certificates without any restrictive legends. EX-10.33 14 EXHIBIT 10.33 1 EXHIBIT 10.33 1ST AMENDMENT ------------- LETTER AGREEMENT This agreement, effective as of this 15th day of April, 1994, by and between Saba Petroleum Company ("Company") and Bradley T. Katzung ("Employee") amends and modifies the Employment Agreement ("Agreement") between the two parties dated November 8, 1993. RECITALS A. It is in the best interest of the Company to promote Employee to the position of President and Chief Operating Officer of Saba Energy of Texas, Inc. (SETI), subject to and in accordance with the terms and provisions set forth below. B. After review and consideration of the Agreement, company and employee agree to amend and modify the Agreement as set forth below: Now, therefore, for good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties agree as follows: 1. Subject to the terms, conditions and provisions of the Agreement, the Company promotes Employee to President and Chief Operating Officer of Saba Energy of Texas, Inc. 2. Annual salary for Employee will be adjusted to $75,000.00 and will be reviewed on an annual basis. 3. Subject to the terms, conditions and provisions of Paragraph 2.2 and Exhibit 'B' of the Agreement, Employee stock options will be increased to 10,000 option shares per year for a total of 50,000 option shares during the five year contract. Employee will be provided a company car at company expense to be used while employed in this position. Company to provide and administer a company 401K plan. 2 May 6, 1994 Letter Agreement Page 2 4. As an incentive, Company will pay a net profits bonus based on the following: - SETI net profits will be the net operating income before income tax as determined by adding the oil and gas sales, operating revenues, interest income and other income and subtracting production and operating expenses (LOE), general and administrative costs (G&A), depletion and depreciation and interest expense, - the bonus will be paid quarterly after posting of company 1O-Q results beginning with the second quarter, 1994. - the accounting period will be a full fiscal year, - bonus will be determined by the schedule below:
QUARTERLY NET PROFITS $ BONUS ------------- ----- 0 - 150,000 2% 150,000 - 300,000 3% 300,000 - 450,000 4% 450,000 - 600,000 5% 600,000 - 6%
With the schedule above, as an example, if the quarterly net profits were $600,000, the bonus would be $21,000. 5. The effective date of this Letter Agreement shall be the day, month and year first set forth above. 6. This Letter Agreement amends and modifies the Agreement effective November 8, 1993. 3 In witness whereof, the parties have executed this Agreement as of the day, month and year first set forth above. COMPANY EMPLOYEE Saba Petroleum Company, A Colorado Corporation By: /s/ ILYAS CHAUDHARY /s/ BRADLEY T. KATZUNG ------------------------- ----------------------- Ilyas Chaudhary Bradley T. Katzung Its: Chairman of the Board and Chief Executive Officer CC: WALT VONCE WILIAM HOCHEY 4 EMPLOYMENT AGREEMENT BRADLEY T. KATZUNG THIS AGREEMENT, effective as of this 8th day of November, 1993, by and between SABA PETROLEUM COMPANY, a Colorado corporation (hereinafter referred to as the "Company"), and BRADLEY T. KATZUNG, an individual (hereinafter referred to as the "Employee"), the following terms and conditions. RECITALS A. It is in the best interest of the Company to employ the services of Employee as Vice-President of Operations of the Company, subject to and in accordance with the terms and provisions set forth below, B. After independent review and consideration of the Agreement, Employee desires to accept such employment subject to, and in accordance with, the terms and provisions set forth below. NOW, THEREFORE. for good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties agree as follows: 1. EMPLOYMENT RELATIONSHIP; TERM; RENEWAL Subject to the other terms, conditions and provisions of this Agreement the Company hereby employs Employee and Employee hereby accepts such employment for a period of five (5) years, commencing on the Effective Date of this Agreement, as that term is defined below, and subject to the termination provisions as provided herein below in Paragraphs 6 and 8. 2. COMPENSATION 2.1 ANNUAL COMPENSATION Subject to the terms and provisions hereof, the Company shall pay or cause to be paid to Employee during the term hereof an annual salary as described -1- 5 in Exhibit A hereto. Cash compensation shall be paid in equal semi-monthly installments commencing on the Effective Date hereof and provided only that such installments shall be pro-rated in the event of any partial employment period hereunder. 2.2 ADDITIONAL COMPENSATION Employee may be further entitled to additional compensation in the form of stock options in amounts and subject to the conditions as set forth in Exhibit B attached hereto and incorporated herein by reference. 2.3 EMPLOYMENT TAXES All compensation and benefits shall be subject to customary withholding taxes and other employment taxes as from time to time are required by any governmental statute, ordinance, or regulation with respect to such compensation paid by the Company to an employee. 3. EMPLOYEE BENEFITS AND REIMBURSEMENTS A. MEDICAL AND LIFE INSURANCE: During the term of this Agreement and the employment described herein, the Company will make a contribution towards standard medical benefits consistent with existing Company policy. Such contribution to begin with the Effective Date. B. REIMBURSEMENT FOR OUT-OF-POCKET EXPENSES: Company shall, not less frequently than monthly, reimburse Employee with respect to all ordinary out-of-pocket expenses which, in the sole judgment of the Company, were incurred by Employee in the course of and/or in the conduct of Company business by Employee, provided Employee follows and complies with Company reporting and receipts submission procedures. C. OTHER BENEFITS: In addition to the foregoing, Employee shall also be provided any other benefits of whatever kind or nature or shall be permitted to participate in such other benefits or programs which may, from time to time, be adopted or provided by the Company and otherwise made available by -2- 6 the Company to other employees or officers of Company under substantially the same restrictions and limitations, if any and as applicable. D. RELOCATION: Company will reimburse Employee for reasonable and necessary moving costs incurred in the course of Employee relocation. Company will make the final determination whether terms of moving costs are "reasonable and necessary." 4. SERVICES AND DUTIES OF EMPLOYEE Employee agrees that, expressly in his capacity as an officer of the Company, Employee will at all times loyally and conscientiously perform all of the following duties, responsibilities, and obligations: (A) Those duties and responsibilities expressly or implicitly contained in this Agreement; (B) Those duties and responsibilities customarily incident to or required of such position(s) and/or office(s) as may, from time to time, be assigned to Employee by the Board of Directors; (C) Such other services, acts, or things necessary, prudent, or advisable in the exercise of Employee's reasonable judgment for the benefit of the Company; and (D) Such additional duties, responsibilities and obligations and such other services, acts, and things as, from time to time, may be designated by the Board of Directors of the Company. Without in any manner limiting the foregoing, Employee agrees to devote such time as may be necessary to or for the business of the Company. By entering into this Agreement, it is the mutual intention of the parties that Employee shall devote all of his productive time, ability, and attention to the business of the Company. 5. NO OUTSIDE EMPLOYMENT By entering into this Agreement, it is the mutual intention of the parties that Employee shall devote all of his productive time, ability, and attention to the -3- 7 business of the Company and shall not, without the prior written consent of the Board, which may be withheld for any reason whatsoever, otherwise actively engage in other business endeavors or pursuits, including, without limitation, the direct or indirect rendition of any services of a business, commercial, or professional nature to any other person or organization, whether for compensation or otherwise. 6. CONFIDENTIALITY AND TRADE SECRETS Employee acknowledges and agrees that, in prior meetings with other employees, representatives, officers and directors of the Company, Employee has or will, during the term of employment, have access to, become acquainted with, and/or develop or invent various Trade Secrets and proprietary information consisting of and including without limitation, formulas, processes, plans, charts, concepts, procedures, compilations, lists of data and information, records, specifications, documents, contracts, reports, forms, manuals, names, addresses, and telephone numbers and other information of customers, lenders, investors, or identified prospective customers, lenders, or investors (all of the foregoing sometimes collectively referred to as "Trade Secrets") which are owned or have been or subsequently are developed, compiled, organized or invented by the Company, the Employee, or the Company's other employees. Employee, for the benefit of the Company and as a condition of this Agreement, expressly agrees that Employee shall not disclose any of the Trade Secrets, directly or indirectly; use them in any way; or claim proprietary ownership interest therein, either during or after the term of this Agreement except as required in the performance of Employee's duties hereunder or as expressly authorized by the written consent and permission of the Company after full explanation and disclosure of any such proposed use or disclosure by the Employee to the Company. Employee further acknowledges and agrees that all Trade Secrets, as defined above, whether now existing or hereafter developed, are and shall at all times be owned solely and exclusively by the Company and Employee shall have no ownership interest therein or rights thereto. 7. EFFECTIVE DATE The Effective Date of this Agreement shall be the day, month, and year first set forth above. -4- 8 8. TERMINATION UPON EVENT OF TERMINATION 8.1. EVENTS OF TERMINATION This Agreement shall terminate immediately upon the occurrence of any of the following events: (A) Whenever the Company and Employee shall mutually agree in writing to terminate this Agreement; (B) Whenever the Company delivers written notice to Employee terminating the Agreement for "cause" including, among other things, Employee's material gross negligence or intentional misconduct under the terms of this Agreement, unless waived in writing and signed by the Company in the Company's sole and absolute discretion (C) Upon the death of Employee; (D) Upon the permanent incapacity of Employee because of illness, physical injury, other physical or mental disability, or any reason such that it reasonably appears that Employee will be unable to perform or complete Employee's duties and responsibilities under this Agreement. If, for any reason other than those set forth immediately above, the Company for any reason terminates this Agreement, then upon such termination, in addition to the other provisions contained herein, the Company shall pay to Employee as a severance allowance an amount equal to the Employee's then annual salary. 8.2 POST-TERMINATION DUTIES AND OBLIGATIONS Upon termination for any of the foregoing Events; (A) Employee or the representative of Employee's estate, in the event of the death of the Employee, shall be entitled to receive that compensation earned by Employee that Employee would otherwise be entitled to up to the date of termination less such amounts as are required by law to be withheld and deducted; and -5- 9 (B) Employee or the representative of Employee's estate, in the event of the death of the Employee, shall deliver to the Company all records, reports, files, schedules, lists, equipment, tools, and any other property in his possession or under his control belonging to the Company and, as appropriate, in good condition and repair, ordinary wear and tear excepted. 9. COMPANY'S AUTHORITY The Company expressly reserves the right to adopt and promulgate from time to time, orally or in writing, Company rules, rules, regulations, directives and policies with respect to Company operations and systems, business expense reimbursements, general employee standards, and employee performance requirements and evaluation criteria (all of the foregoing collectively referred to as "Company Policies"). Employee agrees at all times to observe and comply with all Company Policies, whether oral or in writing, as stated and as reasonably interpreted by the Board of Directors. 10. PAID VACATION AND SICK LEAVE (A) PAID VACATION: Employee shall be entitled to a paid vacation each year pursuant to the then current policy of the Company. (B) SICK LEAVE: As determined by the Company, Employee shall be entitled to a reasonable number of days of sick leave with full compensation as specified in the current policy of the Company during each calendar year. In determining what is a reasonable number of days, the Company shall take into account previous periods of illness or disability, the number of days of sick leave taken in the current and preceding years, and any other relevant factors it deems pertinent. 11. INDEMNIFICATION The Company shall indemnify the Employee and hold him harmless for and with respect to all costs and expenses incurred by Employee resulting from any acts or decisions made by him in good faith while performing services for the Company within the scope of his position and authority hereunder. -6- 10 Consequently, neither this Agreement nor any right, duties, or obligations hereunder, or interests herein, shall be transferred, assigned, conveyed, hypothecated, delegated or pledged, in whole or in part, voluntarily or involuntarily, by operation of law or otherwise. Any attempted transfer, assignment or delegation shall be null and void. 13. NOTICES All notices provided in or permitted pursuant to this Agreement shall be in writing and shall be deemed to have been duly given when delivered or mailed by United States certified mail, return receipt requested, postage prepaid, addressed to Company at its principal office address and to Employee at Employee's residence address on the records of the Company or at such other addresses either party may have furnished to the other party in writing in accordance herewith. 14. VALIDITY The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement, which shall remain in full force and effect 15. AMENDMENTS Any modification to or amendment of this Agreement shall be effective only if: (A) It is in writing; (B) It expressly refers to this Agreement; and (C) It is signed by all parties hereto. 16. CONSTRUCTION This Agreement shall be construed without regard to any presumption or other rule requiring construction against the party drafting a document. It shall be construed neither for nor against any party, but each provision shall be given reasonable interpretation in accordance with the plain meaning of its terms and the expressed intent of the parties. -7- 11 17. ENTIRE AGREEMENT This Agreement supersedes any and all prior agreements between the parties thereto, if any, whether oral or written, with respect to the employment of Employee by the Company and contains all of the covenants, conditions, and agreements between the parties with respect to the rendition of such services as herein contemplated or to be performed hereunder. Each party acknowledges for the benefit of the other: (A) That no representations, inducements, promises, or agreements, orally or in writing, have been made by any party, or any person acting or claiming to be acting on behalf of the other party; and (B) That no other agreement, statement, or promise with respect to such employment which is not set forth herein shall be valid or binding. 18. ATTORNEYS' FEES In the event of any dispute or disagreement under this Agreement whether or not suit is instituted, or if any action is instituted, at law or in equity, including, without limitation, an action for declaratory or injunctive relief to enforce or interpret the provisions of this Agreement, the prevailing party shall be entitled to be reimbursed for all costs and expenses, including, without limitation, reasonable attorneys' fees, which may be set by the court in the same action if any action has been so commenced or in a separate action brought for that purpose. Such right of reimbursement shall be in addition to any other relief to which that party may be entitled. 19. GOVERNING LAW AND VENUE Irrespective of the place of execution or performance, this Agreement will be governed by and construed in accordance with the laws of the State of California. The venue of any and all such actions brought under or pursuant to this Agreement shall be Orange County, California. -8- 12 20. WAIVER No provision of this Agreement may be modified, waived or discharged unless such waiver modification or discharge is agreed to in writing and signed by Employee and such Officer as may be authorized by the Board. No waiver by either party thereto at any time of any breach of any condition or provision of this Agreement shall be deemed a waiver of or to the subsequent enforcement of each term and provision of this Agreement. IN WITNESS WHEREOF, the parties have executed this Agreement as of the day, month, and year first set forth above. "COMPANY" "EMPLOYEE" SABA PETROLEUM COMPANY, a Colorado Corporation BY: /s/ ILYAS CHAUDHARY /s/ BRADLEY T. KATZUNG ------------------- ---------------------- ILYAS CHAUDHARY BRADLEY T. KATZUNG ITS: Chairman of the Board and Chief Executive Officer EXHIBIT A ANNUAL COMPENSATION EXHIBIT B ADDITIONAL COMPENSATION -9- 13 EXHIBIT "A" ANNUAL COMPENSATION
Exercise Price Number of Year Salary Per Share Option Shares ---- ------ -------------- ------------- 1 $100,000 $2.75 2,000 2 100,000 2.75 1,000 3 100,000 2.75 2,000 4 100,000 2.75 2,000 5 100,000 2.75 2,000 ------ 10,000
* The Employee may exercise the Option Shares in whole or in part at any time on or after the Employment Anniversary date of the Employee in each of the five (5) years of employment. For example: the option to purchase 2,000 shares of the Company's common stock @ $2.75 may be exercised by the Employee giving the Company written notice of the Employee's intention to do so at any time on or after November 8, 1994. Similarly, the second year option could not be exercised until on or after November 8, 1995. The right to exercise Option Shares shall vest on respective Employment Anniversary Dates, and shall accumulate. In the event the employment of the Employee is terminated for any reason, by the Employee or by the Company, with or without cause, Employee's rights hereunder shall be limited to those Option Shares which have vested. 14 If there shall be any capital reorganization or consolidation or merger of the Company with another corporation or corporations, in which the Company is not the surviving entity, or upon change of "control" of the Company, as that term is defined in Reg. 260.0-2(f) of the Securities Exchange Act of 1934, any and all Option Shares shall immediately vest. The Company will prepare, or cause to be prepared and filed with the appropriate regulatory agencies a registration statement(s) which will cause the Employee's Option Shares to be registered under Section 12(g) of the Securities Act of 1933; to be freely transferable; and, to be represented by stock certificates without any restrictive legends. -2- 15 EXHIBIT "B" ADDITIONAL COMPENSATION The Company grants to the Employee as additional compensation the Option to purchase up to 10,000 shares of the Company's common stock at the price of $2.75 per share, such option rights to vest on the following basis:
Number Year of Shares ---- --------- 1 2,000 2 2,000 3 2,000 4 2,000 5 2,000
* The Employee may exercise the Option Shares in whole or in part at any time on or after the Employment Anniversary date of the Employee in each of the five (5) years of employment. For example: the option to purchase the 2,000 shares of the Company's common stock @ $2.75 may be exercised by the Employee giving the Company written notice of the Employee's intention to do so at any time on or after November 8, 1994. Similarly, the second year option could not be exercised until on or after November 8, 1995. The right to exercise Option Shares shall vest on respective Employment Anniversary Dates, and shall accumulate. In the event of termination of the employment, as described in Section 8.1 herein above of Employee, vested shares from preceding years shall become due and exercisable within one year from the date of termination, and any and all non-vested Option shares shall be cancelled. In the event of termination, not covered under Section 8.1 herein above, all option shares covered in this Exhibit B will vest and will be exercisable during the five year period. -1- 16 If there shall be any capital reorganization or consolidation or merger of the Company with another corporation or corporations, in which the Company is not the surviving entity, or upon change of "control" of the Company, as that term is defined in Reg. 260.0-2(f) of the Securities Exchange Act of 1934, any and all Option Shares shall immediately vest. The Company will prepare, or cause to be prepared and filed with the appropriate regulatory agencies a registration statement(s) which will cause the Employee's Option Shares to be registered under Section 12(g) of the Securities Act of 1933; to be freely transferable; and, to be represented by stock certificates without any restrictive legends. -2- EX-10.34 15 EXHIBIT 10.34 1 EXHIBIT 10.34 SANTA MARIA REFINING COMPANY P O Box 1260 Santa Maria, CA 93456 Tel: 805-922-5871 Fax: 805-925-7764 CONSULTANT AGREEMENT 1. NAME: Burt Cormany 2. NAME OF THE COMPANY: Santa Maria Refinery Company (SMRC) 3. LOCATION: Santa Maria, California 4. JOB TITLE: President 5. EFFECTIVE DATE: July 1, 1994 6. MAJOR AREAS OF RESPONSIBILITY: MANAGEMENT OF All Refinery operations including - budgets, cash flow needs and projections - regulatory compliance - CUP achievement - asphalt marketing 7. REPORTING TO: Ilyas Chaudhary, Chairman of SMRC's Board of Directors 8. COMPENSATION: A. $60,000 per annum to be paid on a monthly basis and 12,000 shares of Saba Petroleum Company Common Stock to be issued as fully paid on January 1, 1995 as a one time bonus. Compensation for second year of the contract shall be $100,000 per annum B. Standard medical and 401(K) Plan benefits C. Company vehicle for Company usage E. Bonus at discretion of the Directors F. The Company shall indemnify against any claims while holding the office 9. TERMINATION NOTICE: 90 days severance upon termination 10. CONTRACT TERM: 2 years from July 1, 1994 to June 30, 1996 /s/ BURT CORMANY /s/ ILYAS CHAUDHARY - -------------------------------- --------------------------------- Burt Cormany Ilyas Chaudhary - Director Santa Maria Refining Company July 22, 1994 July 20, 1994 - -------------------------------- --------------------------------- Date Date EX-11.1 16 EXHIBIT 11.1 1 EXHIBIT 11.1 SABA PETROLEUM COMPANY Computation of Earnings Per Common Share For the Years Ended December 31, 1996 and 1995
Year Ended December 31 1996 1995 PRIMARY EARNINGS Net income before minority interest in earnings of consolidated subsidiary 4,006,117 602,164 Minority interest in earnings of consolidated subsidiary (241,401) (55,632) --------- --------- Net income available to Common 3,764,716 546,532 ========= ========= PRIMARY SHARES Weighted average number of Common Shares outstanding 8,744,805 8,327,494 Additional shares assuming issuance of shares underlying options 671,228 415,274 --------- --------- Primary Shares 9,416,033 8,742,768 ========= ========= PRIMARY EARNINGS PER COMMON SHARE Net income available to Common $0.40 $0.06 ========= ========= FULLY DILUTED EARNINGS New income before minority interest in earnings of consolidated subsidiary 4,006,117 602,164 Minority interest in earnings of consolidated subsidiary (241,401) (55,632) Plus interest expense attributable to Debentures, net of related income taxes 645,585 12,722 --------- --------- Net income available to Common 4,410,301 559,254 ========= ========= FULLY DILUTED SHARES Weighted average number of Common Shares outstanding 8,744,805 8,327,494 Additional shares assuming issuance: Of shares underlying options 671,228 415,274 Of convertible common shares @ $4.375 per share underlying: $11,000,000 from 12/26/95 2,514,285 41,331 $1,650,000 from 2/7/96 339,016 0 Less shares actually issued upon conversions (203,078) 0 --------- --------- Fully Diluted Shares 12,066,256 8,784,099 ========= ========= FULLY DILUTED EARNINGS PER COMMON SHARE Net income $0.37 $0.06 ========= =========
EX-23.1 17 EXHIBIT 23.1 1 EXHIBIT 23.1 CONSENT OF INDEPENDENT ACCOUNTANTS We consent to the incorporation by reference in this annual report on Form 10-KSB of our report dated March 26, 1997, on our audits of the consolidated financial statements of Saba Petroleum Company and subsidiaries as of December 31, 1996 and 1995, and for the two years in the period ended December 31, 1996, appearing in the registration statements on Form S-3 (SEC File Nos. 33-71272 and 333-00799) of Saba Petroleum Company filed with the Securities and Exchange Commission pursuant to the Securities Act of 1933. COOPERS & LYBRAND L.L.P. Los Angeles, CA April 1, 1997 EX-23.2 18 EXHIBIT 23.2 1 EXHIBIT 23.2 [NETHERLAND, SEWELL LETTERHEAD] CONSENT OF INDEPENDENT PETROLEUM ENGINEERS AND GEOLOGISTS The undersigned hereby consents to be named as the source for certain oil and gas reserve information presented in the Form 10-KSB of Saba Petroleum Company (the "Registrant") as filed with the Securities & Exchange Commission pursuant to the Securities Exchange Act of 1934, as amended. NETHERLAND, SEWELL & ASSOCIATES, INC. By: /s/ FREDERIC D. SEWELL ---------------------------------- Frederic D. Sewell President Dallas, Texas March 31, 1997 EX-23.3 19 EXHIBIT 23.3 1 EXHIBIT 23.3 [SPROULE ASSOCIATES LETTERHEAD] Ref: 2261.11489 March 31, 1997 Saba Petroleum Company Ste. 201, 3201 Skyway Drive Santa Maria, CA 93455 RE: CONSENT OF SPROULE ASSOCIATES LIMITED Dear Sirs: The undersigned hereby consents to be named as the source for certain oil and gas reserve information presented in the Form 10-KSB of Saba Petroleum Company (the "Registrant") as filed with the Securities and Exchange Commission pursuant to the Securities Exchange Act of 1934, as amended. Sincerely, R. KEITH MACLEOD, P. ENG. - --------------------------------- R. Keith MacLeod, P. Eng. Manager, Engineering and Director EX-27.1 20 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED BALANCE SHEET AT DECEMBER 31, 1996 AND CONSOLIDATED STATEMENT OF INCOME FOR THE YEAR ENDED DECEMBER 31, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FORM 10-KSB FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996. YEAR DEC-31-1996 JAN-1-1996 DEC-31-1996 734,036 0 7,426,326 (65,000) 0 11,581,286 50,182,272 (15,323,780) 49,116,886 9,163,757 20,811,980 0 0 12,901,083 4,814,127 49,116,886 0 33,202,344 0 24,051,144 (214,756) 0 2,401,856 6,964,100 2,957,983 0 0 0 0 3,764,716 0.40 0.37
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