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Tuesday, November 09, 2010

GeoGlobal GSPC Carried Interest Dispute Update

This is an update on the "carried interest dispute" between GeoGlobal Resources (GGR Charts and current Quote) and the Gujarat State Petroleum Corporation.
Background: 
GeoGlobal Resources (Ticker GGR) is a Canadian based oil and natural gas exploration company listed on the American Stock Exchange.

GSPC  is Gujarat State Petroleum Corporation, a state owned oil company in India that had to put its planned IPO on hold, possibly due to the way it treats its partners.

GGR has a 10% "carried interest" in the KG exploration block in the deep waters off the shores of India.  This means it pays none of the costs of exploration until there is cash flow from the discovery to pay its share of the costs.  This "carried interest" was payment for GGR's expertise in finding hydrocarbons.  GGR will only see revenue after its share is fully repaid to the major "operating" partner, GSPC.  Some time ago, GSPC got political pressure for "giving away too much" to GGR but this was well after the KG discovery was declared a "major discovery."
Here is the latest via email from indianpetro.com and my thoughts.  The links to "details" require a paid subscription to read which I do not have.  Since GGR is listed on the American Stock Exchange, I rely of formal SEC filings mostly.
Fracas continues at KG-OSN-2001/3
Part-I: GeoGlobal complains about being kept out of the loop by GSPC

Nov 8:
The fracas over multiple issues at the KG-OSN-2001/3 block is showing no signs of abating. GeoGlobal Resources (GGR) -- technical partner and 10% stakeholder in the block -- has written a strongly worded letter to the management committee (MC) for the block, accusing GSPC (Gujarat State Petroleum Corporation) of going ahead with operations in the block without due intimation to its partner.
Webster: intimation
#1 to make known especially publicly or formally
#2  to communicate delicately and indirectly
GSPC had asked GGR to participate in the MC meeting for the block, but only to discuss a single item on the agenda, dealing with cessation of the Canadian E&P major's participating interest (PI) in the block. The Indian PSU wants GGR's stake to be terminated due to alleged inaccuracies in the technical studies conducted by the latter on the block.

GGR opined that as a member of the operating committee (OC) for the block, it had full rights to be intimated about all agenda points and provide its opinion on the same. Not adhering to this implied that GSPC's actions were in "complete derogation" of the provisions in Article 6.7 of the production sharing contract (PSC) for the block, which states that "...the Secretary shall forward the agenda to the members at least nine days prior to the date fixed for the meeting..."

The company also pointed out that Jubilant -- the other 10% stakeholder at the block -- had no(t) received any intimation about the agenda point on cessation of GGR's stake. This reinforced the fact that the item had never been placed before the OC for its approval, contrary to PSC stipulations.

GGR said that GSPC's assumption that the former was a "defaulter" was presumptuous at best and could even be proved completely wrong.

In view of this GGR has proposed a specific agenda point for the MC meeting. The item reads, "to discuss and decide on the purported action of GSPC taken vide its letter dated August 18, 2010, to GGR". GGR has further requested that the scheduled date of the MC meeting should be pushed back to a more suitable date, allowing time for GGR to present its case on all the agenda items in the meeting.   (Click on Details for more information) Details

Fracas continues at KG-OSN-2001/3
Part-II: GSPC claims it has followed PSC provisions to the letter

Nov 8: Gujarat State Petroleum Corporation (GSPC) has refuted the claims put forward by GeoGlobal Resources (GGR) saying that it was in no way violating the provisions of the PSC (production sharing contract) and JOA (joint operating agreement) signed for the KG-OSN-2001/3 block.

GSPC pointed out that article 5.6 of the JOA stipulates that approval of the OC (operating committee) requires a minimum affirmative vote of only 70% while GSPC itself held 80% stake at the block. Such decisions are final and binding on all parties. Therefore, no separate approval would be required from the other parties (Jubilant or GGR) for passing an OC resolution.

Moreover, the state-run oil major said that it had notified the government regarding the cessation of GGR's participating interest (PI) at the block, in strict adherence to PSC provisions. GSPC also claimed that Jubilant had also been informed of the move through a copy of the letter sent to the government.

GSPC also claimed that according to article 6.16 of the PSC, the management committee (excluding GGR representatives) had full rights to decide on the participation of the "defaulting party", that is, GeoGlobal, but only after hearing out GGR's views on the matter.

GSPC said that GGR would be given ample opportunity to present its case before the MC. However, the scheduled date for the MC meeting should not be postponed keeping in mind that GGR was informed about the issue well in advance and further delays would unnecessarily hamper work progress in this block.  (Click on Details for more information) Details

Fracas continues at KG-OSN-2001/3
Part-III: DGH says exploration period cannot be extended without definite work programme and budget

Nov 8: Not only is GSPC finding it difficult to push through the proposed cessation of GeoGlobal's 10% stake in the KG-OSN-2001/3 block, but it is also facing flak from the DGH (Directorate General of Hydrocarbons) on extending the exploration period at the block for integrated appraisal of five discoveries in the block.

The DGH has said that the terms of the PSC (production sharing contract) stipulate that the contractor has to submit a detailed programme (including a work programme and budget) for carrying out integrated appraisal of the discoveries.

Without this, the upstream regulator said that it could not recommend extension of the exploration period, no matter how many requests were put in by the operator. Therefore, it is imperative for GSPC to immediately submit the requisite work programme and budget if the request for extension was to be considered favorably by the DGH.

Readers will recall that GSPC has been persistently requesting for a 30-month extension in the exploration period in order to appraise the discoveries that have been made in the block. The operator has made five discoveries in this block, including the "KG-16" in DeenDayal East (DDE), the "KG-22" in DeenDayal North (DDN), the "KG-21" in DeenDayal West DownThrown (DDW-DT) and the "KG-19" and "KG-20SS" in the Base Raghavpuram Unit (BRU) structure.
It is difficult to appraise the data without the help from GGR. Reports I've read elsewhere say GGR stopped helping GSPC find hydrocarbons and won't help until this carried interest dispute is resolved.  That is GGR won't work for free.
GSPC has recently proposed that the appraisal, declaration of commerciality (DoC) and field development plan (FDP) for all these discoveries should be carried out in an integrated and cost-effective manner in order to conceptualise and implement the optimal development strategy for the block. 

Pertinently, the KG-20SS well is an additional well, that is, it was drilled over and above the minimum work programme (MWP) that was specified for the block. (Click on Details for more information) Details 

Disclaimers:
#1   I have made a lot of money for myself and my newsletter subscribers over the years with GeoGlobal Resources stock (GGR Charts and current Quote).  I bought shares as low as 20¢ a decade ago (Nov. 22, 2000).   I have been on "house money" since 2005. I added shares at 90¢ on 12/31/04 tax loss selling to reach 9,000 shares.  By my final sale in 2005 at $13.42, my position was only 2,400 shares with $32,415 in profits taken out from selling.  Since then, I have traded around this core position to run it up to 8,900 shares now with $25,810 cash taken out as I am now loading up for the next run.
#2  As of 08/26/10 I have a $25,810 cash, all pure profit! Plus I currently have 8,900 shares. GGR could drop to zero overnight and I'd still have the cash profits!
#3 I started with a negative $10,005 balance and held 3,330 shares with a cost basis of $3.00 per share back in 1999 when the company was an internet stock with the ticker BOWG.
#4 I took massive profits in 2005 to lock in nice gains. 
#5 Now GGR has joined the ranks of stocks like LRCX that are more like ATM machines - all on house money where I try to continue to grow the total dollars taken out using share price volatility.
For commentary and my current outlook for GGR, read "Kirk's Investment Newsletter"

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