BPZ Resources, Inc. - Shareholder.com

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BPZ RESOURCES, INC AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2010, 2009 and 2008 Note 1 — Basis of Presentation and Significant Accounting Policies Organization BPZ Resources, Inc., (together with its subsidiaries, collectively referred to as the “Company” or “BPZ” unless the context requires otherwise) a Texas corporation, is based in Houston, Texas with offices in Lima, Peru and Quito, Ecuador. The Company is focused on the exploration, development and production of oil and natural gas in Peru and to a lesser extent Ecuador. The Company also intends to utilize part of its planned future natural gas production as a supply source for the complementary development of a gasfired power generation facility which is expected to be wholly- or partially-owned by the Company. The Company maintains a subsidiary, BPZ Exploración & Producción S.R.L. (“BPZ E&P”), registered in Peru through its wholly-owned subsidiary BPZ Energy, LLC, a Texas limited liability company, formerly BPZ Energy, Inc., and its subsidiary BPZ Energy International Holdings, L.P., a British Virgin Islands limited partnership. Currently, the Company, through BPZ E&P, has exclusive rights and license contracts for oil and gas exploration and production covering a total of approximately 2.2 million acres, in four blocks, in northwest Peru. The Company’s license contracts cover 100% ownership of the following properties: Block Z-1 (0.6 million acres), Block XIX (0.5 million acres), Block XXII (0.9 million acres) and Block XXIII (0.2 million acres). The Block Z-1 contract was signed in November 2001, the Block XIX contract was signed in December 2003 and Blocks XXII and XXIII contracts were signed in November 2007. Generally, according to the Organic Hydrocarbon Law No. 26221 and the regulations thereunder (the “Organic Hydrocarbon Law” or “Hydrocarbon Law”) the seven-year term for the exploration phase can be extended in each contract by up to an additional three years to a maximum of ten years. However specific provisions of each license contract can vary the exploration phase of the contract as established Hydrocarbon Law. The license contracts require the Company to conduct specified activities in the respective blocks during each exploration period in the exploration phase. If the exploration activities are successful, the Company may decide to enter the exploitation phase and the total contract term can extend up to 30 years for oil exploration and production and up to 40 years for gas exploration and production. In the event a block contains both oil and gas, as is the case in the Company’s Block Z-1 contract, the 40-year term may apply to oil exploration and production as well. Additionally, through its wholly-owned subsidiary, SMC Ecuador Inc., a Delaware corporation, and its registered branch in Ecuador, the Company owns a 10% non-operating net profits interest in an oil and gas producing property, Block 2, located in the southwest region of Ecuador (the “Santa Elena Property”). The license agreement and new operating agreement covering the property extends through May 2016. The Company is in the process of developing its oil and natural gas reserves. The Company was producing and selling oil from the CX-11 platform in the Corvina field of Block Z-1 under a well testing program, until it placed the Corvina field into commercial production in November 2010. The Company is also in the initial stages of appraising, exploring and developing its potential oil and natural gas reserves from the A platform in the Albacora field of Block Z-1 and began producing from the A-14XD, in December 2009, and selling oil from the A-14XD well under a well testing program during the second quarter of 2010. From the time the Company began producing from the CX-11 platform in the Corvina field in November 2007 and the Albacora field in December 2009, through December 31, 2010, it has produced approximately 3.4 MMBbls of oil. Additionally, the Company’s activities in Peru include analysis and evaluation of technical data on its other properties, preparation of the development plans for the properties, designs for platforms, procuring machinery and equipment for an extended drilling campaign, obtaining all necessary environmental and operating permits, bringing additional production on-line, seismic acquisition, obtaining detailed engineering and design of the power plant and gas processing facilities and securing the required capital and financing to conduct the current plan of operation. Basis of Presentation and Principles of Consolidation The consolidated financial statements include the accounts of BPZ Resources, Inc. and its wholly-owned subsidiaries and branch offices. All intercompany balances and transactions have been eliminated. The Company’s accounting policy regarding partnership or joint venture interests in oil and gas properties is to consolidate such interests on a pro-rata basis in accordance with accepted practice in the oil and gas industry. However, the Company has not been able to receive timely information to allow it to proportionately consolidate the minority non-operating net profits interest owned by its consolidated subsidiary, SMC Ecuador Inc. See Note- 6, “Investment in Ecuador Property” to the consolidated financial statements for further discussion regarding the Company’s investment in its Ecuador property. Accordingly, the Company accounts for this 78
investment under the cost method. As such, the Company records its share of cash received or paid attributable to this investment as other income or expense and amortizes its investment into income over the remaining term of the license agreement which expires in May 2016. Use of Estimates The preparation of the consolidated financial statements in accordance with U.S. generally accepted accounting principles (“GAAP” or “U.S. GAAP”) requires management to make certain estimates and assumptions. These estimates and assumptions affect the reported amounts of assets, liabilities, revenues and expenses in the consolidated financial statements, and the disclosure of contingent assets and liabilities. Actual results could differ from these estimates. Estimates of crude oil reserves are the most significant of the Company’s estimates. All of the reserves data in this Form 10- K are estimates. Reservoir engineering is a subjective process of estimating underground accumulations of crude oil and natural gas. There are numerous uncertainties inherent in estimating quantities of proved crude oil and natural gas reserves. The accuracy of any reserves estimate is a function of the quality of available data and of engineering and geological interpretation and judgment. As a result, reserves estimates may be different from the quantities of crude oil and natural gas that are ultimately recovered. Other items subject to estimates and assumptions include the carrying amounts of property, plant and equipment including impairment and asset retirement obligation and deferred income tax assets. Management evaluates estimates and assumptions on an ongoing basis using historical experience and other factors, including the current economic and commodity price environment. Current credit market conditions combined with volatile commodity prices have resulted in increased uncertainty inherent in such estimates and assumptions. As future events and their effects cannot be determined accurately, actual results could differ significantly from these estimates. Reclassification Certain reclassifications have been made to the 2009 and 2008 consolidated financial statements to conform to the 2010 presentation. These reclassifications were not material to the accompanying consolidated financial statements. Revenue Recognition The Company recognizes revenues when they are realized or realizable and earned. Revenues are considered realized or realizable and earned when: (i) persuasive evidence of an arrangement exists, (ii) delivery has occurred or services have been rendered, (iii) the seller’s price to the buyer is fixed or determinable, and (iv) collectability is reasonably assured. The Company sells its production in the Peruvian domestic market on a contract basis. Revenue is recorded net of royalties when the purchaser takes delivery of the oil. At the end of the period, oil that has been produced but not sold is recorded as inventory at the lower of cost or market. Cost is determined on a weighted average based on production costs. See Note — 13, “Revenue” for further information. Reporting and Functional Currency The U.S. Dollar is the functional currency for the Company’s operations in both Peru and Ecuador. Ecuador has adopted the U.S. Dollar as its official currency. Peru, however, uses its local currency, Nuevo Sol, in addition to the U.S. Dollar and therefore its financial results are subject to foreign currency gains and losses. The Company has adopted Accounting Standard Codification (“ASC”) Topic 830, “Foreign Currency Matters”, previously Statement of Financial Accounting Standards (“SFAS”) No. 52, “Foreign Currency Translation,” which requires that the translation of the applicable foreign currency into U.S. dollars be performed for balance sheet monetary accounts using current exchange rates in effect at the balance sheet date, non-monetary accounts using historical exchange rates in effect at the time the transaction occurs, and for revenue and expense accounts using a weighted average exchange rate during the period reported. Accordingly, the gains or losses resulting from such translation are included in other income and expense in the consolidated statements of operations. Due to the relatively low level of activity to-date and the relatively steady exchange rate in Peru, foreign exchange gains and losses for the year ended December 31, 2010, 2009, and 2008 were not material to the Company’s financial statements. 79
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BPZ 2010 ANNUAL REPORT
Page 3 and 4:
Manuel Pablo Zúñiga-Pflücker Pre
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I would like to express my sincere
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Company drilled and completed at th
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UNITED STATES SECURITIES AND EXCHAN
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PART I BPZ Resources, Inc. cautions
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Our Competition Intense competition
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License contracts are subject to ro
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Although we believe our operations
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Our reserve estimates depend on man
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The debt facility matures on July 2
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• clean-up responsibilities; •
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• although we plan to enter into
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esult in the suspension of our curr
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We may not be able to replace our r
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Because we are a relatively new pub
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the existing platform located in th
Page 35 and 36: In connection with the first explor
Page 37 and 38: In addition, the Board of Directors
Page 39 and 40: Block Z-1 Seismic Acquisition Altho
Page 41 and 42: Performance Graph The following gra
Page 43 and 44: (1) In our Form 10K for the year en
Page 45 and 46: Oil Development General We will con
Page 47 and 48: The A-16D well was originally inten
Page 49 and 50: agreements; and change in control.
Page 51 and 52: We estimated our non-convertible bo
Page 53 and 54: Loan Agreement. The amount availabl
Page 55 and 56: wells and regular maintenance, the
Page 57 and 58: million of salary and salary relate
Page 59 and 60: of revenue to offset our deferred t
Page 61 and 62: Lease Operating Lease operating exp
Page 63 and 64: The income tax expense (benefit) fo
Page 65 and 66: cash of $6.4 million and in 2008 pr
Page 67 and 68: Long-Term Debt and Capital Lease Ob
Page 69 and 70: (2) prior to January 1, 2015, durin
Page 71 and 72: Other In July 2009, we, through our
Page 73 and 74: (1) Includes operating leases for o
Page 75 and 76: Revenue Recognition We recognize re
Page 77 and 78: Interest Rate Risk. As of December
Page 79 and 80: ITEM 8. FINANCIAL STATEMENTS AND SU
Page 81 and 82: To the Board of Directors and Stock
Page 83 and 84: BPZ Resources, Inc. and Subsidiarie
Page 85: BPZ Resources, Inc. and Subsidiarie
Page 89 and 90: Oil and Gas Accounting Reserves Det
Page 91 and 92: Loss per Common Share In accordance
Page 93 and 94: Note 5 — Property, Equipment and
Page 95 and 96: Activity related to the Company’s
Page 97 and 98: The Company estimates the cash paym
Page 99 and 100: holders of the 2015 Convertible Not
Page 101 and 102: an amended registration statement w
Page 103 and 104: there was $1.2 million of total unr
Page 105 and 106: Additional Fair Value Disclosures $
Page 107 and 108: costs related to the platform in th
Page 109 and 110: Note 17 — Business Segment Inform
Page 111 and 112: minority position in the project. H
Page 113 and 114: of the subjective decisions require
Page 115 and 116: Costs Incurred in Oil and Natural G
Page 117 and 118: (1) Includes crude oil, condensate
Page 119 and 120: The following table sets forth the
Page 121 and 122: (d) Attestation Report To the Board
Page 123 and 124: PART IV ITEM 15. EXHIBITS AND FINAN
Page 125 and 126: Net acres or net wells. The sum of
Page 127 and 128: INDEX OF EXHIBITS 2.1 Plan of Conve
Page 129 and 130: Company Information Board of Direct
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