Operational history

OML 122 is located 25 to 60 kilometres offshore from the Western Niger Delta in water depths of 40 to 300 metres.

In April 2005, Equator signed a Finance and Service Agreement with Peak Petroleum Industries Nigeria Limited (ÔPeakÕ), the lease holder and operator of OML 122. In return for providing the funding and technical services for an appraisal well on each of two discoveries and for a selected exploration well, Equator became entitled to a share of any oil and gas production.

In September 2005, Equator and Peak chartered the ÔBulford DolphinÕ semi-submersible drilling rig and, in November 2005, commenced drilling their first well, Bilabri DX-1, on the multi-layered discovery. The extent of the known hydrocarbon reservoirs was found to exceed expectations and, furthermore, the well discovered additional gas reservoirs. On test, the 21 metre oil column in the C2 sand flowed crude oil with a specific gravity of 39 degrees API, at a rate of 7188 barrels per day. The gas reservoir in the overlying C1 sand flowed at a rate of 26 million standard cubic feet per day. The data from the flow tests combined with the well logs to confirm that the reservoir properties and crude oil quality of Bilabri were excellent. Accordingly, Equator and Peak initiated a development programme consisting of 6 wells and signed a charter contract for a Floating Production, Storage & Offloading vessel (ÔFPSOÕ) with BW Offshore on 17 October 2006.

Following the DX-1 well, the Owanare prospect was selected for the exploration well and the AX 1 well was drilled. Gas was discovered in three separate horizons and the well was suspended for a future development.

The Bilabri field was then further appraised with wells D2, D3 and D4. During the drilling programme, operations were disrupted on three occasions when the field was invaded by militants from the Niger Delta. On two occasions, crew members were taken as hostages. In addition, Peak defaulted on the cash calls for its share of project expenditure.

The three additional appraisal wells established that the aerial extent of the C2 sand was larger than expected but determined that the C1 sand contained gas only. In April 2007, NSAI assessed the Gross Proved plus Probable oil reserves for Bilabri as 13.2 million barrels. In terms of gas, NSAIÕs best estimate of Gross Proved plus Probable contingent resources was 395 billion standard cubic feet for Bilabri and 106 billion standard cubic feet for Owanare, giving a total gross contingent gas resource of 501 billion standard cubic feet, all discovered by wells funded by Equator. Based on the results from the appraisal drilling, the scope of the Bilabri oil development was reduced from six to three wells comprising two horizontal completions of the existing D2 and D4 wells plus a vertical completion of the existing DX-1 well.

On the 22 January 2007, the FPSO entered a shipyard in Singapore for upgrade and delivery to Nigeria in the fourth quarter of 2007. The sub-sea equipment was ordered and scheduled for installation also during fourth quarter 2007. Equator funded 100% of the cost of developing Bilabri, with expenditure on OML 122 totalling US$ 263 million.

However, during 2007 the project was beset with security problems, including a fourth militant invasion and kidnapping, which caused the shutdown of drilling operations. The contract for the Bulford Dolphin drilling rig was terminated for prolonged force majeure on the 11 May 2007. Subsequently, BW Offshore terminated the contract for the FPSO. The Company became liable for early termination penalties on the FPSO and for debts on a number of unpaid invoices from suppliers.

In September 2007, Equator agreed terms with Peak by entering into the Bilabri Settlement Agreement (ÔBSAÕ) for Peak to take responsibility for operations and to fund the remainder of the Bilabri oil development. Peak also assumed the existing and future project liabilities and an obligation to make an upfront payment to Equator. In return, EquatorÕs interest in Bilabri and Owanare was reduced to a carried interest of 5% in the oil project and a paying interest of 12.5% in any gas development.

Legal proceedings

Peak did not meet any of its obligations under the BSA. Equator therefore served a notice of arbitration on Peak in the London Court of International Arbitration (LCIA). Peak responded by obtaining an order from the Federal High Court in Lagos restraining the continuation of the Arbitration Proceedings being held at LCIA. Equator nevertheless, continued with the proceedings, and on the 27 May 2008, the tribunal awarded the total sum of US$ 123 million plus interest to Equator.

In 2010, Equator filed a winding up petition against Peak for its inability to pay its debt. By mid-2011, some success was achieved with the withdrawal of the suit filed by Peak to restrain the Arbitral proceedings. Equator followed by offering Peak a compromise in which Equator would reassume the responsibility of funding the development of Bilabri in return for a larger share of production and the recovery of future costs, the existing debts and interest. Peak rejected the offer.

In November 2011, the winding up order was made final. In February 2012, a liquidator was appointed to take custody and control of the assets of Peak.

The Liquidator held the first Creditors and first Contributories Meetings on the same day in July 2013. Eleven out of sixteen registered creditors attended the Creditors Meeting while none of PeakÕs shareholders attended the Contributories Meeting. Given that there is only one significant asset, Oil Mining Lease 122, the Liquidator described his three options as:

• sell the assets by public auction;
• ascertain the value of the assets and invite creditors, members of the public and the shareholders of Peak to buy shares in a new company; or
• direct the creditors to manage OML 122.

In each case, the proceeds would be used to pay the debts to the creditors. Any remainder would go to the shareholders of Peak.

A Committee of Inspection comprising three of the creditors including Equator was formed to advise the Liquidator. During the meeting, Shell announced that it had a 40% interest in the block. This claim arises from heads of agreement signed with Peak in 1998, long before Oil Prospecting License 460 was converted to Oil Mining Lease 122 in 2001.

Peak responded with a series of appeals and applications. Many were struck out by the courts. However, Peak continued to pursue:

• an application seeking to restrain Equator from dealing with its assets; and
• further applications seeking to commit EquatorÕs lawyer, Baker HughesÕ lawyer and the Liquidator for contempt.

Until these applications are determined, the Liquidator holds PeakÕs assets for the benefit of the creditors, particularly Equator.

By the end of 2013, Peak did make one attempt to reinitiate discussions on a settlement. We declined preferring to continue to pursue our rights with the Liquidator and to seek the striking out of all appeals.

In 2014, Equator agreed to work with the Peak shareholders in developing an opportunity to again settle. At the time, a capital advisory services firm was offering to settle PeakÕs outstanding project debts and finance the development of the field. In September 2014, Equator and the Peak shareholder signed a letter agreement that outlined the terms of the new settlement. The Peak shareholders would acknowledge and pay Equator the sum of $52.24m to settle agreed debts owed solely to Equator. They would also honour EquatorÕs other rights under the BSA, namely a carried interest of 5% in the oil project and a paying interest of 12.5% in any gas development. Details of the settlement agreement were negotiated and agreed during 4Q 2014, the court action having been suspended.

Activity in 2015

Peak and Equator signed the Settlement Agreement in May 2015. The agreement granted Peak a period of 6 months to source the funding required to pay its outstanding project debts and to finance the development of the field. The agreement provided a further 3 month period for Peak to make payment into an escrow account of the outstanding renegotiated debt to Equator.

Post period activities

Even with the help of generous extensions to the Settlement Agreement, Peak has failed to secure funding. In 2017, Equator has returned to the Appeal Court seeking for the remaining appeals to be struck out so that the liquidation can continue. The Appeal Court has adjourned the hearing to October 2017.

Oil and gas resources

In September 2011, NSAI confirmed their assessment of the recoverable hydrocarbons in the Bilabri and Owanare discoveries. However, because the development of Bilabri had been suspended they reclassified the oil volumes as contingent resources (Table 3).

(1) Netherland, Sewell & Associates, Inc