History

In March 2006, Equator gained a 30% participating interest in each of deep water licenses OPL 323 and OPL 321, offshore Nigeria.

EquatorÕs bidding group won the blocks in the 2005 licensing round with bids comprising signature bonuses (US$ 161.7 million net), work programmes and local content. However, the Korean National Oil Corporation (ÔKNOCÕ) exercised a right of first refusal and was awarded a 60% interest in the blocks and was appointed operator. EquatorÕs main bidding partner, ONGC Videsh elected not to participate, allowing Equator to take a 30% interest. The remaining 10% was awarded to Local Content Vehicles (ÔLCVsÕ) - Tulip Energy Resources Nigeria Limited for OPL 321 and NJ Exploration Limited for OPL 323. Equator and KNOC carried the costs of the two LCVÕs in proportion to their participating interests. The two Production Sharing Contracts (ÔPSCÕsÕ) were signed with the Nigeria National Petroleum Corporation (ÔNNPCÕ) on the 10 March 2006. Subsequently, the Joint Operating Agreements were signed on the 7 June 2007.

The award of operatorship to KNOC made it impractical for the CompanyÕs other bidding partners to enter the PSCÕs directly. The Company therefore granted them carried interests amounting to 4% out of its 30% participation in the PSCÕs. During 2008, the Company entered into agreements to eliminate these carried interests for a combination of warrants and contingent cash payments, giving Equator the full economic rights to its 30% participating interest in each PSC.

In August 2007, the Company executed an agreement to farm-out a 20% interest in OPL 323 to BG Exploration and Production Nigeria Limited. The total consideration to be paid by BG was US$ 75 million, comprising both cash and a carry on the future expenditure on EquatorÕs remaining 10% interest. However, NNPC withheld its required approval due to a number of on-going public and private government inquiries into the award of the blocks to KNOC.

In January 2009, the Nigerian government voided the allocations of OPL 323 and OPL 321 to KNOC. The blocks were simultaneously offered to the winning group in the 2005 licensing round of which Equator is a member. KNOC brought a lawsuit against the government parties in the Federal High Court in Abuja. One of EquatorÕs bidding partners, Owel Petroleum Services Nigeria Ltd (ÔOwelÕ), joined in the lawsuit as a co-defendant of the government. In August 2009, judgment was given in KNOCÕs favour. The government and Owel responded by submitting separate appeals against the High Court judgment.

In September 2009, at the request of the Company, the government refunded its signature bonuses of US$ 161.7 million. The government subsequently acknowledged the CompanyÕs notice of its intention to maintain its interests in the two blocks. BG terminated the farm-out agreement in August 2010.

The government did not pursue its appeal in the courts but Owel did. In April 2012, the Court of Appeal ruled on OwelÕs appeal. The three judges considered a total of twenty one issues, six of which were resolved in favour of Owel while the rest were resolved in favour of either KNOC or all of the ten Respondents, comprising KNOC, the President of Nigeria, other Federal Government parties, the Local Content Vehicles and ONGC Videsh. The Owel appeal therefore succeeded only in part. However, on Issue 8, which bordered on the jurisdiction of the Federal High Court, the Court of Appeal ruled that the junior court had no jurisdiction to entertain KNOCÕs original action for a Judiciary Review because, in ordering the voiding of the award of the blocks to KNOC, the President of Nigeria had acted in an executive capacity not a judicial one. The Court of Appeal therefore set aside the Federal High Court judgment of August 2009 and struck out the original KNOC petition for a Judiciary Review. However, the Court of Appeal did not rule on the validity of the PSCÕs. Owel therefore petitioned the Supreme Court seeking a ruling that the PSCÕs no longer subsist. KNOC and the government parties cross petitioned.

By the end of 2013, KNOC engaged Covington & Burling of Washington DC to help them reach a settlement with Owel, Equator, NJ, Tulip and, ultimately, the Federal Government. In the second half of the year, a number of meetings were held among KNOC, Owel (also representing ONGC) and Equator and steady progress was made on new participating interest splits and the treatment of back costs.

In Abuja on Friday 7 February 2014, ONGC and NJ Exploration joined the settlement negotiations (the principle of Tulip was in hospital). The parties subsequently held meetings in Seoul and New Delhi in which technical and economic studies were shared and the split of participating interest and the allocation of past expenditure were negotiated. The parties came close to agreement on most of the issues. However, by October 2014, ONGC was indicating that it was withdrawing from the process. Also, new management in KNOC ordered a review of all of its corporationÕs activities. As a result, settlement discussions on OPL 321 and OPL 323 became suspended.

Activities in 2015

After the inauguration of President Buhari, Equator re-opened discussions by holding bi-lateral meetings with each of KNOC, Owel and NJ Exploration, including a visit to Seoul in July 2015. At the same time, Owel petitioned to unify the various petitions lodged in the Supreme Court. During the year, Equator sought clarification of the intentions of ONGC.

Post period activities

On 27 January 2016, the disputing parties successfully applied to the Supreme Court for a suspension to the proceedings to allow further attempts at an out-of-court settlement. However, the initial efforts by KNOC petered out after a few weeks. We sought a bi-lateral meeting with KNOC but this was declined.

A year later, on 3 March 2017, the Supreme Court affirmed the decision of the Court of Appeal that struck out KNOCÕs original suit for a judicial review. The Supreme Court ruled that the action taken by the President in 2009 to void the award of the Blocks was within his executive powers. The remedy for KNOC was therefore a suit for breach of contract and damages and not a writ of certiorari. The Supreme Court did not rule on the merits of KNOCÕs case and therefore KNOC may still choose to return to the High Court with a contractual lawsuit.

The Department of Petroleum Resources has again offered the blocks to the ONGC Group. Equator and Owel are seeking to determine the intentions of ONGC, KNOC and the previous Local Content Vehicles. We are preparing to negotiate terms for new PSCÕs that reflect the reality of crude oil prices hovering around $50/bbl and the knowledge of the increased geological complexity of the blocks.

If ONGC withdraw, we will seek a new major partner to replace them to operate the blocks and to bear most of the considerable financial burden.

Impairment

In recognition that the extended court processes were preventing Equator from exploring the blocks and from developing any oil discoveries, the Company posted impairment provisions at the end of 2012 of US$ 11,092,732 for OPL 321 and US$ 12,008,639 for OPL 323. These amounts represented the CompanyÕs share of the joint expenditure made by the operator, KNOC. Subsequently, further impairments of US$ 934,881 and US$ 1,012,072 respectively, representing amounts invested by the Company on its own behalf, were made leaving zero carrying values.

It is emphasised that the Company continues to maintain and to vigorously pursue its full rights to the blocks.

Operational status

From March 2006 until January 2009, the joint venture of KNOC, Equator, NJ and Tulip thoroughly interpreted the existing 3D seismic survey and identified several prospect horizons in a number of geological structures. The prospect horizons and, in turn, the geological structures were ranked in order to select the optimum locations for the two commitment wells on each block.

The Deepwater Pathfinder was contracted and preparations were made to drill the four obligation wells starting in the third quarter of 2009. However, to avoid a substantial early termination penalty in light of the ongoing litigation, the rig contract had to be assigned elsewhere.

Prospectivity

OPL 323

OPL 323 is located 80 kilometres offshore and lies in water depths of between 890 metres and 2080 metres. A number of large structures have been identified by interpretation of the 3D seismic survey. Within each of the geological structures there are several prospective horizons. Many of the prospect horizons are supported by seismic amplitude anomalies. Furthermore, the proximity of the block to large oil fields on adjacent acreage supports the presence of source rocks and abundant reservoir sands. OPL 323 is to the west of the Abo Field in OML 125 and immediately to the north of the large Bosi and Erha Fields in OML 133. Erha has proved reserves reported by ExxonMobil to be in excess of 500 million barrels of oil and 5 trillion cubic feet of gas and, with its satellite development Erha North, produces in excess of 200,000 barrels of oil per day. The long awaited development for Bosi, the second field on OML 133, reportedly is expected to produce 135,000 barrels of oil per day.

During 2006, Agip made a discovery of both oil and gas in the Okodo-1 well on OML 125, adjacent to OPL 323. This discovery had a direct impact on the prospectivity of one structure on OPL 323, located only seven kilometres away. It appears to lie in the same channel as the Okodo discovery, which proved that the hanging wall of the common major bounding fault forms a trap for hydrocarbons and that the immediate area has sources of oil and gas and migration paths.

In September 2011, Netherland, Sewell & Associates Inc. (ÔNSAIÕ), Independent Petroleum Engineers, confirmed its 2006 assessment of the prospective resources within the four largest structures, which used a statistical ÔMonte CarloÕ approach. For ÔBest EstimateÕ, they used the median (P50), the standard adopted in 2007 by the Society of Petroleum Engineers. The Best Estimate of Gross Unrisked Prospective Resources on four structures is 1.1 billion barrels of oil and 4.9 trillion standard cubic feet of gas (Tables 1 & 2).

The subsequent more detailed evaluation of five structures by the operator gave a best estimate of 1.3 billion barrels for oil.

OPL 321

OPL 321 is located immediately to the west of OPL 323, lying in deeper water in the range 1900 to 2600 metres. The block lies on trend with block OPL 322 to the south, where ShellÕs discovery well, Bobo-1, encountered a significant column of hydrocarbons. It has access to the same hydrocarbon sources as the giant Bosi and Erha Fields located nearby to the southeast. NSAI assessed the Best Estimate of the Gross Unrisked Prospective Resources in the largest prospect to be 0.57 billion barrels of oil and 0.67 trillion standard cubic feet of gas (Tables 1 & 2).

The operator, in its subsequent and more detailed evaluation, identified a total of four structures and calculated the best estimate of the total gross unrisked prospective resources of oil to be 1.6 billion barrels.

Totals may not add due to rounding

(1) Netherland, Sewell & Associates, Inc

(2) Probability of geological success

At the end of the joint studies conducted in 2014 by ONGC, KNOC and Equator, it was concluded that the unrisked oil and gas resources remain similar to those expressed in the above tables. However, from a deeper understanding of the nature of the geology and a knowledge of the poor exploration success achieved in the Nigerian deep water since 2009, it was concluded that the Probabilities of Geological Success are about half those indicated in the above tables. This makes exploration of the blocks under the 2005 fiscal terms marginal. The Company is therefore seeking improved terms in order to regain some economic attractiveness for the blocks.