MercoPress. South Atlantic News Agency

Falkland Oil and Gas in farmout agreement involving license areas and cash

Tim Bushell FOGL CEO, “greater flexibility to our drilling plans”

The exploration company Falkland Oil and Gas Ltd. (FOGL) has entered a farmout agreement with an unnamed party for its licenses south and east of the Falkland Islands.

The potential partner also has an option for an associated joint operating agreement (JOA), although FOGL would retain license operator-ship. FOGL expects confirmation of the farm-out within the next two months, prior to the start of its latest drilling program.

Under the agreement, the counterparty would take a 25% interest in FOGL license areas and contribute its share of costs for two planned exploration wells in 2012. It would also pay a share of costs incurred last year in preparation for drilling.

In addition the counterparty will make a cash contribution of 40 million dollars: 20 million on completion (expected to be prior to the spudding of the Loligo well) and 20 million in 2013.

FOGL expects to receive the semi-submersible Leiv Eiriksson rig in June after it has drilled the first two wells’ of Borders & Southern Petroleum’s Falkland campaign, on the Darwin and Stebbing prospects. Rig issues interrupted progress on Darwin, and operations here could take another four to five weeks to complete, according to a report this week from Borders & Southern.

Tim Bushell, the chief executive of FOGL, said: “We are delighted to have agreed favorable farm-out terms which we assess as a two for one promote on the first two wells. This farmout provides further external industry confirmation of the technical case and gives us greater flexibility with respect to our drilling plans. We look forward to progress our drilling campaign in the next few months”.

According to the terms of the deal, FOGL will receive an option fee of 6 million dollars, which FOGL will retain if the counterparty does not exercise the option before the spudding of the Loligo well (currently expected to be June 2012).

If the Option is exercised, 3 million of the option fee will be offset against the first 20 million of cash consideration referred to above, whilst FOGL will retain 3 million.

In the event that the counterparty has not exercised the option prior to an announcement by Borders and Southern on the results of either the Darwin or Stebbing wells and such announcement results in a significant increase in FOGL share price, then “an adjustment mechanism will apply”.

FOGL will have the right to reduce the counterparty's interest to 12.5% in the Southern Licence Area, but with the counterparty paying the same 40 million cash consideration

The counterparty may elect to remove the Southern Licence Area from the FOA and reduce the overall cash consideration by 10m; or the counterparty may elect to pay an additional 10m to increase its interest in the Southern Licence Area back to 25%.