Share Price
KKPL
Share Sale and Purchase Agreement
In December 2005, pursuant to a Share Sale and Purchase Agreement, PetroKamchatka's 90%-owned subsidiary, LukinCholot, sold 50% of the shares of CJSC Icha Exploration and CJSC Tigil Exploration to KKPL (KNOC Kamchatka Petroleum Limited, a Korea National Oil Company-led company, in which KNOC holds a 55% interest, with KeangNam Enterprise, Daesung Industrial Co. Ltd., and SK Gas holding the balance of the shares). As part of the Share Sale and Purchase Agreement, LukinCholot, KKPL, CJSC Icha Exploration and CJSC Tigil Exploration were required to enter into the Shareholder Agreements, which govern the relationship between PetroKamchatka and KKPL in respect of each of CJSC Icha Exploration and CJSC Tigil Exploration.
Shareholder Agreements
Pursuant to the Shareholder Agreements, LukinCholot and KKPL shared the first US$10 million of the expenditures for CJSC Icha Exploration and CJSC Tigil Exploration on the Icha licence and the Tigil licence respectively on the basis of 80% to KKPL and 20% to LukinCholot. Of the next US$20 million of expenditures, KKPL paid 53.75% and LukinCholot paid 46.25%. Following the expenditure of the first US$30 million, LukinCholot and KKPL are obliged to share in the costs associated with the Icha licence and the Tigil licence in proportion to their respective share ownership in the prospective companies provided that, in the event that the Russian minority shareholders in LukinCholot require that their share of subsequent costs be carried, KKPL shall continue to bear 50% of such costs up to the maximum of 53.75% of all subsequent costs. On August 11, 2009, PetroKamchatka acquired MAGKO's 5% interest in LukinCholot. Accordingly, since this time PetroKamchatka pays 47.5% and KKPL pays 52.5% of expenditures on the Tigil and Icha Blocks.
Pursuant to the Shareholder Agreements, in the event of a discovery of hydrocarbons, LukinCholot and KKPL are required to mutually determine whether the discovery warrants the drilling of additional wells in order to appraise the quality and potential of the discovery. In addition, LukinCholot and KKPL must both approve the proposed work program and capital budget required to conduct the appraisal of the discovery.
The Shareholder Agreements also provide that LukinCholot and KKPL must unanimously agree whether any discovery of hydrocarbons is to be considered a commercial discovery. If it is determined that any discovery is a commercial discovery, then LukinCholot and KKPL must also unanimously agree upon the steps that CJSC Icha Exploration or CJSC Tigil Exploration, as applicable, are to take in order to secure the requisite production licences from FASU.
Area of Mutual Interest
The Shareholder Agreements also establish an area of mutual interest covering virtually all of the western side of the Kamchatka Peninsula, whereby, if either LukinCholot or KKPL, or their respective affiliates, has the opportunity to directly or indirectly acquire any hydrocarbon interest within the area of mutual interest, the party receiving such opportunity shall offer the other party the right to acquire a proportionate interest in such opportunity for nominal consideration. The offeree party's interest in the opportunity shall be based on the ratio of shares held in CJSC Icha Exploration or CJSC Tigil Exploration, as applicable. The offering party must offer the opportunity to the offeree party on terms not less favourable than the terms available to the offering party. The offeree has 30 days following receipt of the offer to notify the other party that it wishes to participate in the opportunity. Failure to provide any notice within the 30-day period shall be deemed by the offeree as an election not to participate in the opportunity. This right of first offer shall continue until the later of: (i) four years from the effective date of the applicable Shareholder Agreement; (ii) the third anniversary of the spudding of the first mandatory well required pursuant to the Tigil licence; and (iii) the third anniversary of the spudding of the first mandatory well required pursuant to the Icha licence. On September 25, 2009, PetroKamchatka formally offered KKPL the right to participate in the Urginskaya, Pustaretskaya, Palanskaya, Ichinskaya and Vorovskaya licences through the Russian operating companies CJSC Unetmelgin, CJSC Kingi-Exploration, CJSC Palana-Exploration, CJSC Tvayan-Exploration and CJSC Kehta-Exploration, respectively. KKPL did not provide notice to PetroKamchatka within the stipulated 30-day period, resulting in PetroKamchatka retaining a net beneficial interest of 90% in the Urginskaya licence, and 100% net beneficial interest in the four other licences.
Default
The Shareholder Agreements also provide that, if either LukinCholot or KKPL is in default of any payment amounts required to be made under the applicable Shareholder Agreement and the aggregate of all default amounts exceed US$500,000, the non-defaulting party may require that the defaulting party transfer any or all of its shares in CJSC Icha Exploration or CJSC Tigil Exploration, as applicable, to the non-defaulting party for no additional consideration.
Global Amendment
On December 5, 2007, the Shareholder Agreements were amended pursuant to the Global Amendment Agreement to revise and clarify certain provisions relating to project controls and default of the parties. In addition, a provision was added which prohibits the surrender of a licence area in certain circumstances. Certain other provisions of the Global Amendment Agreement restrict the activities of PetroKamchatka in respect of CJSC Tigil Exploration or CJSC Icha Exploration, including: (i) LukinCholot shall not permit either CJSC Tigil Exploration or CJSC Icha Exploration to enter into any agreement or transaction having a value in excess of US$10,000 with a related party of LukinCholot without express written consent of the other shareholder of such companies, (ii) no funds may be withdrawn or disbursed from any project account (to fund operations) without, as applicable, the co-signature of each shareholder of CJSC Tigil Exploration or CJSC Icha Exploration (which signature shall not be unreasonably withheld), and (iii) no withdrawal or disbursement shall be made from a project account for each of CJSC Tigil Exploration or CJSC Icha Exploration to pay any cash call until all shareholders of such operating company shall have made their required cash deposits into the project account.
Operator
Pursuant to the Shareholder Agreements, PetroKamchatka has been selected as the operator of the Icha licence and the Tigil licence. PetroKamchatka is required to carry out its duties as operator of these licences pursuant to the Operating Agreements. Pursuant to the Operating Agreements, PetroKamchatka conducts all operations required in connection with the Icha licence and the Tigil licence and, in addition, PetroKamchatka must perform all activities required to keep the licences valid and in force. Also pursuant to the Operating Agreements, PetroKamchatka is required to prepare and provide all technical information required pursuant to these agreements including all test reports, geological studies, engineering data, reserve reports and other information. In addition, PetroKamchatka is to prepare all work reports, budgets and other information required to be provided for review and approval pursuant to the Shareholder Agreements. PetroKamchatka may only be removed from its duties as operator in the event that it becomes bankrupt, wound-up, dissolved, a receiver is appointed for a substantial part of its assets or PetroKamchatka has committed a material breach of the applicable Operating Agreement.
Under the provisions of the Shareholder Agreements, PetroKamchatka is reimbursed for 53.75% (52.5% since August 2009) of all costs incurred by LukinCholot in carrying out the management of the Russian operating companies CJSC Tigil Exploration and CJSC Icha Exploration. Calgary technical costs, such as the salaries and consulting expenses related to technical work, are reimbursed by KKPL at 53.75% (52.5% since August 2009) of the total costs incurred. PetroKamchatka also receives compensation for its operating overhead incurred as project operator as follows: 3% of the first US$1 million of total project costs incurred for both CJSC Tigil Exploration and CJSC Icha Exploration, 2% of the next US$9 million incurred, and 1% of all costs incurred thereafter over the course of the calendar budget year.
Koryakia Property Fund
PetroKamchatka holds a 90% interest in LukinCholot and the Koryakia Property Fund holds the remaining 10% interest. The LukinCholot charter provides for the agreement between PetroKamchatka and the Koryakia Property Fund governing LukinCholot. The important aspects of the charter call for PetroKamchatka to cover all of LukinCholot's obligations in relation to the exploration phases for the Tigil, Icha, and Urginskaya blocks. The Koryakia Property Fund is responsible for its contributions to cover all development costs should a commercial discovery be made and brought into production.