Quarterly report pursuant to Section 13 or 15(d)

OIL AND NATURAL GAS PROPERTIES

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OIL AND NATURAL GAS PROPERTIES
9 Months Ended
Jun. 30, 2020
Oil and Gas Exploration and Production Industries Disclosures [Abstract]  
OIL AND NATURAL GAS PROPERTIES

NOTE 3 – OIL AND NATURAL GAS PROPERTIES

 

The Company currently has under lease four federal Outer Continental Shelf blocks and has licensed 2.2 million acres of three-dimensional (3-D) seismic data in its area of concentration.

 

The Company, as the operator of two wells drilled in the Gulf of Mexico, has incurred tangible and intangible drilling costs for the wells in process and has billed its working interest partners for their respective share of the drilling costs to date. The intangible drilling and all other costs related to the first well have been impaired in the quarter ending June 30, 2020. The second well, Tau, was drilled to a measured depth of 15,254 feet, as compared to the originally permitted 29,857 foot measured depth. Producible hydrocarbon zones were not established to that depth, but hydrocarbon shows were encountered. Complex geomechanical conditions required two by-pass wellbores, one sidetrack wellbore, and eight casing strings to reach that depth. Equipment limitations prevented further drilling. In addition, the drilling rig had contractual obligations related to another operator. The Company elected to plug this well in a manner that would allow for re-entry at a later time. The Company is evaluating various options related to future operations in this wellbore and testing of the deeper Tau prospect. The Company plans to re-drill this prospect within the next twelve months, however, the impact of the CoVid-19 pandemic on offshore operations is still under mitigation by operators and will influence the potential timing of a re-drill.

 

In January 2019, the Tau well experienced an underground control of well event and as a result, the Company filed an insurance claim pursuant to its insurance policy with its insurance underwriters (the “Underwriters“). The total amount of the claim was approximately $10.8 million for 100% working interest after the insurance deductible amount. The Company received approximately $2.5 million of this amount and credited wells in process for approximately $0.9 million for the Company’s portion, and recorded an accrued payable for approximately $1.6 million, pending evaluation of distributions to the working interest owners. During the nine months ended June 30, 2020, the accrued payable was settled by the issuance to the working interest partner of approximately 38.4 million shares of the Company’s common stock.

 

In May 2019, the Tau well experienced a second underground control of well event and as a result, the Company filed an insurance claim. The Underwriters have acknowledged confirmation of coverage, subject to the Policy terms and conditions, related to a subsurface well occurrence that happened during the drilling of the Company‘s Tau well on May 5, 2019, during drilling operations at a measured depth of 15,254 feet. The Company subsequently controlled the occurrence and ceased drilling operations and plugs were placed in the well to meet regulatory requirements prior to rig release. Pursuant to the Policy terms and conditions, the Underwriters were obligated to reimburse GulfSlope for qualified actual costs and expenses incurred to (i) regain control of the well, and (ii) restore or re-drill the well to 15,254 feet. Total costs and expenses to regain control of the well were estimated at approximately $4.8 million (net of deductible) for 100% working interest and approximately $4.8 million had been received as of June 30, 2020. GulfSlope’s share of this amount was approximately $1.2 million. Subsequent to the end of the reporting period, in July 2020, the Company reached agreement with the insurance Underwriters to accept a settlement in lieu of a re-drill (see Note 12 -Subsequent Events, for further discussion of this settlement).

 

In November 2019, an agreement was reached with a working interest partner whereby the working interest partner re-conveyed to the Company their 5% interest in Tau and Canoe in exchange for the release of claims and the Company foregoing collection of accounts receivable owed by the working interest partner. As a result of this agreement approximately $3.6 million of accounts receivable was reclassed to oil and gas properties – unproved during the nine months ended June 30, 2020.

 

As of June 30, 2020, the Company’s oil and natural gas properties consisted of unproved properties, wells in process and no proved reserves. During the three months ended June 30, 2020 and 2019, the Company capitalized approximately $1.2 million and $0.4 million of interest expense to oil and natural gas properties, respectively, and approximately $0.3 million and $0.3 million of general and administrative expenses, capitalized to oil and natural gas properties, respectively. During the nine months ended June 30, 2020 and 2019, the Company capitalized approximately $2.3 million and $0.6 million of interest expense to oil and natural gas properties, respectively, and approximately $0.7 million and $0.6 million of general and administrative expenses, capitalized to oil and natural gas properties, respectively. Conversely, during the nine months ended June 30, 2020, the Company received certain credits totaling approximately $2.1 million (net to the Company’s interest) which the Company applied against oil and natural gas properties in the Condensed Balance Sheet.

 

During the three and nine months ended June 30, 2020 and 2019 the Company incurred impairment charges of approximately $2.1 million and $4.3 million, respectively resulting from the expiration of oil and natural gas leases.