Annual report pursuant to Section 13 and 15(d)

OIL AND NATURAL GAS PROPERTIES

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OIL AND NATURAL GAS PROPERTIES
12 Months Ended
Sep. 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 three 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. The second well, Tau No. 1, 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 operator and will influence the potential timing of a re-drill.

 

In January 2019, the Tau No. 1 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. During 2019, 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 twelve months ended September 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 No. 1 well experienced a second underground control of well event and as a result, the Company filed an insurance claim. The claim was related to a subsurface well occurrence that happened during the drilling of the Company‘s Tau No. 1 well on May 5, 2019 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 determined to be approximately $4.8 million (net of deductible) for 100% working interest and all of this amount had been received as of September 30, 2020. GulfSlope’s share of this amount was approximately $1.2 million.

 

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 No. 1 and Canoe wells 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 reclassified to oil and gas properties – unproved during the year ended September 30, 2020.

 

On July 27, 2020, the Company entered into a settlement with the Underwriters of a well control events insurance policy covering certain claims associated with the drilling of the Company’s Tau Prospect during May 2019. In accordance with the settlement, in lieu of the insurer paying for the redrill of the well and for a complete release of any further liability under the insurance policy, the Company will receive approximately $6.6 million in cash net to its 25% working interest. At September 30, 2020, approximately $6.4 million has been received and all of this amount has been received through the filing date of this report. The Company intends to apply the proceeds from the insurance settlement to pay amounts due on the Convertible Debentures and other payables, as well as fund other general corporate purposes including expenditures associated with the Company’s drilling program.

 

As of September 30, 2020, the Company’s oil and natural gas properties consisted of unproved properties, wells in process and no proved reserves. During the years ended September 30, 2020 and 2019, the Company capitalized approximately $2.3 million, net of impairment of approximately $0.6 million, and $1.1 million, respectively, of interest expense to oil and natural gas properties. Approximately $0.3 million and $0.3 million of general and administrative expenses, respectively, was capitalized to oil and natural gas properties for the years ended September 30, 2020 and 2019. Conversely, during the year ended September 30, 2020, the Company received certain vendor credits totaling approximately $2.1 million (net to the Company’s interest) and insurance claim proceeds of approximately $7.5 million which the Company applied against oil and natural gas properties in the condensed balance sheet.

 

During the twelve months ended September 30, 2020 and 2019, the Company incurred impairment charges of approximately $2.4 million and $6.0 million, respectively, resulting from the expiration or relinquishment of oil and natural gas leases.