BPZ Resources, Inc., a Texas corporation, is based in Houston, Texas with offices in Lima, Peru and Quito, Ecuador. We are focused on the exploration, development and production of oil and natural gas in Peru and Ecuador. We also intend to utilize part of our planned future natural gas production as a supply source for the complementary development of a Company owned gas-fired power generation facility in Peru.
We maintain a subsidiary registered in Peru through our wholly-owned subsidiary BPZ Energy, LLC, a Texas limited liability company, formerly BPZ Energy, Inc. (“BPZ — Texas”) and its subsidiary BPZ Energy International Holdings, L.P., a British Virgin Islands limited partnership. Currently, we have exclusive rights and license agreements for oil and gas exploration and production covering a total of approximately 2.4 million acres, in four blocks, in northwest Peru. Our license contracts cover 100% ownership of Block Z-1 (739,205 acres), Block XIX (472,860 acres), Block XXII (948,000 acres) and Block XXIII (248,000 acres). The Block Z-1 contract was signed in November 2001, the Block XIX contract was signed in December 2003 and Blocks XXII and XXIII contracts were signed in November 2007. Our license contracts provide for an initial exploration period of seven and potentially up to thirteen years for Block Z-1 and seven and potentially up ten years for Blocks XIX, XXII and XXIII. In addition, they require that we conduct specified activities on the Blocks during this period. If the exploration activities are successful, our total contract term can extend up to 30 years for oil exploration and production and up to 40 years for gas exploration and production. In the event a Block contains both oil and gas, as is the case in our Block Z-1, the 40 year term applies to oil exploration and production as well.
Additionally, through our wholly-owned subsidiary, SMC Ecuador Inc., a Delaware corporation, and its registered branch in Ecuador, we own a 10% non-operated working interest in an oil and gas producing property, Block 2, located in the southwest region of Ecuador (the “Santa Elena Property”). The license agreement covering the property extends through May 2016.
We are in the initial stages of developing our oil and natural gas reserves and have begun producing and selling oil from the CX11 platform in the Corvina field of Block Z-1 under an extended well testing program. Additionally our activities in Peru include analysis and evaluation of technical data on our Blocks, preparation of the development plans for the Blocks, including detailed engineering and design of the power plant and gas processing facilities, refurbishment of and designs for platforms to carry our drilling campaigns in the Corvina and Albacora fields in Block Z-1, procuring machinery and equipment for an extended drilling campaign, obtaining all necessary environmental and operating permits, bringing additional production on-line and securing the required capital and financing to conduct the current plan of operation.
At December 31, 2008, we had estimated net proved oil reserves of 17.2 MMBbls all of which were in the Corvina field in Block Z-1 located offshore northwest Peru. Of our total proved reserves, 4.2 MMBbls (25%) are classified as proved developed producing reserves and approximately 12.9 MMBbls (75%) are classified as proved undeveloped reserves.
We have determined our reporting structure provides for only one operating segment as we only operate in Peru and have only one customer for our production. Information regarding our operating segment including our revenues and long-lived assets can be found in the footnotes to our consolidated financial statements starting on page 53 of this Annual Report on Form 10-K.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS: Overview
We are an independent oil and gas company focused on the exploration, development and production of oil and natural gas in Peru and Ecuador. We also intend to utilize part of our planned future natural gas production as a supply source for the complementary development of a Company owned gas-fired power generation facility in Peru. We have the exclusive rights and license agreements for oil and gas exploration and production covering approximately 2.4 million acres in four blocks in northwest Peru and off the northwest coast of Peru in the Gulf of Guayaquil. We also own a 10% non-operated working interest in an oil and gas producing property, Block 2, located in the southwest region of Ecuador (the “Santa Elena Property”).
We are in the initial stages of developing our oil and natural gas reserves and have begun producing oil and selling oil from the CX11 platform in the Corvina field of Block Z-1 under an extended well testing program. Additionally, our activities in Peru include analysis and evaluation of technical data on our properties, preparation of the development plans for the properties, including detailed engineering and design of the power plant and gas processing facilities, refurbishment of and designs for platforms to be used under an extended well testing program, procuring machinery and equipment for an extended drilling campaign, obtaining all necessary environmental and operating permits, bringing additional production on-line and securing the required capital and financing to conduct the current plan of operation.
Corvina Field
We are producing oil from our recent discoveries at the CX-11 platform, located in the Corvina Field within the offshore Block Z-1, under an extended well testing program that started on November 1, 2007. The Corvina field consists of approximately 47,000 acres in water depths of less than 200 feet. We are currently concentrating our drilling efforts on West Corvina, which consists of 3,500 acres and have completed a total of four oil producing wells, the CX11-21XD, CX11-20XD, the CX11-18XD and the CX11-14D. The oil is delivered by barge to the Petroperu refinery in Talara, located approximately 70 miles south of the platform. Produced oil is kept in production inventory until such time it is delivered to the refinery.
On October 24, 2007, Tecnomarine, our former primary marine transportation contractor, entered into two short-term time charters with the commercial division of the Peruvian Navy to lease two small tankers for use in our offshore oil production operation. On January 30, 2008, one of the tankers, the Supe, sank after catching fire. At the time of the incident, the tanker contained approximately 1,300 barrels of oil, most of which burned in the fire. Official environmental impact assessments concluded that environmental issues have been adequately controlled. On December 18, 2008, a lawsuit was filed by two crewmembers and the family and estate of two of the deceased crewmembers of the Supe against BPZ. As none of the Peruvian government sanctioned investigations into the Supe incident found fault on the part of Tecnomarine, BPZ or the BPZ’s subsidiary, BPZ Exploración & Producción S.R.L., we do not currently believe based upon the known facts relating to the incident that the claims asserted against us are meritorious and intend to vigorously defend ourself. Additionally we believe the incident would be covered by our insurance policies, after a customary deductible. As a result of the incident, our operations were voluntarily suspended at the CX-11 platform.
On March 14, 2008, we were notified by the OSINERGMIN, the government regulatory agency in Peru responsible for monitoring industrial safety, that we could resume drilling and testing operations at the CX-11 platform allowing us to begin testing the CX11-18XD well. Three drill stem tests were conducted in the Upper Zorritos formation. The first two drill stem tests targeted the lower sands in zones that had not previously been tested. The third drill stem test targeted sands that had tested oil in our CX11-21XD well. We began producing from the CX11-18XD well in May 2008 and, on June 9, 2008 we received the clearance needed to transport oil from the CX-11 platform to the nearby Talara refinery by the corresponding Peruvian environmental agency. In addition, our FPSO vessel was placed into service in the Corvina field and is currently being used in our extended well testing program to process produced crude oil.
Upon completion of the CX11-18XD well, we began drilling operations on the CX11-20XD well in May 2008. The CX11-20XD well is positioned higher up in the geologic structure from the CX11-21XD well. The well has been positioned to further develop the top gas sands found in the previously drilled CX11-21XD well, the oil sands currently producing in the CX11-21XD and CX11-18XD wells, the oil sands encountered and briefly tested in the CX11-18XD well during the initial drill-stem test number one, as well as sands found in the CX11-14D well. The well tested positive for oil in quantities that we believe to be commercially producible. We completed two drill stem tests on four sets of oil sands in the well. On November 1, 2008 we completed the CX11-20XD well as an oil-producing well under an extended well testing program currently ongoing at the Corvina field. However, because the well crosses sands which tested positive for what we believe to be economic quantities of gas, during the drilling and testing of both the CX11-21XD and CX11-18XD wells, we intend to re-complete the CX11-20XD well, with dual production strings, when gas is needed for the gas-to-power project, to allow the well to produce gas as well as oil.
On November 21, 2008, we began drilling operations on the CX11-15D well located in the Corvina field within the offshore Block Z-1 in northwest Peru. The CX11-15D targeted the known oil and gas sands higher in the geological formation with the main objective of proving up a portion of the probable oil and gas reserves and giving us another oil producing well. During the testing it was confirmed that the deeper prospective sands were found lower than expected and were located below the estimated oil-water contact, thus testing formation water. The tests in the upper oil zones resulted in no flow due to the quality of the sands in this location. However, the gas sands in the gas zone were encountered higher than expected, which should allow us to prove up some of the probable gas reserves. Operations have commenced to sidetrack the CX11-15D well, targeting a location higher in the geological formation. Once the sidetrack is complete, in approximately one month, we will test the prospective oil sands which, in this location, should be above the oil-water contact and of better quality. As part of the extended well testing program, the well will then be placed on production if commercial amounts of oil are tested. We anticipate increased production based on the CX11-15D well being completed in late March.
As of December 31, 2008, we had four oil producing wells, the CX11-21XD, CX11-20XD, the CX11-18XD and the CX11-14D under an extended well testing program. For 2009 we intend to keep the drilling rig at the CX-11 platform to focus on oil development in the offshore Block Z-1 and to drill three additional oil development wells to maximize cash flow.
Albacora Field
The Albacora field is located in the northern part of the offshore Block Z-1. Based on our internal models, we believe the Albacora field consists of approximately 6,000 acres and, like the Corvina field, is located in water depths of less than 200 feet. In 2009, once our second contracted drilling rig (the PTX18) has been mobilized to the Albacora A-1 platform, which is currently being refurbished, we plan to drill the A-14XD well, a twin well to Albacora’s 8-X-2 discovery well. The PTX18 rig is contracted with Petrex, our current drilling contractor, for a period of three years. This rig will be capable of drilling to approximately 14,000 feet, and will be modified to drill from an offshore platform. This first well in Albacora will qualify as an exploratory well as we plan on testing the prospective Lower Zorritos formation sands. The 8-X-2 discovery well, drilled 35 years ago, tested oil and gas in the upper Zorritos formation sands at quantities we believe to be commercially producible. Our drilling plans in Albacora field are to drill two new wells in 2009.
Gas-to-Power Project
The Corvina gas-to-power project entails the installation of a 10-mile gas pipeline from the CX-11 platform to shore, construction of gas processing facilities and an approximately 135 megawatt (“MW”) simple-cycle electric generating plant. The proposed power plant site is located adjacent to an existing substation and power transmission lines which, with certain upgrades, are expected to be capable of handling up to 360 MW of power. In order to support our proposed electric generation project, we commissioned an independent power market analysis for the region. The Peruvian electricity market is deregulated and power is transported through an interconnected national grid managed by the Committee for Economic Dispatching of Electricity (known as “COES”). Based on this study, we believe we will be able to sell economic quantities of electricity from the initial 135 MW power plant. The market study also indicates that there may be future opportunities for us to generate and sell significantly greater volumes of power into the Peruvian and possibly Ecuadorian power markets. Accordingly, the revenues from the natural gas delivered to the power plant will be derived from the sale of electricity. As a result of factors outside our control, as further discussed below, we have postponed development of the gas-to power project until such time as we are able to obtain the necessary financing, personnel and equipment to continue the project, including finding a joint venture partner to assist us in the gas-to-power project.
GE Turbine Purchase Agreement
On September 26, 2008, we, through our power generation subsidiary, Empresa Eléctrica Nueva Esperanza, SRL, entered into a $51.5 million contract for the purchase of equipment and services (the “Agreement”) with GE Packaged Power, Inc. and GE International, Inc. Sucursal de Peru (collectively “GE”), which are part of GE Energy’s aeroderivative business. The Agreement obligates us to purchase three LM6000 gas-fired turbines. Each turbine will have a generation capacity of 45 megawatts, with excess capacity of approximately 5%. Delivery of the three units was initially scheduled for the fourth quarter 2009.
In January 2009, as a result of our decision to focus on increasing oil production, cash flow and reserves from the Corvina and Albacora fields during 2009, we entered into an amendment to the Agreement with GE. Under the terms of the amendment, both GE and BPZ, agree to a suspension period under the Agreement from and including December 15, 2008 through November 15, 2009, whereby no failure on the part of BPZ or GE to perform any obligations under the Agreement will give rise to a breach of contract or give right to terminate the contract provided that we make milestone payment number four to GE in the amount of $3.4 million no later than February 25, 2009. As of February 24, 2009, we paid $3.4 million related to milestone payment four to GE. In addition we agreed to make milestone payment five in the amount of $3.5 million to GE no later than November 16, 2009. Any failure to make these payments in full will result in immediate termination of the Agreement with no cure period or time to correct the breach.
Once we decide to bring the Agreement out of the suspension period, we will provide evidence that payment security has been established and new delivery dates, pricing and payment terms will be determined by the BPZ and GE. All previous payments made by us on the Agreement will be applied to the new price.
Employees
As of December 31, 2008, we employed 27 full-time employees (of which four are executive officers) in our Houston office and 145 full-time employees (of which one is an executive officer) in our Lima, Peru office. We had three full-time employees in the Quito, Ecuador office. BPZ believes that its relationship with its employees is satisfactory. None of our employees are currently represented by a union.
Available Information
The Company maintains a website (http://www.bpzenergy.com), on which we make available, free of charge, all of the Company’s above mentioned filings with the Security and Exchange Commission (“SEC” or “Commission”), including Forms 3, 4 and 5 filed with respect to our equity securities under Section 16(a) of the Securities Act of 1934. These filings will be available as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC.