grantierra energy inc
DESCRIPTION
Gran Tierra Energy was formed to capitalize on the expertise, experience and strategic relationships of the management team to build substantial value and a record of success in South America. Our mission is tocreate value, sensibly and aggressively, in oil and gas exploration and production.TRANSCRIPT
17 EXPLORATIONWELLS BUDGETED IN 2011
Pacayaco
Canangucho-1
Taruka-1
Rumiyaco-1
La Vega Este-1
Stratig
raphic-1
Stratig
raphic-2
Turpial-1
San Angel-1
Block 129
Melero-1
Block 155
Kanatari-1
Pichico-1
Exploration-1
Block 142-1
Block 142-2
Gran Tierra Energy was formed to capitalize on the
expertise, experience and strategic relationships of
the management team to build substantial value and a
record of success in South America. Our mission is to
create value, sensibly and aggressively, in oil and gas
exploration and production.
Gran Tierra Energy Annual Report 2010 | 1
TOTA
L R
EV
EN
UE
& IN
TER
EST $375mm
Revenue and interest increased by 42% to $374.5 million compared with $263.7 million in 2009. This increase was primarily a result of a 13% increase in crude oil production from the continued development of the Costayaco field in the Chaza Block in Colombia combined with a 25% increase in crude oil prices.
INC
OM
E
$37mmNet income was $37.2 million compared with net income of $13.9 million for the same period in 2009. The 42% increase in revenue and other income was partially offset by an increase in operating expenses, general and administrative expenses, depletion, depreciation and accretion expense, and income tax expense.
CA
SH F
RO
M O
PE
RAT
ION
S $204mmCash from operations increased to $203.8 million compared with $165.5 million from Gran Tierra Energy’s 2009 operations. The Company ended 2010 with cash and cash equivalents of $355.4 million compared with $270.8 million in 2009. Gran Tierra Energy remains debt free.
0
38
76
114
152
190
228
266
304
342
380
0907 08 10
375($millions)TOTAL REVENUE AND INTEREST
-10
-5
0
5
10
15
20
25
30
35
40
0907 08 10
37($millions)INCOME
($millions)
0
21
42
63
84
105
126
147
168
189
210
0907 08 10
204
CASH FROM OPERATIONS
high
light
s 2010
2 | Gran Tierra Energy Annual Report 2010
Consolidated results of operations
Oil and natural gas sales $373.3 $262.6 42
Interest 1.2 1.1 8
Total revenue 374.5 263.7 42
Operating expenses 59.4 40.8 46
Depletion, depreciation, accretion and impairment 163.6 135.9 20
General and administrative expenses 40.2 28.8 40
Foreign exchange loss 16.8 19.8 (15)
Other 0.0 0.2 (123)
Total expenses 280.1 225.4 24
Income before income taxes 94.4 38.3 147
Income taxes (57.2) (24.4) 135
Net income $37.2 $13.9 167
Consolidated statements of cash flow
Net cash provided by operating activities $203.8 $165.5 23
Net cash provided by (used in) investing activities (143.9) (76.4) 88
Net cash provided by financing activities 24.8 4.9 402
Net increase in cash and cash equivalents $84.6 $94.0 94
Consolidated balance sheets
Cash and cash equivalents $355.4 $270.8 31
Other current assets 62.7 $50.0 26
Total oil and gas properties 721.2 709.6 2
Other long-term assets 109.9 113.5 (3)
Total assets 1,249.3 1,143.8 9
Current liabilities 152.3 105.6 44
Deferred tax liability — long-term 205.6 217.5 (5)
Other long-term liabilities 4.5 4.3 5
Total liabilities 362.4 327.4 11
Total shareholders’ equity 886.9 816.4 9
Total liabilities and shareholders’ equity $1,249.3 $1,143.8 9
Production (net of royalties)
Oil and natural gas liquids (BO) 5,228,554 4,621,546 13
Natural gas (mcf) 268,776 49,028 448
Total production (boe) *,** 5,273,350 4,629,717 14
* Gas volumes are converted to barrels of oil equivalent (“boe”) at the rate of six thousand cubic feet (“mcf”) of gas per barrel of oil based upon the approximate relative values of natural gas and oil. Natural gas liquid (“NGL”) volumes are converted to boe on a one-to-one basis with oil.
** Production represents production volumes adjusted for inventory changes.
TOTA
L R
EV
EN
UE
& IN
TER
EST $375mm
Revenue and interest increased by 42% to $374.5 million compared with $263.7 million in 2009. This increase was primarily a result of a 13% increase in crude oil production from the continued development of the Costayaco field in the Chaza Block in Colombia combined with a 25% increase in crude oil prices.
INC
OM
E
$37mmNet income was $37.2 million compared with net income of $13.9 million for the same period in 2009. The 42% increase in revenue and other income was partially offset by an increase in operating expenses, general and administrative expenses, depletion, depreciation and accretion expense, and income tax expense.
CA
SH F
RO
M O
PE
RAT
ION
S $204mmCash from operations increased to $203.8 million compared with $165.5 million from Gran Tierra Energy’s 2009 operations. The Company ended 2010 with cash and cash equivalents of $355.4 million compared with $270.8 million in 2009. Gran Tierra Energy remains debt free.
MIL
LIO
NS
OF
$U.S
.
MIL
LIO
NS
OF
$U.S
2010
2009
% C
HA
NG
E
Gran Tierra Energy Annual Report 2010 | 3
EXP
LOR
ATIO
N B
LOC
KS
15.7mm gross acres
PR
OV
ED
RE
SER
VE
S
23.6MMBO NAR
PR
OD
UC
TIO
N 14,325BOPD NAR
over
view
0
7
14
21
28
35
06 0907 08 10
33
EXPLORATION BLOCKS
0
5
10
15
20
25
06 0907 08 10
23.6 (millions BO)PROVED RESERVES
0
3000
6000
9000
12000
15000
06 0907 08 10
14,325 (BOPD)PRODUCTION
2010
4 | Gran Tierra Energy Annual Report 2010
EXP
LOR
ATIO
N B
LOC
KS
15.7mm gross acres
PR
OV
ED
RE
SER
VE
S
23.6MMBO NAR
PR
OD
UC
TIO
N 14,325BOPD NAR
PRODUCTION total 14,325 BOPD NAR In 2010, average production was 14,325 BOPD NAR. Approximately 13,500 BOPD NAR production from Colombia and approximately 800 BOPD NAR production from Argentina. The Company anticipates that production will increase to between 17,500 to 19,000 boepd NAR for the balance of 2011, excluding exploration success.
2010 CAPITAL PROGRAM total $177 MILLION*Gran Tierra Energy’s focus for 2010 was to continue the development of the Costayaco field in Colombia, increase our land position in Peru, workover and sidetrack operations in Argentina and gain a position in the Recôncavo Basin, Brazil. Exploration success continued in Colombia with the discovery and further delineation of the Moqueta field in the Putumayo Basin.
Colombia
$105 13,547
PeruBrazil
Argentina
$23
$35 778
EXPLORATION & DEVELOPMENT ($MILLIONS) PRODUCTION (BOPD NAR)
* Includes $2 million in corporate capital.
$12
Gran Tierra Energy Annual Report 2010 | 5
expl
orat
ion
6 | Gran Tierra Energy Annual Report 2010
With the addition of our new oil discovery in the Moqueta field
and our Costayaco field fully developed, Gran Tierra Energy is
continuing to focus on growing reserves through exploration.
The Company will again be undertaking our largest capital program
in company history with a planned capital budget of $355 million.
This program includes a variety of exploration and development
opportunities in Colombia, Brazil and Argentina, along with
exploration opportunities in Peru.
136mmbonet risked resource potential
Gran Tierra Energy Annual Report 2010 | 7
CA
SH O
N H
AN
D $ 355mm
Gran Tierra Energy’s balance sheet improved dramatically through the year; at year-end, we reported cash and cash equivalents of $355 million and no debt. Our cash position, together with cash flows from operations are expected to provide us with sufficient liquidity to fund our planned 2011 capital program and acquire new blocks for exploration.
CA
SH F
RO
M O
PE
RAT
ION
S
$204MM 2010
The combination of a strong balance sheet, cash on hand, and cash flow from operations leaves us well capitalized to fund further exploration and development activities.
EXP
LOR
ATIO
N/R
ISK
RE
WA
RD 136MM
BO net risked prospective resourceWe plan to continue to explore prospective oil and gas assets to find commercial reserves and grow production to generate higher cash flow for future investment and growth.
0
20
40
60
80
100
120105
15 16
(MMBO)
ColombiaAverage
1 in 3 chanceof success
PeruAverage
1 in 10 chanceof success
BrazilAverage
4 in 10 chanceof success
NET RISKED PROSPECTIVE RESOURCE POTENTIAL
$355mm2011 capital programst
rate
gy
8 | Gran Tierra Energy Annual Report 2010
Colombia*
43.6†
~15,000
Peru**Brazil***
Argentina****
PLANNED PRODUCTION (BOEPD NAR) 96% LIGHT OILGTE TOTAL PROVED, PROBABLE + POSSIBLE (PPP) RESERVES (MMBO) NAR
500– 1,000
3.8†
2,000–3,000
* 5 delineation wells, 4 development wells, and 10 exploration wells providing near term oil growth potential ** 3 exploration wells high-risk high-reward oil exploration *** 4 exploration and 2 development wells providing near term oil growth potential **** 8 development wells to grow oil production
† 3P amounts do not include 35MMBOE NAR from Petrolifera acquisition.
CA
SH O
N H
AN
D $ 355mm
Gran Tierra Energy’s balance sheet improved dramatically through the year; at year-end, we reported cash and cash equivalents of $355 million and no debt. Our cash position, together with cash flows from operations are expected to provide us with sufficient liquidity to fund our planned 2011 capital program and acquire new blocks for exploration.
CA
SH F
RO
M O
PE
RAT
ION
S
$204MM 2010
The combination of a strong balance sheet, cash on hand, and cash flow from operations leaves us well capitalized to fund further exploration and development activities.
EXP
LOR
ATIO
N/R
ISK
RE
WA
RD 136MM
BO net risked prospective resourceWe plan to continue to explore prospective oil and gas assets to find commercial reserves and grow production to generate higher cash flow for future investment and growth.
TARGET 17,500–19,000 BOEPD IN 2011.
Gran Tierra Energy Annual Report 2010 | 9
$ 355mm 2011 capital program*
CO
LOM
BIA $175mm
P Chaza Pacayaco • 15 MMBO risked resource potentialThe focus of our 2011 capital program will be to further explore our land position in the prolific Putumayo Basin. Building on our recent discovery in the Moqueta field, the majority of our capital spending will go towards exploration, which includes the drilling of ten exploration wells plus a seismic acquisition program totaling 440 km2 of 3D seismic and 370 km2 of 2D seismic to develop future exploration opportunities. In addition, we plan on spending $30 million on facility construction associated with ongoing development of the Moqueta field and further facility work at Costayaco.
P Chaza Canangucho-1 •
P Piedemonte Sur Taruka-1 •
P Rumiyaco Rumiyaco-1 •
P Azar La Vega Este-1 •
P Putumayo-10 Stratigraphic •
P Piedemonte Norte Stratigraphic •
MM Turpial Turpial-1 •
LM Magdalena San Angel-1 •
L Garibay Melero-1 •
BR
AZ
IL $55mm
R Block 129 1 well • 16 MMBO risked resource potentialIn 2010, Gran Tierra Energy acquired 70% working interest and operatorship in four blocks REC-T-129, -142, -155, and -224 in the onshore Recôncavo Basin. In its $55 million 2011 capital program, Gran Tierra Energy plans to drill the first exploration well in Block 129, followed by up to three additional exploration wells, plus two development wells on Block 155 in a recent oil discovery. Gran Tierra Energy was recently approved by the ANP as a class B Operator, permitting us to act as an Operator in both the onshore and in the shallow-water (< 400m) offshore Brazil.
R Block 142 1 well •
R Block 142 1 well •
R Block 155 1 well •
PE
RU $70mm
M Block 128 Kanatari-1 • 105 MMBO risked resource potentialGran Tierra Energy’s 2011 capital program in Peru is $70 million, including $47 million towards drilling exploration wells and an additional $19 million for seismic acquisition. Gran Tierra Energy has drilled the first exploration well in Block 128 and is evaluating a possible second exploration well on Block 122. Seismic activity is planned to continue in Blocks 123, 124, and 129 with exploration drilling environmental impact assessments to be conducted concurrently in Blocks 123 and 129. Upon approval of assigned interests to Gran Tierra Energy by Perupetro S.A., the Company plans to drill one exploration well on Block 95.
M Block 122 Pichico-1 •
M Block 95 Exploration-1 •
AR
GE
NTI
NA
$55mm
NO Palmar Largo PL-10ST •
Capital spending in Argentina will initially focus on reversing production declines on properties in the Neuquen Basin. Gran Tierra Energy plans to conduct work-over programs on approximately sixteen wells, along with drilling approximately six development wells, including three producers and three new water injectors. Gran Tierra Energy believes it can improve recovery in the existing reservoirs by minimizing water channeling in the waterflood project through the use of polymer.
NO Surubi Proa-2 •
NE Puesto Morales 6 wells •
* Capital program includes delineation, development and exploration drilling, facilities and seismic acquisition.
stra
tegy
10 | Gran Tierra Energy Annual Report 2010
CO
LOM
BIA $175mm
P Chaza Pacayaco • 15 MMBO risked resource potentialThe focus of our 2011 capital program will be to further explore our land position in the prolific Putumayo Basin. Building on our recent discovery in the Moqueta field, the majority of our capital spending will go towards exploration, which includes the drilling of ten exploration wells plus a seismic acquisition program totaling 440 km2 of 3D seismic and 370 km2 of 2D seismic to develop future exploration opportunities. In addition, we plan on spending $30 million on facility construction associated with ongoing development of the Moqueta field and further facility work at Costayaco.
P Chaza Canangucho-1 •
P Piedemonte Sur Taruka-1 •
P Rumiyaco Rumiyaco-1 •
P Azar La Vega Este-1 •
P Putumayo-10 Stratigraphic •
P Piedemonte Norte Stratigraphic •
MM Turpial Turpial-1 •
LM Magdalena San Angel-1 •
L Garibay Melero-1 •
BR
AZ
IL $55mm
R Block 129 1 well • 16 MMBO risked resource potentialIn 2010, Gran Tierra Energy acquired 70% working interest and operatorship in four blocks REC-T-129, -142, -155, and -224 in the onshore Recôncavo Basin. In its $55 million 2011 capital program, Gran Tierra Energy plans to drill the first exploration well in Block 129, followed by up to three additional exploration wells, plus two development wells on Block 155 in a recent oil discovery. Gran Tierra Energy was recently approved by the ANP as a class B Operator, permitting us to act as an Operator in both the onshore and in the shallow-water (< 400m) offshore Brazil.
R Block 142 1 well •
R Block 142 1 well •
R Block 155 1 well •
PE
RU $70mm
M Block 128 Kanatari-1 • 105 MMBO risked resource potentialGran Tierra Energy’s 2011 capital program in Peru is $70 million, including $47 million towards drilling exploration wells and an additional $19 million for seismic acquisition. Gran Tierra Energy has drilled the first exploration well in Block 128 and is evaluating a possible second exploration well on Block 122. Seismic activity is planned to continue in Blocks 123, 124, and 129 with exploration drilling environmental impact assessments to be conducted concurrently in Blocks 123 and 129. Upon approval of assigned interests to Gran Tierra Energy by Perupetro S.A., the Company plans to drill one exploration well on Block 95.
M Block 122 Pichico-1 •
M Block 95 Exploration-1 •
AR
GE
NTI
NA
$55mm
NO Palmar Largo PL-10ST •
Capital spending in Argentina will initially focus on reversing production declines on properties in the Neuquen Basin. Gran Tierra Energy plans to conduct work-over programs on approximately sixteen wells, along with drilling approximately six development wells, including three producers and three new water injectors. Gran Tierra Energy believes it can improve recovery in the existing reservoirs by minimizing water channeling in the waterflood project through the use of polymer.
NO Surubi Proa-2 •
NE Puesto Morales 6 wells •
BA
SIN
*
BLO
CK
WEL
L
1/2
2011
2/2
2011
RIS
KED
RES
OU
RC
E
POTE
NTI
AL
* Putumayo Middle Magdalena Lower Magdalena Llanos Marañon Recôncavo NOroeste NEuquen
Gran Tierra Energy Annual Report 2010 | 11
Bogotá
PutumayoBasin
Venezuela
Llanos Basin
Cauca Basin
Lower Magdalena Basin
Col
ombi
a ex
plor
atio
n
ColombiaGran Tierra Energy is the number one land holder, reserve holder, and producer in the Putumayo Basin. The Company has interests in 19 blocks that cover 524,953 net acres. In 2010, Gran Tierra Energy focused drilling on the Putumayo Basin and dedicated resources to exploring other prospective areas on our extensive land position. The highlight of the year was the discovery of the Moqueta and Jilguero oil fields. In 2011, we have plans to further explore the Putumayo Basin with a ten well exploration program along with two wells in the Magdalena Basin and one well in the Llanos Basin, in addition to further delineation and development drilling in the Moqueta oil discovery.
10exploration wells
12 | Gran Tierra Energy Annual Report 2010
Bogotá
PutumayoBasin
Venezuela
Llanos Basin
Cauca Basin
Lower Magdalena Basin
19 blocks*
3,139,728net acres*
370km2D seismic planned/2011*
440km23D seismic planned/2011*
10exploration wells planned/2011
* These amounts include the acquisition of Petrolifera in 2011. Gran Tierra Energy Annual Report 2010 | 13
50 km
Eastern Cordillera
Costayaco
Orito
Putumayo Basin
Ecuador
Santana Oil Sales
Point
OTA export pipeline
PiedemonteSur
PiedemonteNorte
Putumayo-10
Guayuyaco& Santana
GTE Working interest
100 0
Chaza Moqueta
Azar
Rumiyaco
Col
ombi
a pr
oduc
tion
ColombiaIn 2010, Gran Tierra Energy produced a record average of 13,547 BOPD NAR in Colombia. We continued the development of the Costayaco field, completing Costayaco-11, Costayaco-12 and Costayaco-13 as producing wells. In 2011, we have plans to further develop the Putumayo Basin with an eight well development and delineation program and pipeline construction to handle the planned increase in our production from the Moqueta oil discovery.
15%increase in average daily production
14 | Gran Tierra Energy Annual Report 2010
50 km
Eastern Cordillera
Costayaco
Orito
Putumayo Basin
Ecuador
Santana Oil Sales
Point
OTA export pipeline
PiedemonteSur
PiedemonteNorte
Putumayo-10
Guayuyaco& Santana
GTE Working interest
100 0
Chaza Moqueta
Azar
Rumiyaco
13,547 BOPD NAR
22.5mmbo NAR proved reserves*
43.6mmboNAR (Proved + Probable + Possible)*
8development and delineation wells
* As at December 31st 2010 Gran Tierra Energy Annual Report 2010 | 15
CostayacoField
Guayuyaco Block
ToroyacoField
LindaField
JuanambuField
Pipeline
Putumayo-1 Block
Uchupayaco
1310
6
5 12
411
127
43
12
938
GTE Working interest
Oil well Water
2 km
100% 0%
Chaza Block
MoquetaField
Col
ombi
a di
scov
ery
& d
evel
opm
ent
ColombiaWith the successful discovery of oil at Moqueta in 2010, Gran Tierra Energy will be investing in new infrastructure for the field including further appraisal drilling with Moqueta-4, drilled early in 2011, and Moqueta-5 and Moqueta-6 later in 2011, construction of a six inch diameter, eight km long flow line to Costayaco, gas reinjection facilities, road access construction and full field development planning. We are also planning seismic acquisition on the Chaza Block to further delineate the Moqueta field and to evaluate new prospects along trend with our Moqueta discovery.
3wells Moqueta discovery
16 | Gran Tierra Energy Annual Report 2010
CostayacoField
Guayuyaco Block
ToroyacoField
LindaField
JuanambuField
Pipeline
Putumayo-1 Block
Uchupayaco
1310
6
5 12
411
127
43
12
938
GTE Working interest
Oil well Water
2 km
100% 0%
Chaza Block
MoquetaField
1.2mmbo NAR proved reserves*
3.0mmboNAR (proved + probable reserves)*
9.7mmboNAR (proved + probable + possible reserves)*
3delineation wells
* As at December 31st 2010 Gran Tierra Energy Annual Report 2010 | 17
Recôncavo Basin
REC-T-129
REC-T-142
REC-T-155
REC-T-224
Bra
zil p
rodu
ctio
n
BrazilAfter successfully establishing our Brazil team and office, we delivered on our goal to capture a high quality exploration and production opportunity by entering the Recôncavo Basin. Gran Tierra Energy entered into an agreement to acquire operatorship and a 70% working interest in four onshore blocks in the Recôncavo Basin (Blocks 129, 142, 155 and 224) subject to ANP approval of assignment of interests in 2011. In 2010, a 93 km2 3D seismic program was completed on three of these blocks.
350BOPD NAR
18 | Gran Tierra Energy Annual Report 2010
4 blocks
18,953 net acres
2development wells planned/2011
4exploration wells planned/2011
Gran Tierra Energy Annual Report 2010 | 19
Recôncavo Basin
129E1
H3
H1
D2
D1
1-ALV-2-BA
H2
142
155
Bra
zil e
xplo
ratio
n
BrazilGran Tierra Energy plans to drill four exploration wells and two development wells to further develop a new oil discovery on Block 155. Gran Tierra Energy was recently approved by the ANP as a class B Operator, permitting us to broaden our Brazil strategy to include the onshore and the shallow water (< 400m) offshore.
4exploration wells
20 | Gran Tierra Energy Annual Report 2010
Recôncavo Basin
129E1
H3
H1
D2
D1
1-ALV-2-BA
H2
142
155
Gran Tierra Energy Annual Report 2010 | 21
Brazil
Ecuador
95
EcuadorEcuadorEcuadorEcuadorEcuadorEcuadorEcuadorEcuador
95
128
122
133
107
124123
129
AndesMountains
Pipeline
Marañon Basin
IquitosArch
Peru
exp
lora
tion
PeruIn 2010, Gran Tierra Energy completed seismic acquisition in Block 128 and Block 122. In September 2010, we entered into an agreement to acquire a 20% working interest in Block 123, Block 124, and Block 129. A 747 km 2D seismic program was shot in these three blocks in 2010. Also, we recently acquired blocks 133 and 107 through our acquisition of Petrolifera which further expands our portfolio of opportunities in Peru, with exploration drilling planned in 2012.
3exploration wells
22 | Gran Tierra Energy Annual Report 2010
Brazil
Ecuador
95
128
122
133
107
124123
129
AndesMountains
Pipeline
Marañon Basin
IquitosArch
8 blocks
7.2 mm net acres
2,660km2D seismic planned/2011
3exploration wells planned
Gran Tierra Energy Annual Report 2010 | 23
Iquitos Arch Marañon/Ucayali Foreland Basin
Blocks 122 & 128
Blocks 123, 124 & 129
Block 95 Blocks 133 & 107
Andes Mountains
Fold Belt
Proven Prospective
Prospective
Hydrocarbon generation
& migration
133 & 107
Peru
exp
lora
tion
PeruIn December 2010, we entered into an agreement to acquire operatorship and a 60% working interest in Block 95, subject to government approval. This new block is located in Northeast Peru, due south of our existing acreage in the prolific Marañon Basin where more than one billion barrels of recoverable oil have been discovered. An oil discovery has already been made on this block, with the discovery well flowing 800 BOPD at Bretaña-1. This discovery is planned to be delineated with an exploration well by Gran Tierra Energy in 2012.
3exploration wells
129
123
124
122
128
95
Colombia
Brazil
Ecuador
Marañon Basin
Iquitos Arch
Arch
Oil Formation
Basin
100 km24 | Gran Tierra Energy Annual Report 2010
Iquitos Arch Marañon/Ucayali Foreland Basin
Blocks 122 & 128
Blocks 123, 124 & 129
Block 95 Blocks 133 & 107
Andes Mountains
Fold Belt
Proven Prospective
Prospective
Hydrocarbon generation
& migration
Gran Tierra Energy Annual Report 2010 | 25
Santa Victoria
Noroeste Basin
Valle Morado
NeuquenBasin
Arg
entin
a ex
plor
atio
n &
pro
duct
ion
ArgentinaGran Tierra Energy is the largest exploration land holder in the Noroeste Basin, with an interest in seven blocks encompassing 1.6 million net acres of land. In 2010, the Company had an average production of 778 BOPD NAR* from six producing net wells.
In Argentina in 2010, we began re-entry and sidetrack operations on the Valle Morado VM.x-1001 delineation gas well. In early 2011, these operations were suspended and the well bore will be abandoned due to a number of operational challenges encountered. In 2011, Gran Tierra Energy is planning a $55 million capital program which includes a development well in Palmar Largo and Surubi, and a six well development program to enhance production from our new operations in the Neuquen Basin following the acquisition of Petrolifera.
8development wells
* This amount does not include production from Petrolifera assets acquired in 2011.
26 | Gran Tierra Energy Annual Report 2010
Santa Victoria
Noroeste Basin
Valle Morado
NeuquenBasin
12 blocks
1.6mmnet acres
8development wells planned/2011
778bopd2010 average daily production NAR
1.1mmbo proved reserves NAR*
3.8mmbo (Proved + Probable + Possible) NAR*
16mmboe(Proved + Probable + Possible) NAR additional from Petrolifera acquisition in 2011
*As at December 31st 2010 Gran Tierra Energy Annual Report 2010 | 27
lette
r to
shar
ehol
ders
Gran Tierra Energy made substantial progress across all areas of business in 2010 as we successfully con-tinued to grow landholdings, reserves and production. Record average daily and annual production translated into strong financial performance as we continued to perform well in our established operating regions, while also accessing new lands and partnerships in our core operating arenas. Our strong balance sheet, in combination with growing cash flow from operations, continues to provide Gran Tierra Energy with strong flexibility in funding our existing exploration and development programs, and has allowed us to pursue additional underdeveloped assets, such as those acquired in our acquisition of Petrolifera Petroleum Limited that closed subsequent to year-end 2010. The team at Gran Tierra Energy works daily to identify and execute on opportunities to create shareholder value, which saw us succeed in 2010 and positions Gran Tierra Energy for continued success in 2011.
MORE than ever
28 | Gran Tierra Energy Annual Report 2010
Exploration Success Continues in ColombiaGran Tierra Energy drilled the Moqueta-1 prospect on the Chaza Block in the second quarter of 2010 and subsequently confirmed a new oil discovery with testing of light oil. We went on to successfully drill three additional delineation wells allowing us to confirm substantial additional oil pay at the discovery, with the limits of the field yet to be defined. In parallel with this drilling, we also initiated new 2D and 3D seismic acquisition programs to obtain additional subsurface information to assist in the interpretation of the field and prospectivity in adjacent areas. The fifth well in this area was drilling in the second quarter of 2011 as we continue to seek the boundaries of this substantial discovery. In parallel, construction of a pipeline from Moqueta to our Costayaco facilities was initiated at year-end 2010 and is expected to be transporting new oil production from this growing discovery in the second quarter of 2011. A second oil discovery was also made in the Garibay Block in the Llanos Basin of Colombia, which is now on production and which will be followed up with additional exploration drilling in 2011.
We continue to believe that Colombia holds substantial long-term opportunities for Gran Tierra Energy and we were pleased to submit successful bids on three exploration blocks in the 2010 Colombia Bid Round. The new acreage more than doubled Gran Tierra Energy’s acreage in Colombia, adding new land in our core operating environment in the Putumayo Basin, in addition to two very large frontier exploration blocks, Cauca-6 and -7, which encompass more than 1.3 million net acres approximately 100 kilometers northwest of the Putumayo Basin.
Expanding the Portfolio in PeruIn 2010, we tripled the number of exploration blocks in Peru and added two more blocks in early 2011, which resulted in Gran Tierra Energy becoming one of the largest acreage holders in the country. Gran Tierra Energy
acquired a 20% interest from Burlington Resources Peru Limited, a wholly-owned subsidiary of ConocoPhillips Company, in 6.7 million gross contiguous exploration acres adjacent to our existing blocks 122 and 128 in the Marañon Basin. Late in the year, we also acquired a 60% working interest and operatorship in Block 95 in the Marañon Basin, from Global Energy Development PLC. The block consists of 1.3 million acres and is located south of our existing acreage in the prolific Marañon Basin. This acreage contains an oil field discovered in
1974, with an oil well that flowed 800 barrels of oil per day naturally without pumps, that was never developed. Now, Gran Tierra Energy, as operator, intends to explore this block with drilling in 2012 in an effort to prove up additional reserves for development. Finally, with the acquisition of Petrolifera Petroleum Limited completed in early 2011, two additional, highly prospective blocks were acquired in the Ucayali Basin of central Peru. These blocks lie on trend with the prolific Camisea developments in southern Peru. This first exploration well in this additional acreage is scheduled to be drilled in 2012.
Early in 2011 we drilled our first well in Peru. The unsuccessful Kanatari-1 well was a frontier exploration well located on the eastern flank of the Marañon Basin, approximately 130 kilometers from the nearest offset well in Peru. This well found good quality reservoir, but
In 2010, we tripled the number of exploration blocks in Peru and added two more blocks in early 2011, which resulted in Gran Tierra Energy becoming one of the largest acreage holders in the country.
Gran Tierra Energy Annual Report 2010 | 29
unfortunately encountered no oil shows. Although disappointing, this was just one prospect in a vastly expanded Peru drilling portfolio, with a balanced diversity of risk-reward exploration opportunities that will be tested by drilling in the coming years.
Building a Strong Foundation in BrazilIn 2009, we opened an office in Brazil and assembled a seasoned team in-country to establish our operations. In August 2010, we succeeded in establishing our initial exploration and production position by farming into the Alvorada Petroleo acreage to obtain a 70%
working interest and operatorship in four onshore blocks in the prolific Recôncavo Basin. The Recôncavo Basin covers approximately 10,000 square kilometers, has 129 oil and gas fields, and has produced more than 1.5 billion barrels of oil to date. This initial farm-in provides us with an opportunity to delineate and develop a recently discovered oil field, an opportunity to explore for additional similar oil fields, and an opportunity to apply new technologies with horizontal drilling to test a new exploration concept in the basin defined with modern 3D seismic data. We have now established production in Brazil and intend to continue growing Gran Tierra Energy’s presence through appropriate partnerships, acquisitions and participation in land sales as those opportunities arise.
Increasing Option Value in ArgentinaActivities in Argentina in 2010 were limited to maintaining oil production levels and attempting to further develop a gas discovery at the Valle Morado field in northern Argentina. We were able to maintain our oil production through the year, but were unsuccessful in sidetracking the Valle Morado discovery well, due to the poor condition of the old casing in the well. Gran Tierra Energy is currently planning to drill a new well in the Valle Morado field in 2012 to take advantage of rising gas prices in the country. With the completion of the Petrolifera acquisition, additional work will be done in 2011 in an effort to reverse the declining oil and gas production of the newly acquired Neuquen Basin assets.
Building For the FutureGran Tierra Energy has a track record of successfully capturing and growing new assets. In 2010, we again identified an opportunity to grow through acquisition and announced an agreement late in 2010 to acquire all of the outstanding shares of Petrolifera Petroleum Limited. We successfully closed the acquisition on March 18, 2011.
This acquisition resulted in Gran Tierra Energy acquiring underdeveloped operated land in three of our core countries of operations, lands that we are comfortable that we can develop and unlock value through appropriate allocation of capital by our experienced operating teams. In Colombia, Gran Tierra Energy intends to delineate a potentially significant gas discovery in the Lower Magdalena Basin in 2011, prepare for exploration drilling in Peru in 2012, and work to reverse production declines in Argentina where both oil and gas prices are have consistently been rising. Based on 2010 year-end reserve reports, the acquisition added 17 million barrels of oil equivalent (SEC compliant) proved plus probable reserves to
In August 2010, we succeeded in establishing our initial exploration and production position by farming into Alvorada Petroleo acreage to obtain a 70% working interest and operatorship in four onshore blocks in the prolific Recôncavo Basin.
lette
r to
shar
ehol
ders MORE
than ever
30 | Gran Tierra Energy Annual Report 2010
Gran Tierra Energy’s 2010 year-end proved plus probable reserves of 31 million barrels of oil, increasing materially not only our reserves, but also our reserve life index, and our exploration and development drilling portfolio.
Giving Back to the CommunitiesGran Tierra Energy continues to grow its commitment and relationships in the communities where we operate, and view this as a key success factor in our growth. Our commitments focus on improving access to and quality of education through supporting educational programs and provision of scholastic kits, improving the health of the community through sponsorship of health centers and vaccination programs, and building sustainable community capacity by supporting various farming and fishery programs. Our employees, our Board of Directors and I personally take great pride in these endeavors. I would encourage you to read Gran Tierra Energy’s Corporate Social Responsibility report issued this year in combination with its annual report.
Well Positioned for Growth2010 was highlighted by a range of positive developments that saw us grow land holdings, reserves, and production to record levels, make new oil discoveries and expand our drilling portfolio in South America through new joint ventures, bid-rounds and acquisitions. At December 31, 2010, we had approximately $355 million in cash and cash equivalents that, combined with cash flow from operations, is expected to fund our ambitious 2011 capital program of $355 million. Taking into account the Petrolifera Petroleum Limited acquisition, we anticipate average production in 2011 to range between 17,500 and 19,000 barrels of oil equivalent per day, net after royalty, weighted approximately 95% to oil.
With a healthy balance sheet, strong oil production, today’s firm energy markets, and Gran Tierra Energy’s robust drilling portfolio, we are fully funded to execute on
our multiple opportunities to drive growth in 2011 with activities spanning four countries in South America. It is this portfolio approach to managing risks and rewards that has brought strong returns to investors in the past and we intend to continue this in the future.
In closing, I would like to thank all our stakeholders for their continued support and our growing staff for all their hard work. We look forward to updating you on our progress through the balance of 2011 and beyond.
Sincerely,
Dana CoffieldPresident and Chief Executive Officer
Gran Tierra Energy Annual Report 2010 | 31
corp
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bilit
y 59 projects
Gran Tierra EnergyThe name Gran Tierra (Great Earth) embodies the respect we have for the world we live in. We are committed to making each of the regions we touch better places to live and work. We believe in building strong relationships with all stakeholders that result in tangible benefits to communities today and for generations to come. We will continue to work closely with communities, partners, and government and non-government agencies in Colombia, Peru, Argentina, and Brazil to ensure our operations have a positive impact on communities and create value for all our stakeholders.
46 Colombia projects
7 Peru projects
6 Argentina projects
32% infrastructure
26% education
26% sustainability
16% social welfare
40% social welfare
40% education
20% sustainability
40% sustainability
30% education
30% social welfare
32 | Gran Tierra Energy Annual Report 2010
Gran Tierra Energy Annual Report 2010 | 33
Cautionary Information Regarding Forward-Looking StatementsThis Annual Report, particularly in “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” includes forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 (the Securities Act) and Section 21E of the Securities Exchange Act of 1934 (the Exchange Act). All statements other than statements of historical facts included in this Annual Report including without limitation statements in the Management’s Discussion and Analysis of Financial Condition and Results of Operations regarding our financial position, estimated quantities and net present values of reserves, business strategy, plans and objectives of our management for future operations, covenant compliance, capital spending plans and those statements preceded by, followed by or that otherwise include the words “believe”, “expects”, “anticipates”, “intends”, “estimates”, “projects”, “target”, “goal”, “plans”, “objective”, “should”, or similar expressions or variations on such expressions are forward-looking statements. We can give no assurances that the assumptions upon which the forward-looking statements are based will prove to be correct and because forward-looking statements are subject to risks and uncertainties, actual results may differ materially from those expressed or implied by the forward-looking statements. There are a number of risks, uncertainties and other important factors that could cause our actual results to differ materially from the forward-looking statements, including, but not limited to, those set forth below and as more fully discussed in Part I, Item 1A “Risk Factors” in our Annual Report on Form 10-K filed with the Securities and Exchange Commission (“SEC”) on February 25, 2011. The information included herein is given as of the date of the release of this Annual Report to our stockholders (other than information that speaks as of an earlier date) and, except as otherwise required by the federal securities laws, we disclaim any obligations or undertaking to publicly release any updates or revisions to any forward-looking statement contained in this Annual Report to reflect any change in our expectations with regard thereto or any change in events, conditions or circumstances on which any such statement is based.
Risks Related to Our Business• OurLackofDiversificationWillIncreasetheRiskofanInvestmentinOurCommonStock.• WeMayEncounterDifficultiesStoringandTransportingOurProduction,WhichCouldCauseaDecreasein
Our ProductionoranIncreaseinOurExpenses.• GuerrillaActivityinColombiaCouldDisruptorDelayOurOperations,andWeAreConcernedAboutSafeguarding
OurOperationsandPersonnelinColombia. • OurBusinessMaySufferIfWeDoNotAttractandRetainTalentedPersonnel.• OurOilSalesWillDependonaRelativelySmallGroupofCustomers,WhichCouldAdverselyAffectOur
Financial Results.• StrategicRelationshipsUponWhichWeMayRelyareSubjecttoChange,WhichMayDiminishOurAbilityto
ConductOurOperations. • OurBusinessisSubjecttoLocalLegal,PoliticalandEconomicFactorsWhichareBeyondOurControl,WhichCould
ImpairOurAbilitytoExpandOurOperationsorOperateProfitably. • ForeignCurrencyExchangeRateFluctuationsMayAffectOurFinancialResults.• ExchangeControlsandNewTaxesCouldMateriallyAffectourAbilitytoFundOurOperationsandRealizeProfitsfrom
OurForeignOperations. • CompetitioninObtainingRightstoExploreandDevelopOilandGasReservesandtoMarketOurProductionMay
ImpairOurBusiness. • MaintainingGoodCommunityRelationshipsandBeingaGoodCorporateCitizenmaybeCostlyandDifficult
to Manage.• OurOperationsInvolveSubstantialCostsandareSubjecttoCertainRisksBecausetheOilandGasIndustriesinthe
CountriesinWhichWeOperateareLessDeveloped. • NegativePoliticalandRegulatoryDevelopmentsinArgentinaMayNegativelyAffectourOperations.• TheUnitedStatesGovernmentMayImposeEconomicorTradeSanctionsonColombiaThatCouldResultInA
SignificantLossToUs. • WeMayBeUnabletoObtainAdditionalCapitalThatWeWillRequiretoImplementOurBusinessPlan,WhichCould
RestrictOurAbilitytoGrow. • WeMayNotBeAbleToEffectivelyManageOurGrowth,WhichMayHarmOurProfitability.
34 | Gran Tierra Energy Annual Report 2010
Risks Related to Our Industry• UnlessWeareAbletoReplaceOurReserves,and DevelopOilandGasReservesonanEconomicallyViableBasis,
OurReserves,ProductionandCashFlowsMayDeclineasaResult. • WeareRequiredtoObtainLicensesandPermitstoConductOurBusinessandFailuretoObtainThese Licenses
ortoObtainThemonaTimelyBasis CouldCauseSignificantDelaysandExpensesThatCouldMateriallyImpactOur Business.
• OurExplorationforOilandNaturalGasIsRiskyandMayNotBeCommerciallySuccessful,ImpairingOurAbilitytoGenerateRevenuesfromOurOperations.
• EstimatesofOilandNaturalGasReservesthatWeMakeMayBeInaccurateandOurActualRevenuesMayBeLowerandOurOperatingExpensesMayBeHigherthanOurFinancialProjections.
• IfOilandNaturalGasPricesDecrease,WeMaybeRequiredtoTakeWrite-DownsoftheCarryingValueofOurOilandNaturalGasProperties.
• DrillingNewWellsandProducingOilandNaturalGasfromExistingFacilitiesCouldResultinNewLiabilities,WhichCouldEndangerOurInterestsinOurPropertiesandAssets.
• OurInabilitytoObtainNecessaryFacilitiesand/orEquipmentCouldHamperOurOperations.• DecommissioningCostsAreUnknownandMaybeSubstantial;UnplannedCostsCouldDivertResourcesfrom
Other Projects.• PricesandMarketsforOilandNaturalGasAreUnpredictableandTendtoFluctuateSignificantly,WhichCould
ReduceProfitability,GrowthandtheValueofGranTierra.
Penalties We May Incur Could Impair Our Business.• Policies,ProceduresandSystemstoSafeguardEmployeeHealth,SafetyandSecurityMayNotbeAdequate.• EnvironmentalRisksMayAdverselyAffectOurBusiness.• OurInsuranceMayBeInadequatetoCoverLiabilitiesWeMayIncur.• ChallengestoOurPropertiesMayImpactOurFinancialCondition.• WeWillRelyonTechnologytoConductOurBusinessandOurTechnologyCouldBecomeIneffectiveOrObsolete.
Risks Related to Our Common Stock• TheMarketPriceofOurCommonStockMayBeHighlyVolatileandSubjecttoWideFluctuations.• WeDoNotExpecttoPayDividendsIntheForeseeableFuture.
Gran Tierra Energy Annual Report 2010 | 35
Selected Financial Data
(ThousandsofU.S.Dollars,ExceptShareandPerShareAmounts)
Year Ended December 31,
2010
Year EndedDecember31,
2009
Year EndedDecember31,
2008
Year EndedDecember31,
2007
Year EndedDecember31,
2006
StatementofOperationsData
Revenuesandotherincome
Oilandnaturalgassales $ 373,286 $ 262,629 $ 112,805 $ 31,853 $ 11,721
Interest 1,174 1,087 1,224 425 352
Totalrevenuesandotherincome 374,460 263,716 114,029 32,278 12,073
Expenses
Operating 59,446 40,784 19,218 10,474 4,233
Depletion,depreciation,accretionandimpairment 163,573 135,863 25,737 9,415 4,088
Generalandadministrative 40,241 28,787 18,593 10,232 6,999
Liquidateddamages – – – 7,367 1,528
Derivativefinancialinstruments(gain)loss (44) 190 (193) 3,040 –
Foreignexchange(gain)loss 16,838 19,797 6,235 (78) 371
Totalexpenses 280,054 225,421 69,590 40,450 17,219
Income(loss)beforeincometaxes 94,406 38,295 44,439 (8,172) (5,146)
Incometaxexpense (57,234) (24,354) (20,944) (295) (678)
Netincome(loss) $ 37,172 $ 13,941 $ 23,495 $ (8,467) $ (5,824)
Netincome(loss)percommonshare—basic $ 0.15 $ 0.06 $ 0.19 $ (0.09) $ (0.08)
Netincome(loss)percommonshare—diluted $ 0.14 $ 0.05 $ 0.16 $ (0.09) $ (0.08)
BalanceSheetData
As at December 31,
2010
As atDecember 31,
2009
As atDecember 31,
2008
As atDecember 31,
2007
As atDecember 31,
2006
Cashandcashequivalents $ 355,428 $ 270,786 $ 176,754 $ 18,189 $ 24,101
Workingcapital(includingcash) 265,835 215,161 132,807 8,058 14,541
Oilandgasproperties 721,157 709,568 765,050 63,202 56,093
Deferredtaxasset—longterm – 7,218 10,131 1,839 444
Totalassets 1,249,254 1,143,808 1,072,625 112,797 105,537
Deferredtaxliabilityanddeferredremittancetax— longterm 205,606 217,528 214,210 10,567 9,876
Otherlong-termliabilities 4,469 4,258 4,251 1,986 634
Shareholders’equity $ 886,866 $ 816,426 $ 791,926 $ 76,792 $ 76,195
Wemadeourinitialacquisitionofoilandgasproducingandnon-producingpropertiesinArgentinainSeptember2005foratotalpurchasepriceofapproximately$7 million.Priortothattimewehadnorevenues.InJune2006,weacquiredArgosyEnergyInternationalL.P.’sassetsinColombiaforconsiderationof$37.5 millioncash,870,647sharesofourcommonstockandoverridingandnetprofitinterestsincertainassetsvaluedat$1 million.InNovember2008,weacquiredSolanafor$671.8 millionthroughtheissuancetoSolanastockholdersofeithersharesofourcommonstockorsharesofcommonstockofasubsidiaryofGranTierra.
36 | Gran Tierra Energy Annual Report 2010
Preliminary Note to Management’s Discussion and Analysis of Financial Condition and Results of OperationsThe following Management’s Discussion and Analysis of Financial Condition and Results of Operations is as it appears in our Annual Report on Form 10-K, filed with the Securities and Exchange Commission on February 25, 2011.
On January 17, 2011, we entered into an Agreement to acquire all the issued and outstanding shares and warrants of Petrolifera Petroleum Limited (“Petrolifera”), which we completed on March 18, 2011. Petrolifera is a Canadian based international oil and gas company that trades on the Toronto Stock Exchange and has oil and gas assets in Argentina, Colombia, and Peru. Our discussion below therefore speaks as of the date of our filing of our Annual Report on Form 10-K, and does reflect any update as a result of the closing of this transaction, including with respect to our 2011 Work Program and Capital Expenditure Program.
Management’s Discussion and Analysis of Financial Condition and Results of OperationsThis report, and in particular this Management’s Discussion and Analysis of Financial Condition and Results of Operations, contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934. Please see the cautionary language in the section entitled “Cautionary Information Regarding Forward-Looking Statements” earlier in this Annual Report regarding the identification and risks relating to forward-looking statements.
The following discussion of our financial condition and results of operations should be read in conjunction with the Financial Statements and Supplementary Data included in this Annual Report.
OverviewWeareanindependentinternationalenergycompanyincorporatedintheUnitedStatesandengagedinoilandnaturalgasacquisition,exploration,developmentandproduction.WeareheadquarteredinCalgary,Alberta,CanadaandoperateinSouthAmericainColombia,Argentina,Peru,andBrazil.
InSeptember2005,weacquiredourinitialoilandgasinterestsandproperties,whichwereinArgentina.During2006,weincreasedouroilandgasinterestsandpropertybasethroughfurtheracquisitionsinColombia,ArgentinaandPeru.WefundedacquisitionsofourpropertiesinColombiaandArgentinathroughaseriesofprivateplacementsofoursecuritiesthatoccurredbetweenSeptember2005andJune2006.
In2007,wemadeanewfielddiscovery,Costayaco,intheChazaBlockofthePutumayoBasininColombia.EffectiveNovember14,2008,wecompletedtheacquisitionofSolanaResourcesLimited(“Solana”),aninternational
resourcecompanyengagedintheacquisition,exploration,developmentandproductionofoilandnaturalgasinColombiaandincorporatedinAlberta,Canada.Atthedateofacquisition,SolanaheldvariousworkinginterestsinnineblocksinColombiaincludinga50%workinginterestintheChazaBlock,whichincludestheCostayacofield,anda35%workinginterestintheGuayuyacoBlock,whichincludestheJuanambufield.
Duringthethirdquarterof2009,weopenedabusinessdevelopmentofficeinRiodeJaneiro,Brazil.InJune2010,weexpandedourlandpositioninthePutumayoBasinandaddednewfrontierexplorationacreagein
ColombiathroughsuccessfulbidsonthreeblocksinColombia.InAugustandOctober2010respectively,wemadenewColombianfielddiscoveriesinMoquetaintheChazaBlock(PutumayoBasin)andJilguerointheGaribayBlock.AlsoinAugust2010,wefinalizedafarm-inagreementwithAlvoradaPetroleoS.A.relatingtotheon-shoreReconcavoBasininBrazil,pendingregulatoryapprovalfromBrazil’sAgencianacionaldePetroleoGasnaturaleBioncombustiveis(“ANP”).In PeruinSeptember2010,weacquireda20%workinginterestinthreeblocksand,inDecember2010,weacquireda60% interestinoneblock.BothtransactionsinPeruaresubjecttogovernmentapproval.
OnJanuary17,2011,weannouncedthatwehadenteredintoanArrangementAgreementtoacquirePetroliferaPetroleumLtd.(“Petrolifera”).PetroliferaisaCanadianbasedinternationaloilandgascompanylistedontheTorontoStockExchangewhichownsworkinginterestsin11explorationandproductionblocks;threelocatedinColombia,threeinPeruandfiveinArgentina.TheArrangementAgreementissubjecttoPetroliferashareholderandregulatory,stockexchangeandcourtapprovals,andisexpectedtocloseinMarch2011.See“SubsequentEvents”belowforfurtherdetailsofthis transaction.
Gran Tierra Energy Annual Report 2010 | 37
Business StrategyOurplanistocontinuetobuildaninternationaloilandgascompanythroughacquisitionandexploitationofunder-developedprospectiveoilandgasassets,andtodeveloptheseassetswithexplorationanddevelopmentdrillingtogrowcommercialreservesandproduction.OurinitialfocusisinselectcountriesinSouthAmerica,currentlyColombia,Argentina,Peru,andBrazil;wewillconsiderotherregionsforfuturegrowthshouldthoseregionsmakestrategicandcommercialsenseincreatingadditionalvalue.
Wehaveappliedatwo-stageapproachtogrowth,initiallyestablishingabaseofproduction,developmentandexplorationassetsbyselectiveacquisitions,andsecondlyachievingadditionalreserveandproductiongrowththroughdrilling.Weintendtoduplicatethisbusinessmodelinotherareasasopportunitiesarise.Wepursueopportunitiesincountrieswithprovenpetroleumsystems;attractiveroyalty,taxationandotherfiscalterms;andstablelegalsystems.
Financial and Operational Highlights YearEndedDecember31,
2010 %Change 2009 %Change 2008
EstimatedProvedOilandGasReserves,netofroyalties– MillionsofBarrelsofOilEquivalent(1)(“Mmboe”)at yearend 23.8 6 22.4 15 19.4
Production—BarrelsofOilEquivalent(“boe”)perDay 14,448 14 12,684 249 3,635
PricesRealized—perboe $ 70.79 25 $ 56.73 (33) $ 84.78
RevenueandOtherIncome($000s) $ 374,460 42 $ 263,716 131 $ 114,029
NetIncome($000s) $ 37,172 167 $ 13,941 (41) $ 23,495
NetIncomePerShare—Basic $ 0.15 150 $ 0.06 (68) $ 0.19
NetIncomePerShare—Diluted $ 0.14 180 $ 0.05 (69) $ 0.16
FundsFlowFromOperations($000s)(2) $ 203,422 28 $ 159,531 223 $ 49,437
CapitalExpenditures($000s) $ 177,039 101 $ 88,124 89 $ 46,728
As at December31,
2010 %Change 2009 %Change 2008
Cash&CashEquivalents($000s) $ 355,428 31 $ 270,786 53 $ 176,754
WorkingCapital(includingcash&cashequivalents) ($000s) $ 265,835 24 $ 215,161 62 $ 132,807
Property,PlantandEquipment($000s) $ 727,024 2 $ 712,743 (7) $ 767,552(1) Gas volumes are converted to boes at the rate of six thousand cubic feet (“mcf”) of gas per barrel of oil, based on the approximate relative energy
content of gas and oil. The conversion ratio for natural gas to oil does not assume price equivalency and the price for a barrel of oil equivalent for natural gas may differ significantly from the price of a barrel of oil.
(2) Funds flow from operations is a non-GAAP measure which does not have any standardized meaning prescribed under United States Generally Accepted Accounting Principles (“GAAP”). Management uses this financial measure to analyze operating performance and the income (loss) generated by Gran Tierra’s principal business activities prior to the consideration of how non-cash items affect that income (loss), and believes that this financial measure is also useful supplemental information for investors to analyze operating performance and Gran Tierra’s financial results. Investors should be cautioned that this measure should not be construed as an alternative to net income (loss) or other measures of financial performance as determined in accordance with GAAP. Gran Tierra’s method of calculating this measure may differ from other companies and, accordingly, it may not be comparable to similar measures used by other companies. Funds flow from operations, as presented, is net income (loss) adjusted for depletion, depreciation, accretion and impairment, deferred taxes, stock based compensation, unrealized loss (gain) on financial instruments and unrealized foreign exchange losses (gains). A reconciliation from funds flow from operations to net income is as follows:
YearEndedDecember31,
FundsFlowFromOperations—Non-GAAPMeasure($000s) 2010 2009 2008
Netincome $ 37,172 $ 13,941 $ 23,495
Adjustmentstoreconcilenetincometofundsflowfromoperations
Depletion,depreciation,accretionandimpairment 163,573 135,863 25,737
Deferredtaxes (20,090) (15,355) (6,418)
Stock-basedcompensation 8,025 5,309 2,520
Unrealized(gain)lossonfinancialinstruments (44) 277 (2,882)
Unrealizedforeignexchangeloss 14,786 19,496 6,985
Fundsflowsfromoperations $ 203,422 $ 159,531 $ 49,437
38 | Gran Tierra Energy Annual Report 2010
Financial Highlights for the Year Ended December 31, 2010• In2010,productionofcrudeoil(netafterroyaltyandinventoryadjustments)averaged14,325barrelsofoilperday
(“BOPD”),anincreaseof13%over2009,duemainlytoproductionfromnewdevelopmentwellsintheCostayacofieldintheChazaBlockinColombiawhereGranTierrahasa100%workinginterest.Productionofnaturalgasaveraged123barrelsofoilequivalentperday(“BOEPD”)fromColombia.
• Revenueandotherincomeincreasedby42%from2009duetoincreasedproductionandhigheroilprices.• Aforeignexchangelossof$16.8 million,ofwhich$14.8 millionisanunrealizednon-cashforeignexchangeloss,
wasrecordedin2010primarilyduetothetranslationofadeferredtaxliabilitydenominatedinColombianpesos.Thedevaluationof6%intheU.S.dollaragainsttheColombianPesoin2010resultedintheforeignexchangeloss.This representsadecreasefromtheforeignexchangelossrecordedin2009,ofwhich$19.5 millionwasanunrealizednon-cashforeignexchangelossrelatedprimarilytothesamedeferredtaxliability.
• Ournetincomegrewby167%fromtheprioryearto$37.2 million,representingabasicnetincomepershareof$0.15comparedwith$0.06in2009.
• Oilandgaspropertyexpendituresfor2010were$177.0 million:$105.5 millioninColombia,$33.9 millioninArgentina,$23.2 millioninPeru,$12.4 millioninBrazil,and$2.0 millionofgeneralcorporateassets.Includedinthecapitalexpenditureswerethirteenwellsofwhichninewereexplorationandfourweredevelopment.
• Ourcashpositionof$355.4 million(excludingrestrictedcash)atDecember31,2010increasedfrom$270.8 millionatDecember31,2009asaresultofincreasedcashprovidedbyoperatingactivities,partiallyoffsetbycapitalexpenditures.
• Fundsflowfromoperationsincreased28%to$203.4 millionin2010from$159.5 millionin2009.Theincreasewasprimarilyduetoincreasedsalesvolumesandpricesascomparedtotheprioryear,onlypartiallyoffsetbyincreasedoperatingandgeneralandadministrative(“G&A”)expensesin2010.
• Workingcapital(includingcash&cashequivalents)was$265.8 millionatDecember31,2010,whichisa$50.7 millionincreasefromDecember31,2009,duemainlytoincreasedcashasatDecember31,2010comparedtoDecember31,2009.
• Property,plantandequipmentasatDecember31,2010was$727.0 million,anincreaseof$14.3 millionfromDecember31,2009,primarilyasaresultofa101%increaseincapitaladditions,partiallyoffsetbydepletion,depreciation,accretionandimpairment(“DD&A”).
Operational Highlights for the Year Ended December 31, 2010
Exploration and Development Activities in Colombia
ChazaBlock• Costayaco Field Drilling, Water Injection and Workovers
InJune2010,wecompletedloggingoperationsandinitiatedproductiontestingofCostayaco–11.Costayaco-11wastied-inandputonproductioninearlyJulyandwillbeusedasaCaballosandT-sandproducerandsubsequentlyasawater-injectortoprovidepressuremaintenanceintheT-Sandstonereservoir.Inthelasthalfof2010,asuccessfulworkoverprogramenhancedtheproductivityoftheCostayacofield.InSeptemberandOctober2010,aplannedwaterinjectionfacilitywascompletedandwaterinjectioncommencedfromCostayaco-5andCostayaco-6intotheT-Sandforreservoirmaintenanceandmaximizationofoilrecovery.Costayaco-12andCostayaco-13drillingcommencedinDecember2010.
• Moqueta Field Exploration and Delineation InJune2010,wecompletedinitialtestingontheMoqueta-1explorationwellintheChazaBlockinColombia.TheMoqueta-2delineationwellwasdrilledinJuly2010fromtheexistingMoqueta-1pad.TheMoqueta-3appraisalwellwascompletedandtestedinOctober,2010andconfirmedoilbearingreservoirsintheVilletaUandTSandstonesandCaballosreservoirsandstones.TheMoqueta-4developmentwellwasinprogressatDecember31,2010andtestingwillbecompleteinMarch2011.Additionalseismicwasalsoacquiredduringtheyear.ConstructionoftheMoquetatoCostayacopipelineisexpectedtocommenceinthefirstquarterof2011andfirstoilproductionisanticipatedinthesecondquarterof2011.
• Dantayaco Field Exploration TestingofDantayaco–1wascompletedandthewellpluggedandabandonedinJanuary2010.
Gran Tierra Energy Annual Report 2010 | 39
• Pacayaco Field Exploration Pacayaco-1commenceddrillinginNovember2010andwassuspendedpendingacquisitionandinterpretationofseismic.Theacquisitionandinterpretationisnowcompleteandeitheranewwellorasidetrackoftheexistingwellwillbedrilledlateinthesecondquarterof2011.
• Rio Guineo Exploration Seismicrelatingtothisleadwasacquiredduringtheyear.
GaribayBlock• TestingofJilguero–1intheGaribayBlockwascompletedinOctober2010andlong-termproductiontestingbeganin
January2011.
RioMagdalenaBlock• Popa-3,anappraisalwellintheRioMagdalenaBlock,hasbeendrilledandloggedandgasbearingreservoirs
identified.Thewellhasbeencasedandsuspendedpendingfurtherevaluation.
PiedmonteNorteandSurBlocks• DrillingpreparationsforTaruka-1,anexplorationwellinthePiedemonteSurBlock,beganinlateDecember2010.
DrillingbeganinJanuary2011andthewellwaspluggedandabandonedinFebruary2011.• SeismicwasacquiredinboththePiedmonteNorteandPiedmonteSurblocksduringtheyear.
NewColombianExplorationandExploitationContracts• InJune2010,wewereawardedthreeblocks,Putumayo-10,Cauca-6,andCauca-7,intheColombiaBidRound
administeredbyColombia’sANH.BidcontractsareexpectedtobefinalizedbyMarch,2011.Wealsocompletedandreceivedgovernmentapprovalforafarm-inonPutumayo-1Block.
Argentina Development and Exploration
• InJuly2010,re-entryandsidetrackoperationsbeganontheGTE.St.VMor-2001wellinValleMoradoand,inFebruary2011,theseoperationsweresuspendedandthewellborewillbeabandonedduetoanumberofoperationalchallengesencountered.GranTierraEnergycontinuestoreviewalternativesassociatedwiththefielddevelopment.
• WeacquiredseismicintheSantaVictoriaBlockandhavereceiveda90dayextensionoftheexplorationperiodtoMarch29,2011,todeterminewhethertoproceedintothenextphaseofthecontract.
Peru Exploration
Block128• WereceivedEnvironmentalImpactAssessmentapprovalsforseismicanddrillingoperationsonBlock128during
2010.Weacquiredseismicduring2010andbegandrillinganexplorationwellinFebruary2011.AlsoinFebruary2011,werelinquished20%ofthisBlock.
Block122• WereceivedEIAapprovalsforseismicanddrillingoperationsonBlock122during2010.Seismicacquisitionwas
ongoingatDecember31,2010andanexplorationwellisplannedforthethirdquarterof2011.
Blocks123,124,and129• InSeptember2010,weacquireda20%workinginterestinBlock123,Block124,andBlock129,whichissubjectto
governmentapproval.Thesethreeblockshaveatotalareaofapproximately6.7 milliongrossacres.
Block95• InDecember2010,weacquireda60%workinginterestandtheoperatorshipofBlock95,whichissubjectto
governmentapproval.Block95hasatotalareaof1.3 milliongrossacres.
Brazil Exploration
• OnAugust29,2010,weenteredintoanagreementwithAlvoradaPetroleoS.A.wherebywewillfulfillcertaincommitments,includingthedrillingoftwowellsin2011,andearna70%workinginterestinfourBlocksintheon-shoreReconcavoBasin,Brazil.Thetransactionissubjecttogovernmentapproval.
40 | Gran Tierra Energy Annual Report 2010
Consolidated Results of Operations (1) YearEndedDecember31,
ConsolidatedResultsofOperations 2010 %Change 2009 %Change 2008
(ThousandsofU.S.Dollars)
Oilandnaturalgassales $ 373,286 42 $ 262,629 133 $ 112,805
Interest 1,174 8 1,087 (11) 1,224
374,460 42 263,716 131 114,029
Operatingexpenses 59,446 46 40,784 112 19,218
Depletion,depreciation,accretionandimpairment 163,573 20 135,863 428 25,737
Generalandadministrativeexpenses 40,241 40 28,787 55 18,593
Foreignexchangeloss 16,838 (15) 19,797 218 6,235
Other (44) 123 190 (198) (193)
280,054 24 225,421 224 69,590
Incomebeforeincometaxes 94,406 147 38,295 (14) 44,439
Incometaxexpense (57,234) 135 (24,354) 16 (20,944)
Netincome $ 37,172 167 $ 13,941 (41) $ 23,495
Production,NetofRoyalties
OilandNGL’s(“bbl”)(2) 5,228,554 13 4,621,546 248 1,328,145
Naturalgas(“mcf”)(2) 268,776 448 49,028 237 14,559
Totalproduction(“boe”)(2)(3) 5,273,350 14 4,629,717 248 1,330,572
AveragePrices
OilandNGL’s(«perbbl») $ 71.19 25 $ 56.79 (33) $ 84.89
Naturalgas(«permcf») $ 3.90 (1) $ 3.93 (20) $ 4.93
ConsolidatedResultsofOperations(“perboe”)
Oilandnaturalgassales $ 70.79 25 $ 56.73 (33) $ 84.78
Interest 0.22 (4) 0.23 (75) 0.92
71.01 25 56.96 (34) 85.70
Operatingexpenses 11.27 28 8.81 (39) 14.44
Depletion,depreciation,accretionandimpairment 31.02 6 29.35 52 19.34
Generalandadministrativeexpenses 7.63 23 6.22 (55) 13.97
Foreignexchangeloss 3.19 (25) 4.28 (9) 4.69
Other (0.01) 125 0.04 (127) (0.15)
53.10 9 48.70 (7) 52.29
Incomebeforeincometaxes 17.91 117 8.26 (75) 33.41
Incometaxexpenses (10.85) 106 (5.26) (67) (15.74)
Netincome $ 7.06 135 $ 3.00 83 $ 17.67(1) Consolidated results of operations include the operations of Solana subsequent to our acquisition of Solana on November 14, 2008.(2) Gas volumes are converted to boes at the rate of six thousand cubic feet mcf of gas per barrel of oil, based upon the approximate relative energy content
of gas and oil, which rate is not necessarily indicative of the relationship of oil and gas prices.(3) Production represents production volumes adjusted for inventory changes.
Gran Tierra Energy Annual Report 2010 | 41
Consolidated Results of Operations for the Year Ended December 31, 2010 Compared to the Results for the Year Ended December 31, 2009
Netincomeof$37.2 million,or$0.15persharebasicand$0.14persharediluted,wasrecordedin2010comparedto$13.9 million,or$0.06persharebasicand$0.05persharediluted,in2009.A42%increaseinrevenueandotherincometo $374.5 millionfrom$263.7 millionrecordedin2009waspartiallyoffsetbyan$18.7 millionincreaseinoperatingexpenses,a$11.5 millionincreaseingeneralandadministrativeexpenses,a$27.7 millionincreaseinDD&A,anda$32.9 millionincreaseinincometaxexpense.
Revenue and other incomeincreased42%asaresultofa13%increaseincrudeoilproductioncombinedwitha25%improvementincrudeoilprices.
Crude oil and NGL production,netafterroyalties,in2010increasedto5.2 millionbarrelscomparedto4.6 millionbarrelsin2009,duetoincreasedproductionfromourColombiaoperations.Averagerealizedcrudeoilpricesfor2010increasedto$71.19perbarrelfrom$56.79perbarrelin2009,reflectinghigherWestTexasIntermediate(“WTI”)oilprices.
TheadditionalgovernmentroyaltyfortheCostayacoField(describedin“SegmentedOperations—Colombia”)beganinthefourthquarterof2009andwaspaidforonlythreemonthsof2009versusthefullyearof2010.Asaresult,ourshareofproductionwasreducedbyatotalof947,000BOE’srelatingtothisadditionalroyaltyin2010ascomparedtoonly328,000BOE’sin2009.Sinceourproductionvolumesarereportednetafterroyaltiesandthisroyaltystructurewasnotinplaceforanequalamountoftimein2009and2010,certainchangesbetweentheseyears,includingvolumes,changesinperboeoperatingcosts,andperboegeneralandadministrativecosts,willnotbereadilycomparable.Forinstance,theincreaseintheCostayacofieldproductionwillnotappearashighincomparisonwith2009asitwouldappearwithouttheadditionalroyaltyvolumesdeducted.Similarly,theperboeoperatingandgeneralandadministrativecostswillappearhigheronaperboebasisin2010thanin2009asthecostsaredividedoverasmallerbaseafterroyaltiesarededucted.
Operating expensesfor2010amountedto$59.4 million,a46%increasefromtheprioryeartotalof$40.8 million.TheincreaseinoperatingexpensesoccurredprimarilyinColombiaandwasduetoanenhancedworkoverprogramrelatedtotheCostayacoarea,anincreaseintransportationcostsrelatedtoincreasedproductionandpipelinemaintenance,andanincreaseinproducingwellsinCostayaco.Operatingexpensesonaboebasisin2010were$11.27,a28%increasefrom2009reflectingboththeincreaseintotaloperatingcostsandtheeffectoftheadditionalgovernmentroyaltypayableonperboecalculations,partiallyoffsetbyanincreaseinproduction.
DD&Aexpensefor2010increasedto$163.6 millioncomparedto$135.9 millionin2009.Theincreaseinproductionlevelswaspartiallyoffsetbyanincreaseofreservesatyear-endandareductionoffuturedevelopmentcostsincludedinthedepletablebaseascomparedto2009.DD&Aexpensein2010includeda$23.6 millionceilingtestimpairmentforourArgentinacostcenter,including$17.9 millionrelatingtotheabandonmentoftheGTE.St.VMor-2001sidetrackoperations,ascomparedtoa$1.9 millionchargein2009.Onaboebasis,DD&Ain2010was$31.02comparedto$29.35for2009,representinga6%increaseresultingfromtheceilingtestimpairmentlossoffsetpartiallybyincreasedreservesanddecreasedfuturedevelopmentcosts.
G&A expensesof$40.2 millionfor2010was40%higherthan2009duetoincreasedemployeerelatedcostsreflectingtheexpansionofoperationsinPeru,Brazil,andColombiaandhigherbusinessdevelopmentcosts.G&Aexpensesperboeincreased23%to$7.63perboecomparedto$6.22perboefor2009.Theincreaseingeneralandadministrativecostsonaperboebasisovertheprioryearwascompoundedbytheadditionalroyaltypaidin2010.
Theforeign exchange lossof$16.8 millionfor2010,ofwhich$14.8 millionisanunrealizednon-cashforeignexchangeloss,comparesto$19.8 millionrecordedin2009,ofwhich$19.5 millionisanunrealizednon-cashforeignexchangeloss.TheselossesoriginateinColombiaandrelatetoforeignexchangelossesresultingfromthetranslationofadeferredtax liability.
Incometaxexpensefor2010amountedto$57.2 millioncomparedto$24.4 millionrecordedin2009.Thisrepresentsanincreaseof135%inannualincometaxexpense,primarilyasaresultofhigherprofitsandtheapplicationofavaluationallowanceagainstpreviouslyrecognizeddeferredtaxassetsassociatedwithArgentina.Thedecreaseinthe2010effectivetaxrateto61%from64%in2009isprimarilyduetoadecreaseinthevaluationallowanceassociatedwithlossesinourU.S.,Canadian,PeruandBrazilbusinessunits,partiallyoffsetbytheincreaseinthevaluationallowanceassociatedwithlossesinourArgentinabusinessunits.Thevariancefromthe35%U.S.statutoryratefor2010resultsfromforeigncurrencytranslationlossesthatareneithertaxablenordeductiblefortaxpurposesineachoftherespectivejurisdictions,thevaluationallowancesasdescribedabove,enhancedtaxdepreciationincentiveinColombia,andColombiathirdpartyroyaltypaymentsthatarenotdeductiblefortaxpurposes.Similarfactorscausethevariancefromthe35%U.S.statutoryratefor2009.
42 | Gran Tierra Energy Annual Report 2010
Consolidated Results of Operations for the Year Ended December 31, 2009 Compared to the Results for the Year Ended December 31, 2008
AsaresultoftheSolanaacquisition,weincreasedourworkinginterestto100%intheCostayacofieldand70%intheJuanambufield,inColombia,whichresultedinincreasedproduction,revenue,operatingcosts,andDD&Ain2009.
Netincomeof$13.9 million,or$0.06persharebasicand$0.05persharediluted,wasrecordedin2009comparedto$23.5 million,or$0.19persharebasicand$0.16persharediluted,in2008.Aforeignexchangelossof$19.8 million,ofwhich$19.5 millionisanunrealizednon-cashforeignexchangeloss,anincreaseof$110.1 millioninDD&Ato$135.9 million,higheroperatingandgeneralandadministrativeexpenses,andincreasedincometaxexpense,morethanoffsetthehigheroilrevenuesin2009.
Revenue and interestincreased131%to$263.7 millionin2009comparedto$114.0 millionin2008.Thiswasduetoanincreaseof248%incrudeoilproductionpartiallyoffsetbya33%decreaseincrudeoilprices.
Crude oil and NGL production,netafterroyalties,in2009increasedto4.6 millionbarrelscomparedto1.3 millionbarrelsin2008,duemainlytoincreasedproductionfromourColombiaoperations.Averagerealizedcrudeoilpricesfor2009decreasedto$56.79perbarrelfrom$84.89perbarrelin2008,reflectinglowerWTIoilprices.
Operating expensesfor2009amountedto$40.8 million,a112%increasefromtheprioryear.TheincreaseinoperatingexpensesisduetoexpandedoperationsandincreasedproductionlevelsinColombia.However,operatingexpensesonaboebasisin2009were$8.81perboe,a39%declinefrom2008reflectingareductioninfixedcostsperbarrelduetoproductionincreasesatCostayaco.
DD&Aexpensefor2009increasedto$135.9 millioncomparedto$25.7 millionin2008.Increasedproductionlevels,aswellasamortizationexpenseof$102.5 millionin2009($6.9 millionin2008)relatedtothefairvalueofproperty,plantandequipmentrecordedontheacquisitionofSolana,accountedfortheincreases.Onaboebasis,DD&Ain2009was$29.35comparedto$19.34for2008.This52%increasewasprimarilyduetothesignificantadditionstotheproveddepletablecostbaseresultingfromtheSolanaacquisitionpartiallyoffsetbyhigherprovedreservesinColombia.DD&Afor2009includeda$1.9 millionceilingtestimpairmentlossinourArgentinacostcenter.Thisimpairmentlossresultedfromhigherestimatedfutureoperatingcoststoproduceremainingreserves.
G&A expensesof$28.8 millionfor2009were55%higherthan2008duetoincreasedemployeerelatedcostsreflectingtheexpandedoperationsinColombia.However,duetohigherproductionin2009,G&Aexpensesperboedecreased55%to$6.22perboecomparedto$13.97perboefor2008.
Theforeign exchangelossof$19.8 millionfor2009,ofwhich$19.5 millionisanunrealizednon-cashforeignexchangeloss,comparesto$6.2 millionrecordedin2008.TheselossesprimarilyrepresentforeignexchangelossesthatoriginateinColombiafromthetranslationofadeferredtaxliabilityrecordedonthepurchaseofSolana.
Income tax expensefor2009amountedto$24.4 millioncomparedto$20.9 millionrecordedin2008.Thisrepresentsanincreaseof16%inannualincometaxexpense,primarilyduetoanincreaseinforeigncurrencytranslationlossesthatareneithertaxablenordeductiblefortaxpurposesineachoftherespectivejurisdictions.Theincreaseinthe2009effectivetaxrateto64%from47%in2008isprimarilyduetotheincreaseinthevaluationallowanceassociatedwithincreasedlossesinourU.S.,CanadianandPerubusinessunits.Thevariancefromthe35%U.S.statutoryratefor2009resultsfromanincreaseinthevaluationallowancesasdescribedabove,andtherecaptureofenhancedtaxdepreciationincentiveinColombia,duetoadisposalofassetsduringtheyear,offsetbyenhancedtaxdepreciationtakenonoilandgascapitalexpenditures.Thevariancefromthe35%U.S.statutoryratefor2008isprimarilyattributabletorecognitionofpreviouslyunrecognizedforeigntaxcredits,foreigncurrencytranslationfluctuationsthatarenottaxableordeductibleintherelatedforeignjurisdictions,andvaluationallowancestakenonlossesincurredintheU.S.,Canada,andPeru.
Estimated Oil and Gas ReservesEstimatedprovedoilreserves,netofroyalties,asofDecember31,2010,were23.6 millionbarrels,a7%increasefromtheestimatedprovedreservesasatDecember31,2009.TheincreasewasgeneratedbyourColombianoperationsandresultedfromourexplorationsuccessinMoquetaandfromsustainedreservoirperformanceinCostayaco,whichledtoconversionofprobablereservestoprovedreservesandwhichmorethanoffset2010productionofoil.Estimatedprobableandpossibleoilandnaturalgasliquidsreserves,netofroyalties,asofDecember31,2010were7.4 millionbarrelsand16.3 millionbarrels respectively.
Estimatedprovedgasreserves,netofroyalties,asofDecember31,2010,were1.2billioncubicfeet(“bcf”),a37%decreasefromtheestimatedprovedreservesasatDecember31,2009.Estimatedprobableandpossiblegasreserves,netofroyalties,asofDecember31,2010were0.1bcfand42.1bcf,respectively.
Gran Tierra Energy Annual Report 2010 | 43
Estimatedprovedoilreserves,netofroyalties,asofDecember31,2009,were22.1 millionbarrels,a15%increasefromtheestimatedprovedreservesasatDecember31,2008.TheincreaseresultedfromoursuccessfuldevelopmentdrillingprograminColombiawhichmorethanoffset2009productionofoil.Estimatedprobableandpossibleoilreserves,netofroyalties,asofDecember31,2009,were5.8 millionbarrelsand11.5 millionbarrels,respectively.
Estimatedprovedgasreserves,netofroyalties,asofDecember31,2009,were1.9bcf,a61%increasefromtheestimatedprovedreservesasatDecember31,2008.Estimatedprobableandpossiblegasreserves,netofroyalties,asofDecember31,2009,were1.7bcfand34.5bcf,respectively.
Segmented Results of OperationsOuroperationsarecarriedoutinColombia,Argentina,Peru,andBrazil,andweareheadquarteredinCalgary,Alberta,Canada.OurreportablesegmentsincludeColombia,ArgentinaandCorporatewiththelatterincludingtheresultsofourinitialactivitiesinPeruandBrazil.In2010,Colombiagenerated96%ofourrevenueandotherincome.
Segmented Results — Colombia (1)
YearEndedDecember31,
SegmentedResultsofOperations—Colombia 2010 %Change 2009 %Change 2008
(ThousandsofU.S.Dollars)
Oilandnaturalgassales $ 359,302 44 $ 248,834 141 $ 103,202
Interest 460 (1) 466 (53) 995
359,762 44 249,300 139 104,197
Operatingexpenses 50,431 52 33,091 173 12,117
Depletion,depreciationandaccretion 133,728 5 127,213 473 22,199
Generalandadministrativeexpenses 15,216 17 13,011 173 4,769
Foreignexchangeloss 17,901 (11) 20,158 204 6,622
217,276 12 193,473 323 45,707
Segmentincomebeforeincometaxes $ 142,486 155 $ 55,827 (5) $ 58,490
Production,NetofRoyalties
OilandNGL's("bbl")(2) 4,944,510 15 4,284,230 295 1,085,198
Naturalgas("mcf")(2) 268,776 448 49,028 (237) 14,559
Totalproduction("boe")(2)(3) 4,989,306 16 4,292,401 295 1,087,625
AveragePrices
OilandNGL’s(“perbbl”) $ 72.45 25 $ 58.04 (39) $ 95.04
Naturalgas(“permcf”) $ 3.90 (1) $ 3.93 (20) $ 4.93
SegmentedResultsofOperations(“perboe”)
Oilandnaturalgassales $ 72.01 24 $ 57.97 (39) $ 94.89
Interest 0.09 (18) 0.11 (88) 0.91
72.10 24 58.08 (39) 95.80
Operatingexpenses 10.11 31 7.71 (31) 11.14
Depletion,depreciationandaccretion 26.80 (10) 29.64 45 20.41
Generalandadministrativeexpenses 3.05 1 3.03 (31) 4.38
Foreignexchangeloss 3.59 (24) 4.70 (23) 6.09
43.55 (3) 45.08 7 42.02
Segmentincomebeforeincometaxes $ 28.55 120 $ 13.00 (76) $ 53.78
(1) Segmented results of operations for Colombia include the operations of Solana subsequent to our acquisition of Solana on November 14, 2008.(2) Natural gas liquids (“NGL”) volumes are converted to boe on a one-on-one basis with oil. Gas volumes are converted to boes at the rate of six mcf of gas
per barrel of oil, based upon the approximate relative energy content of gas and oil, which rate is not necessarily indicative of the relationship of oil and gas prices.
(3) Production represents production volumes adjusted for inventory changes.
44 | Gran Tierra Energy Annual Report 2010
Segmented Results of Operations — Colombia for the Year Ended December 31, 2010 Compared to the Results for the Year Ended December 31, 2009
FortheyearendedDecember31,2010,income before income taxesfromColombiaamountedto$142.5 millioncomparedtoincomebeforetaxesof$55.8 millionrecordedin2009.Anincreaseinproductionrevenuemorethanoffsetincreasedoperating,G&A,andDD&Aexpenses.
FortheyearendedDecember31,2010,production of crude oil and NGLs,netafterroyalties,increasedby15%to4.9 millionbarrelscomparedto4.3 millionbarrelsin2009.TheincreaseinproductionisprimarilyduetotheincreaseinwellsonstreaminCostayacoandthesuccessoftheCostayacoworkoverprogram.Productionlevelsareaftergovernmentroyaltiesrangingfrom8%to26%andthirdpartyroyaltiesof2%to10%.Theadditionalgovernmentroyaltypaidin2010(discussedin“ConsolidatedResultsofOperations”)reducedtheincreaseintotalproductionfromtheCostayacofieldascomparedtotheprioryear.
GranTierra’sColombianoperatingresultsfortheyearendedDecember31,2010wereprincipallydrivenbytheincreaseinproductionvolumesandtheassociatedincreaseinworkover,transportation,operating,G&AandDD&Aexpenses.In 2010,ColombiaproductionincludedCostayaco-1,-2,-3,-4,-8,-9,-10(January2010),and-11(June2010),Juanambu1and2,andtheSantanaBlock.In2009,ColombiaproductionincludedCostayaco-1,-2,-3,-4,-5,-8(July2009),-9(September 2009),andJuanambu1.
OutagesontheEcopetroloperatedTransAndeanPipeline(“OTA”)resultwhensectionsofthepipelinearedamaged.OutagesreducedourdeliveriestoEcopetrolfor29daysin2010(7daysinJuneand22daysinSeptember),ascomparedto46daysin2009(32daysinJulyandAugustand14daysinJune).InJanuary2009,theJuanambuandCostayacofieldswerealsoshutinfor10daysduetoageneralstrikeintheregionwhereouroperationsarelocated.Theoveralldecreaseinsalesasaresultofthedisruptionsisestimatedtobeapproximately2%oftotalsalesin2010and14%oftotalsalesin2009.
Revenue and interestwerepositivelyaffectedbyanincreaseinnetrealizedcrudeoilpricesin2010comparedto2009.Theaveragenetrealizedpricesforcrudeoil,whicharebasedonWTIprices,increasedby25%to$72.45perbarrelfortheyearendedDecember31,2010comparedto2009.IncreasedproductioncombinedwiththeincreasednetrealizedcrudeoilpriceresultedinourrevenueandinterestfromColombiafortheyearendedDecember31,2010increasingby44%to$359.8 millionfrom2009levels.
Asaresultofachievinggrossfieldproductionoffive millionbarrelsinourCostayacofieldduringthemonthofSeptember2009,GranTierrabecamesubjecttoanadditionalgovernmentroyaltypayable.Theadditionalroyaltyiscalculatedon30%ofthefieldproductionrevenueoveraninflationadjustedtriggerpoint.ThattriggerpointforGranTierrawas$32.13for2010and$30.22for2009.Productionrevenueforthiscalculationisbasedonproductionvolumesnetofothergovernmentroyaltyvolumes.In2010,theactualgovernmentroyaltiesatCostayacoaveraged24%includingtheadditionalgovernmentroyaltyof15%.In2009,thegovernmentroyaltiesfortheyearaveraged16%,includingtheadditionalgovernmentroyalty,onceitbecameeffectiveSeptember2009.
Operating expensesfortheyearendedDecember31,2010increasedto$50.4 millionfrom$33.1 millionin2009.TheincreasedoperatingexpensesresultedfromtheCostayacoworkoverprogram($6.6 millionhigherthanin2009),increasedtruckingresultingfromincreasedvolumesandOTApipelinemaintenance,andanincreaseinproducingwellsinCostayacofor2010.Onaperboebasis,operatingexpensesfor2010increasedto$10.11comparedto$7.71incurredin2009,reflectinghigheroperatingcostspartiallyoffsetbytheeffectoftheincreaseintotalproduction.Theadditionalgovernmentroyaltypaidin2010ascomparedto2009furtherincreasedtheperboeoperatingcostamountsfrom2009.
For2010,DD&Aexpenseincreasedto$133.7 millionfrom$127.2 millionin2009.Increasedproductionlevelspartiallyoffsetbyhighercrudeoilreservelevelsandalowerfuturedevelopmentcostaddedtothedepletablebase,accountedfortheincreaseinDD&Aexpense.Onaperboebasis,theDD&AexpenseinColombiadecreasedby10%to$26.80for2010,comparedwith$29.64for2009,duetohigherproductionoffsetbyincreasedprovedreservesandlowerfuturedevelopmentcosts.
HigherG&AexpensesincurredtomanagetheincreasedlevelofdevelopmentandoperatingactivitiesresultedinG&Aexpenseincreasingto$15.2 millionfortheyearendedDecember31,2010from$13.0 millionincurredin2009.Onaperboebasis,G&Aexpensein2010increasedby1%to$3.05from$3.03in2009,duetohighercostspartiallyoffsetbyhigherproduction.Theadditionalgovernmentroyaltypaidin2010ascomparedto2009furtherincreasedtheperboeG&Aamountsfrom2009.
The foreign exchange lossof$17.9 millionfortheyearendedDecember31,2010includesanunrealizednon-cashforeignexchangelossof$14.6 millionandcomparestoaforeignexchangelossof$20.2 millionin2009,includingan
Gran Tierra Energy Annual Report 2010 | 45
unrealizednon-cashforeignexchangelossof$19.3 million.Theunrealizednon-cashforeignexchangelossresultedprimarilyfromthetranslationofadeferredtaxliabilityrecognizedonthepurchaseofSolana.Thisdeferredtaxliability,amonetaryliability,isdenominatedinthelocalcurrencyoftheColombianforeignoperationsandasaresult,foreignexchangegainsandlosseshavebeencalculatedonconversiontotheU.S.dollarfunctionalcurrency.AstrengtheningintheColombianpesoagainsttheU.S.dollarresultsinforeignexchangelosses,estimatedat$104,000foreachonepesodecreaseintheexchangerateoftheColombianpesotooneUSdollaratDecember31,2010.
Segmented Results of Operations — Colombia for the Year Ended December 31, 2009 Compared to the Results for the Year Ended December 31, 2008
FortheyearendedDecember31,2009,income before income taxesfromColombiaamountedto$55.8 millioncomparedtoincomebeforetaxesof$58.5 millionrecordedin2008.Anincreaseinproductionrevenuewasmorethanoffsetbyincreasedexpensesincludinga$13.5 millionincreaseinforeignexchangelossto$20.2 million,ofwhich$19.3 millionisanunrealizednon-cashforeignexchangeloss,primarilyduetothetranslationofdeferredtaxes.Also,a$105.0 millionincreaseinDD&A,primarilyaresultoftheamortizationofthefairvalueofSolana’sproperty,plantandequipmentrecordeduponouracquisitionofSolana,partiallyoffsettheincreaseinproductionrevenue.HigheroperatingexpensesduetoincreasedColombianproductionandincreasedgeneralandadministrativeexpensesfromexpandedactivitiesalsocontributedtoareductioninincomebeforeincometaxes.
FortheyearendedDecember31,2009,production of crude oil and NGLs,netafterroyalties,increasedby295%to4.3 millionbarrelscomparedto1.1 millionbarrelsin2008.TheincrementalproductionvolumesfromSolanapropertiesfortheyearendedDecember31,2009were2.2 millionbarrelsofoil,comparedto69,747barrelsofoilsubsequenttotheacquisitionofSolanaonNovember14,2008.Theseproductionlevelsareaftergovernmentroyaltiesrangingfrom8%to22.5%andthirdpartyroyaltiesof2%to10%.
GranTierra’sColombianoperatingresultsfortheyearendedDecember31,2009areprincipallyimpactedbytheinclusionofproductionfromthreenewdevelopmentwellsintheCostayacofield,includingSolana’s50%shareofproductionfromCostayaco,andSolana’s35%shareofproductionfromJuanambu-1intheGuayuyacoBlock.In2008,ColombiaproductionincludedproductionfromCostayaco-1,2,3,4,5,andJuanambu-1alongwithproductionfromtheSantanaBlock.
Ourproductionin2009and2008wasimpactedbypoliticalandeconomicfactorsinColombia.Inthesecondandthirdquarterof2009,andthefirstandsecondquarterof2008,sectionsoftheEcopetroloperatedTransAndeanPipelineweredamaged,whichtemporarilyreducedourdeliveriestoEcopetrol.OnNovember24,2008,wetemporarilysuspendedproductionoperationsintheCostayacoandJuanambuoilfields.ThiswasasaresultofadeclarationofastateofemergencyandforcemajeurebyEcopetrol,duetoageneralstrikeintheregionwhereouroperationsarelocated.OnJanuary12,2009,crudeoiltransportationresumedinsouthernColombiaasaresultoftheliftingofthestrikeattheOritofacilitiesoperatedbyEcopetrol.
Asaresultofthesefactors,deliveriestoEcopetrolin2009werereducedtoapproximately3,800BOPD,netafterroyalties,for32daysbetweenJulyandAugust2009,andreducedtoapproximately2,200BOPD,netafterroyalties,for14daysinJune,andwewereshutinforthefirst10daysofJanuary.Duringthefirstquarterof2008,deliveriestoEcopetrolwerereducedtoapproximately1,900BOPD,netafterroyalties,for18daysandinthesecondquarterof2008deliverieswerereducedtoapproximately2,300BOPD,netafterroyalties,for14days.
Revenue and interestwerenegativelyimpactedbyadeclineinnetrealizedcrudeoilpricesin2009comparedto2008.Theaveragenetrealizedpricesforcrudeoil,whicharebasedonWTIprices,decreasedby39%to$58.04perbarrelfortheyearendedDecember31,2009comparedto2008.However,substantiallyincreasedproductionresultedinourrevenueandinterestfromColombiafortheyearendedDecember31,2009increasingby139%to$249.3 millionfrom2008.
Asaresultofachievinggrossfieldproductionoffive millionbarrelsinourCostayacofieldduringthemonthofSeptember2009,GranTierraisnowsubjecttoanadditionalgovernmentroyaltypayable.Thisroyaltyiscalculatedon30%ofthefieldproductionrevenueoveraninflationadjustedtriggerpoint.ThattriggerpointforGranTierrawas$30.22for2009.Productionrevenueforthiscalculationisbasedonproductionvolumesnetofothergovernmentroyaltyvolumes.AveragegovernmentroyaltiesatCostayacowithgrossproductionof19,000BOPDand$70WTIperbarrelareapproximately24.8%,includingtheadditionalgovernmentroyaltyofapproximately17.0%.TheNationalHydrocarbonsAgencyslidingscaleroyaltyat19,000BOPDisapproximately9.4%andthisroyaltyisdeductiblepriortocalculatingtheadditionalgovernmentroyalty.
46 | Gran Tierra Energy Annual Report 2010
Operating expensesfortheyearendedDecember31,2009increasedto$33.1 millionfrom$12.1 millionin2008.TheincreasedoperatingexpensesresultedfromtheincreaseinproductionandtheinclusionoftheSolanaoperationsacquiredonNovember14,2008.However,onaperboebasis,operatingexpensesfor2009declinedto$7.71comparedto$11.14incurredin2008,reflectingthereductionoffixedoperatingcostsperbarrelastotalproductionincreased.
For2009,DD&Aexpenseincreasedto$127.2 millionfrom$22.2 millionin2008.IncreasedproductionlevelscoupledwithahigherdepletablecostbaseresultingfromtheSolanaacquisition,partiallyoffsetbyhighercrudeoilreservelevels,accountedfortheincreaseinDD&Aexpense.TheincrementalDD&AexpenserecordedasaresultoftheSolanaacquisitionwas$102.5 millionfortheyearendedDecember31,2009comparedto$6.9 millionrecordedin2008.Onaperboebasis,theDD&AexpenseinColombiaincreasedby45%to$29.64for2009,comparedwith$20.41for2008,duetothehigherdepletablecostbasereflectingtheSolanapropertiesrecordedatfairvalueuponacquisition,partiallyoffsetbyincreasedprovedreserves.
HigherG&Aexpensesincurredtomanagetheincreasedlevelofdevelopmentandoperatingactivities,theSolanaacquiredproperties,andincreasedstock-basedcompensationexpenseresultedinG&Aexpenseincreasingto$13.0 millionfortheyearendedDecember31,2009from$4.8 millionincurredin2008.Onaperboebasis,G&Aexpensein2009decreasedby31%to$3.03from$4.38in2008,duetohigherproduction.
Theforeign exchange lossof$20.2 millionfortheyearendedDecember31,2009includesanunrealizednon-cashforeignexchangelossof$19.3 millionwhichresultedprimarilyfromthetranslationofadeferredtaxliabilitydenominatedinColombianPesosrecognizedonthepurchaseofSolana.AstrengtheningintheColombianpesoagainsttheU.S.dollarresultsinforeignexchangelosses,estimatedat$104,000foreachonepesodecreaseintheexchangerateoftheColombianpesotooneUSdollar.
Capital Program — ColombiaGranTierra’sfocusfor2010wastocontinuewiththedevelopmentoftheCostayacofieldtoincreaseourproductionandreserves,inadditiontoundertakingadditionaloilexplorationeffortstofurtherdefinethepotentialofouracreageinColombia.Insupportofthisstrategy,ourcapitalexpendituresinColombiaamountedto$105.5 millionfortheyearendedDecember31,2010.
SegmentedCapitalExpenditures—ColombiaYear Ended
December 31,
BlockandActivity(MillionsofU.S.Dollars)
2010
Chaza CostayacofacilitiesandsitepreparationanddrillingforCostayaco-11,-12,-13,Moqueta-1,-2,-3,-4,Pacayaco-1,Canangucho-1 $ 75.0
RioMagdalena Popa-3drilling 1.6Guayuyaco Juanambu-2drillingandfacilities 6.3Garibay Completionof3DseismicprogramandJilguero-1drilling 1.0Rumiyaco Commencementof3Dseismic 5.1PiedemonteSur Taruka-1well 5.9Azar 2Dand3Dseismicprograms 1.5PiedemonteNorte Commencementof3Dseismic 2.4Magangue Guepajefacilities 0.6CapitalizedG&A,$5.0property acquisitionandother 6.1SegmentedCapitalExpenditures—Colombia $ 105.5
Gran Tierra Energy Annual Report 2010 | 47
Forcomparison,fortheyearendedDecember31,2009,wespent$81.4 milliononcapitalprojects.
SegmentedCapitalExpenditures—ColombiaYearEnded
December31,
BlockandActivity(MillionsofU.S.Dollars) 2009
Chaza DrilledandtestedCostayaco-6,-7,-8,-9,commenceddrillingofCostayaco-10,drilledDantayaco-1,commenced2Dseismicprogram,installedfacilitiesandequipment $ 53.6
RioMagdalena CompletionandlongtermtestingofPopa-2welland3D75kilometers(“km”)seismicprogram 3.4
Guachiria Completedacquisitionof115squarekilometers(“km2”)of3Dseismic 1.0
GuachiriaNorte DrillingofthePuinaves-2explorationwell,whichwasdry 5.8
GuachiriaSur Completedacquisitionof115km2of3Dseismic 3.7
Garibay Completedacquisitionof110km2of3Dseismic 3.4
Azar Commencementof2Dand3Dseismicprograms 2.3
Guayayaco Juanambuproductionseparator 2.0
Leaseholdimprovements 1.8
CapitalizedG&Aandother 4.4
SegmentedCapitalExpenditures—Colombia $ 81.4
Forcomparison,fortheyearendedDecember31,2008,wespent$31.7milliononcapitalprojects.Includedinthisamountwas$6.8 millionincapitalexpendituresrelatedtotheSolanapropertiessubsequenttotheacquisition.
Segmented Capital Expenditures—ColombiaYear Ended
December 31,
Block and Activity(Millions of U.S. Dollars) 2008
Chaza DrilledandtestedCostayaco-2,-3,-4,-5,commenceddrillingofCostayaco-6,and facilitiesandequipment $ 17.8
Costayacopipeline 15km8-inchpipelinetoconnectCostayacofieldtoexistingpipelineinfrastructure 4.0
Azar Acquired40km2 of3Dseismicandweperformedonewellre-entryonthePalmera1well,encounteringoil 1.3
Guachiria DrillingLosAceites-1andPrimavera-1 1.1
GuachiriaNorte Drilledanexplorationwell,Zafiro-1,inNovember2008,whichwasdry 3.4
CapitalizedG&Aandother 4.1
SegmentedCapitalExpenditures—Colombia $ 31.7
InOctober2010,wesolda3%overridinginterestinJilguero-1anda1%overridinginterestintheGaribayBlockfor$6.4 million.
DuetothehighcosttotransportoilproducedfromtheGuachiriaBlocksintheLlanosBasininColombia,productionwasshutinFebruary2009.InApril2009,GranTierrasignedanassetpurchaseandsaleagreementwithathirdpartyforGranTierra’sinterestsintheGuachiriaNorte,Guachiria,andGuachiriaSurblocks.Principaltermsincluded considerationof$7.0 million fromthethirdparty,comprisinganinitialcashpaymentof$4.0 millionatclosing,followedby15monthlyinstallmentsof$200,000eachbeginningJune1,2009andextendingthroughAugust3,2010,lesssettlementofoutstandingamounts.ThesaleclosedonApril16,2009and GranTierrarecordednetproceedsof$6.3 million.GranTierraretaineda10%overridingroyaltyinterestontheGuachiriaSurBlock,which,intheeventofadiscovery,isdesignedtoreimburse200%ofourcostsforpreviouslyacquiredseismicdata.
48 | Gran Tierra Energy Annual Report 2010
Segmented Results — Argentina YearEndedDecember31,
SegmentedResultsofOperations—Argentina(ThousandsofU.S.Dollars) 2010 %Change 2009 %Change 2008
Oilandnaturalgassales $ 13,984 1 $ 13,795 44 $ 9,603
Interest 26 (80) 127 452 23
14,010 1 13,922 45 9,626
Operatingexpenses 8,808 17 7,537 7 7,027
Depletion,depreciation,accretionandimpairment 29,416 253 8,339 146 3,390
Generalandadministrativeexpenses 2,868 24 2,318 13 2,055
Foreignexchangeloss(gain) 165 493 (42) (114) 311
41,257 127 18,152 42 12,783
Segmentlossbeforeincometaxes $ (27,247) 544 $ (4,230) 34 $ (3,157)
Production,NetofRoyalties
OilandNGL’s(“bbl”)(1)(2) 284,044 (16) 337,316 39 242,947
AveragePrices
OilandNGL’s(“perbbl”) $ 49.23 20 $ 40.90 3 $ 39.53
SegmentedResultsofOperations(“perboe”)
OilandNGLsales $ 49.23 20 $ 40.90 3 $ 39.53
Interest 0.09 (76) 0.38 322 0.09
49.32 19 41.28 4 39.62
Operatingexpenses 31.01 39 22.34 (23) 28.92
Depletion,depreciation,accretionandimpairment 103.56 319 24.72 77 13.95
Generalandadministrativeexpenses 10.10 47 6.87 (19) 8.46
Foreignexchangeloss(gain) 0.58 583 (0.12) (110) 1.28
145.25 170 53.81 2 52.61
Segmentlossbeforeincometaxes $ (95.93) 666 $ (12.53) (4) $ (12.99)(1) NGL volumes are converted to boe on a one-to-one basis with oil.(2) Production represents production volumes adjusted for inventory changes.
Segmented Results of Operations — Argentina for the Year Ended December 31, 2010 Compared to the Results for the Years Ended December 31, 2009 and December 31, 2008
Forthe2010fiscalyear,thepre-tax lossfromArgentinawas$27.3 million comparedtopre-taxlossesof$4.2 millionand$3.2 millionrecordedinfiscalyears2009and2008,respectively,duetolowerproductionlevelsandincreasedoperatingandG&AexpensesaswellasDD&Ain2010,onlypartiallyoffsetbyincreasedoilprices.OperatingexpensesincreaseddueprimarilytocostsassociatedwithValleMorado,whichhadlimitedoperatingcostsin2009,priortore-entryinthethirdquarterof2010.DD&AincludedchargesforceilingtestimpairmentoftheArgentinacostcenterof$23.6 millionin2010and$1.9 millionin2009.Theimpairmentlossin2010included$17.9 millionrelatingtotheabandonmentofthesidetrackoperationsattheGTE.St.VMor-2001well.Theremaining$5.2 millionimpairmentlossresultedfromanincreaseinestimatedfutureoperatingcoststoproduceremainingprovedreservesandareductioninreserves.Generalandadministrativeexpensesincreasedduetoanincreaseinstaffingandconsultingfeesover2009levels.
Crude oil and NGL production,netafter12%royalties,decreased16%to284,044barrelsin2010compared to337,316barrelsin2009and242,947barrelsin2008.Thedecreaseresultedfromgeneralproductiondeclines.Theincreaseinproductionlevelsin2009incomparisonwith2008resultedfromthesuccessfulcompletionandtestingoftheProa-1explorationwellintheSurubiBlockinthethirdquarterof2008withsalescommencinginthefourthquarterofthatyear.
Gran Tierra Energy Annual Report 2010 | 49
Duetothelocalregulatoryregimes,thepricewecurrentlyreceiveforproductionfromourblocksisapproximately$53.50perbarrel.Furthermore,currentlyalloilandgasproducersinArgentinaareoperatingwithoutsalescontracts. AnewwithholdingtaxregimewasintroducedinArgentinawithResolution394/2007.ProducersandrefinersofoilinArgentinahavebeenunabletodetermineanagreedsalespriceforoildeliveriestorefineriessincethementionedresolution;however,wearecontinuingsalesofouroilundermonthlyagreementswithRefinorS.A. Weareworkingwithotheroilandgasproducersinthearea,aswellasRefinorS.A.,tolobbythefederalgovernmentforchange.
Capital Program — ArgentinaCapitalexpendituresfortheyearendedDecember31,2010amountedto$33.9 millionandincludedexploratoryseismicintheSantaVictoriaBlockfor$3.9 million,a$2.7 millionworkoverinElChiviland$24.4 millionrelatedtothere-entryandsidetrackoftheGTE.St.VMor-2001well,including$2.0 milliontobuyoutourpartner’soptiontobackinforanadditionalworkinginterest.
CapitalexpendituresfortheyearendedDecember31,2009amountedto$4.5 millionmainlyrelatedtoworkovers,facilityconstruction,andtheacquisitionofseismic.
CapitalexpendituresfortheyearendedDecember31,2008,amountedto$11.7 millionandincludeddrillingoftheProa-1discoverywellontheSurubiBlockforanetcostof$9.5 million.Proa-1commencedproductioninSeptember2008.TheprovincialoilcompanyREFSAfarmed-intotheblockfora15%workinginterest,andarepayingtheirshareofwellcostsfromtheirshareofproductionfromProa-1.In2008,othercostsof$1.2 millionwereincurredprimarilyoncapitalizedwellworkovers,wellre-entries,seismicacquisition,andequipmentupgrades.
Segmented Results — Corporate YearEndedDecember31,
SegmentedResultsofOperations—Corporate(ThousandsofU.S.Dollars) 2010 %Change 2009 %Change 2008
Interest $ 688 39 $ 494 140 $ 206
Operatingexpenses 207 33 156 111 74
Depletion,depreciationandaccretion 429 38 311 110 148
Generalandadministrativeexpenses 22,157 65 13,458 14 11,769
Derivativefinancialinstruments(gain)loss (44) 123 190 (198) (193)
Foreignexchangegain (1,228) 285 (319) (54) (698)
21,521 56 13,796 24 11,100
Segmentlossbeforeincometaxes $ (20,833) 57 $ (13,302) 22 $ (10,894)
Segmented Results of Operations — CorporateInadditiontotheexpendituresassociatedwiththemaintenanceofGranTierra’sheadquartersinCalgary,Alberta,Canada,costofcomplianceandreportingunderthesecuritiesregulations,businessdevelopmentandtechnicaloversightandsupportforouroperations,theresultsoftheCorporateSegmentincludetheresultsofourinitialoperationsinPeruand Brazil.
G&A Expenses
IncreasedstaffinglevelstosupportbusinessdevelopmentactivitiesandexpandedoperationsinPeruandBrazilaswellashigherstockbasedcompensationexpenseduetoincreasedstockoptiongrantswerethecontributingfactorstothethree-yearincreaseinCorporateG&A.
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Derivative Financial Instruments (Gain) Loss
YearEndedDecember31,
(ThousandsofU.S.Dollars) 2010 2009 2008
Realizedfinancialderivative(gain)loss $ – $ (87) $ 2,689
Unrealizedfinancialderivative(gain)loss (44) 277 (2,882)
Derivativefinancialinstruments(gain)loss $ (44) $ 190 $ (193)
As at December31,
Assets(Liabilities) 2010 2009
Derivativefinancialinstruments $ – $ (44)
InaccordancewiththetermsofthecreditfacilitywithStandardBankPlc,inFebruaryof2007weenteredintoacostlesscollarfinancialderivativecontractforcrudeoilbasedonWTIprice,withafloorof$48.00andaceilingof$80.00,forathreeyearperiod,for400barrelsperdayfromMarch 2007toDecember 2007,300barrelsperdayfromJanuary 2008toDecember 2008,and200barrelsperdayfromJanuary 2009toFebruary 2010.WehadnoderivativecontractsoutstandingatDecember31,2010.
FortheyearendedDecember31,2010,werecordedagainof$44,000.Thiscomparestoalossof$0.2 millionandgainof$0.2 million,fortheyearsendedDecember31,2009,and2008,respectively.ThesegainsandlossesarebasedontheeffectsofchangingWTIcrudeoilprice,andforwardpricecurvesusedtofairvaluethecostlesscollarattherespectiveyear ends.
Foreign Exchange Loss (Gain)
Theforeignexchangeloss(gain)resultsfromthetranslationofforeigncurrencydenominatedtransactions toU.S.Dollars.
Capital Program — CorporateThecapitalexpendituresfortheCorporateSegmentduringtheyearendedDecember31,2010were$37.6 million.Theseexpendituresincluded$21.2millionforseismicacquisitioninPeruonourexplorationblocks122and128,a$2.0 milliondepositonthefarm-inofBlock95inPeru,an$8.0 millionrefundabledepositontheBrazilfarm-in,$4.4 millionnon-refundableexpendituresrelatingtocapitalcommitmentsontheBrazilfarm-in,and$2.0 millionofgeneralcorporateassets.
ThecapitalexpendituresfortheCorporateSegmentduringtheyearendedDecember31,2009were$2.2 million.Theseexpendituresincluded$1.8 millionforPeruonourexplorationblocks122and128fordrillingfeasibilityandgeological studies.
The2008capitalexpendituresof$3.3 millionfortheCorporateSegmentincludedexpendituresof$2.8 millionforPeruonourexplorationblocks122and128.Acquisitionoftechnicaldatathroughaeromagnetic-gravitystudiesbeganin2007,andwascompletedinthefirsthalfof2008,withatotalof20,000kilometersofdataacquiredoverbothblocks.In2008,westartedEnvironmentalImpactAssessmentsandthecommunityconsultationprocessonbothblocks.Theseprojectswerecompletedin2009,alongwithdrillingfeasibilityandgeologicalstudies.
Gran Tierra Energy Annual Report 2010 | 51
Fourth Quarter ResultsThefollowingtableprovidesananalysisofquarterlyfinancialinformation(inthousandsofdollarsexceptproduction,pershareandperBOEamounts)forthethreemonthsendedDecember31,2010comparedtothesameperiodin2009:
ThreeMonthsEnded
December31,
SelectedQuarterlyFinancialInformation 2010 2009
Production—barrelsofoilequivalentperday 15,928 14,714
PerBOEpricesrealized $ 76.79 $ 70.93
Revenueandotherincome $ 112,667 $ 96,286
Expenses 72,244 53,106
Incomebeforeincometax 40,423 43,180
Incometaxexpense 27,305 12,355
Netincome 13,118 30,825
Basicearningspershare $ 0.05 $ 0.13
Dilutedearningspershare $ 0.04 $ 0.12
Thefourthquarter2010netincomewaspositivelyimpactedbytheincreaseinproductionandhighercrudeoilprices,partiallyoffsetbytheincreaseinexpensesrelatedtoexpandedoperations.
Revenueandotherincomeforthefourthquarterof2010amountedto$112.7 million,anincreaseof17%fromthesamequarterlastyear.Higherproductionlevelsandimprovedcrudeoilpricescontributedtothissignificantincrease.Productionofcrudeoilandnaturalgasincreasedby8%to15,928BOEPDfrom14,714BOEPDinthelastquarterof2009.Thepositiveeffectofthisincreaseinproductionwascomplementedbytheincreaseincrudeoilprices.Averagepricesperboeincreasedby8%to$76.79inthefourthquarterof2010from$70.93realizedinthesamequarterlastyear.
Operatingexpensesincreased$4.7 millioninthefourthquarterof2010ascomparedtothefourthquarterof2009dueprimarilytotheworkoverprograminCostayacoandincreasedtransportationcostsrelatedtohigherproductionandpipelinemaintenancein2010.G&Aexpensesincreased$2.8 millioninthefourthquarterof2010ascomparedtothefourthquarterof2009duetoincreasedactivity.DD&Aexpensebetweenthetwoquartersincreased$15.9 millionto$56.3 millionin2010mainlyduetotheArgentinacostcenterceilingtestimpairmentofwhich$17.9 millionrelatedtotheabandonmentoftheGTE.St.VMor-2001sidetrackoperationsoffsetbyahigherreservebasein2010.Thecomparativeresultsbetweenthetwoquarterswerealsoaffectedbyaforeignexchangegainof$16.9 millionrecordedinthethreemonthsendedDecember 31,2010comparedtoaforeignexchangegainof$12.6 millionrecordedinthesamequarterofthepreviousyear,aspreviouslydiscussed.
Liquidity and Capital ResourcesAtDecember31,2010,wehadcashandcashequivalentsof$355.4 millioncomparedto$270.8 millionatDecember31,2009,and$176.8 millionatDecember31,2008.Webelievethatourcashposition,togetherwithpositivecashflowfromoperationsandnodebt,willprovideuswithsufficientliquiditytomeetourstrategicobjectivesandfundourplannedcapitalprogramforatleastthenexttwelvemonths.Inaccordancewithourinvestmentpolicy,cashbalancesareinvestedonlyinUnitedStatesorCanadiangovernmentbackedfederal,provincialorstatesecuritieswiththehighestcreditratingsandshorttermliquidity.Webelievethatourcurrentfinancialpositionprovidesustheflexibilitytorespondtobothinternalgrowthopportunitiesandthoseavailablethroughacquisitions.
GranTierrabelievesthatithassufficientavailablecashandcashflowfromoperationstocoveritsexpectedfundingneedsonbothashort-termandlong-termbasis.Iftheneedweretoarise,GranTierrabelievesthatitcouldaccessshort-termdebtmarkets,tofunditsshort-termrequirementsandtoensurenear-termliquidity.GranTierraregularlymonitorsthecreditandfinancialmarketsand,inthefuture,maytakeadvantageofwhatitbelievesarefavorablemarketconditionstoissuelong-termdebttofurtherimproveitsliquidityandcapitalresources.GranTierra’slong-termfinancingstrategyistomaintaincontinuousaccesstothedebtmarketstoaccommodateitslongtermgrowthstrategy.
EffectiveJuly30,2010,asubsidiaryofGranTierra,Solana,establishedacreditfacilitywithBNPParibasforathree-yeartermwhichmaybeextendedoramendedbyagreementbetweentheparties. Thisreservebasedfacilityhasamaximumborrowingbaseupto$100 millionandissupportedbythepresentvalueofthepetroleumreservesofourtwosubsidiarieswithoperatingbranchesinColombia—GranTierraEnergyColombiaLtd.andSolanaPetroleumExploration(Colombia)Ltd. Theinitialcommittedborrowingbaseis$20 million. Amountsdrawndownunderthefacilitybearinterest
52 | Gran Tierra Energy Annual Report 2010
attheUSD LIBORrateplus3.5%.Inaddition,astand-byfeeof1.50%perannumischargedontheunutilizedbalanceofthecommittedborrowingbaseandisincludedingeneralandadministrativeexpense. Underthetermsofthefacility,wearerequiredtomaintainandwereincompliancewithcertainfinancialandoperatingcovenants.AsatDecember31,2010, wehadnotdrawndownanyamountsunderthisfacility.
Cash Flows
DuringtheyearendedDecember31,2010,ourcashandcashequivalentsincreasedby$84.6 millionascashinflowsfromoperationsof$203.8 millionandfromfinancingactivitiesof$24.7 millionmorethanoffsetnetcashoutflowsforinvestingactivitiesof$143.9 million.
Netcashprovidedbyoperatingactivitiesin2010 waspositivelyaffectedbytheincreasesincrudeoilproductionandrealizedoilpriceovertheprioryear.ThepositiveaffectofthehigherproductionandpricinglevelswaspartiallyoffsetbyincreasesinoperatingandG&Aexpensesandcashtaxesaswellasanincreaseinaccountsreceivableassociatedwiththe higheroilrevenueandareductionofaccountspayablerelatedtooperatingactivities.
Aspreviouslydiscussed,theoilandgaspropertyexpendituresin2010 primarilyrelatedtocontinueddevelopmentofourCostayacofieldinColombiaandtheidentificationofnewexplorationprospectsinallbusinessunitsresultingintheincreaseincashusedforinvestingactivities.Cashprovidedbyfinancingactivitiesin2010relatedtotheexerciseofoutstandingwarrantsandemployeestockoptions.
DuringtheyearendedDecember31,2009,ourcashandcashequivalentsincreasedby$94.0 millionascashinflowsfromoperationsof$165.5 millionandfromfinancingactivitiesof$4.9 millionmorethanoffsetcashoutflowsforinvestingactivitiesof$76.4 million.
Netcashprovidedbyoperatingactivitiesin2009wasaffectedbythesignificantincreaseincrudeoilproductionpartiallyoffsetbythedecreaseinoilpricesandincreaseinreceivablesrelatedtooilsales.TheacquisitionofSolanaalongwiththeadditionalproductionfromthreenewdevelopmentwellsinColombiacontributedtotheincreasedproduction.Thisincreasedoilrevenuefromhigherproductionvolumesandahigherfourthquarter2009averageoilpricereceived,ascomparedtothesamequarteroftheprioryear,resultedinouraccountsreceivableincreasingfromthe2008yearend.Thiswasmorethanoffsetbyanincreaseinouraccountspayableandaccruedliabilitiesassociatedwithoperatingactivitiesatyearend.Inaddition,inDecember2008,ouroperationsinColombiaweresignificantlyrestrictedduetoageneralstrikewhichreducedouryearendaccountsreceivable.The2009oilandgaspropertyexpendituresprimarilyrelatedtocontinueddevelopmentofourCostayacofieldinColombiaandtheidentificationofnewexplorationprospectsinallbusinessunitsresultingintheincreaseincashusedforinvestingactivities.Cashprovidedbyfinancingactivitiesrelatedtotheexerciseofoutstandingwarrantsandemployeestockoptions.
FortheyearendedDecember31,2008,ourcashandcashequivalentsincreasedby$158.6 millionduetopositivecashinflowsfromoperationsof$109.7 million,frominvestingactivitiesof$27.1 millionandfromfinancingactivitiesof$21.7 million.NetcashprovidedbyoperatingactivitieswaspositivelyaffectedbythesignificantincreasesincrudeoilproductionandpricesaswellascollectionofreceivablesobtainedaspartoftheSolanaacquisitionandanincreaseincurrentincometaxespayablerelatedtoGranTierra’staxablepositioninColombia.Cashinflowsfrominvestingactivitiesincluded$81.9 millionassumedonthepurchaseofSolana,netofacquisitioncosts,offsetby$55.2 millionincapitalexpendituresrelatedtoourexplorationanddevelopmentandotheroilfieldrelatedactivitiesnetofthechangeinnon-cashworkingcapital.Cashinflowsfromfinancingactivitiesof$21.7 millionrelatedtotheproceedsfromtheexerciseofwarrantsandstockoptions.
Aspreviouslydiscussed,theincreaseinoilandgaspropertyexpendituresprimarilyrelatetocontinueddevelopmentofourCostayacofieldinColombiaandtheidentificationofnewexplorationprospectsinallbusinessunitsresultingintheincreaseincashusedforinvestingactivities.Cashprovidedbyfinancingactivitiesrelatestotheexerciseofoutstandingwarrantsandemployeestockoptions.
Off-Balance Sheet Arrangements
AsatDecember31,2010,2009and2008wehadnooff-balancesheetarrangements.
Gran Tierra Energy Annual Report 2010 | 53
Contractual Obligations
GranTierraholdsthreecategoriesofoperatingleases,namelyoffice,vehicleandhousing.Wepaymonthlycostsof$0.2 millionforofficeleases,$11,000forvehicleleasesand$5,000forcertainemployeeaccommodationleasesinColombia,ArgentinaandPeru.
FutureleasepaymentsandothercontractualobligationsatDecember31,2010areasfollows: AsatDecember31,2010
PaymentsDueinPeriod
ContractualObligations(ThousandsofU.S.Dollars) Total
Lessthan1 Year
1to3years
3to5years
Morethan5 years
Operatingleases $ 5,444 $ 2,476 $ 2,068 $ 900 $ –
Softwareandtelecommunication 1,456 1,137 319 – –
Drilling,completion,facilityconstruction andoiltransportationservices 71,412 62,754 8,658 – –
Consulting 393 393 – – –
Total $ 78,705 $ 66,760 $ 11,045 $ 900 $ –
Contractualcommitmentshaveincreased$45.4 millionfromDecember31,2010asaresultofincreasedoperatingleasesprimarilyduetoenteringintomorethirdpartyfacilityconstruction,oiltransportationanddrillingrigcommitmentcontracts($46.4 million),inColombia,Argentina,andPeru.
TheacquisitionofPetrolifera,announcedJanuary2011andexpectedtocloseinMarch2011,willbeachievedthroughashareexchange;however,weexpecttoretirePetrolifera’sbankdebtafterclosing,whichwouldresultinacashoutflowofapproximately$60 million.
Related Party Transactions
OnAugust3,2010,GranTierraenteredintoacontractrelatedtothedrillingprograminPeruwithacompanyforwhichoneofGranTierra’sdirectorsisashareholderanddirector.AtDecember31,2010,$0.8 millionhasbeencapitalizedandaccruedinrelationtothiscontract,thetermsofwhich,areconsistentwithmarketconditions.
InconnectionwiththeSolanaacquisition,weacquiredadditionalofficespaceof4,441squarefeetusedbySolanaasitsheadquartersinCalgary. OnFebruary1,2009, weenteredintoa subleaseforthatofficespacewithacompany,ofwhichoneofGranTierra’sdirectorsisashareholderanddirector. ThetermofthesubleaserunsfromFebruary1,2009toAugust 31,2011andthesubleasepaymentis$7,800permonthplusapproximately$4,000foroperatingandotherexpenses. Thetermsofthesubleasewereconsistent withmarketconditionsintheCalgaryrealestatemarket.
Subsequent Events
OnJanuary17,2011,weenteredintoanAgreementtoacquirealltheissuedandoutstandingsharesandwarrantsofPetroliferaPetroleumLimited(“Petrolifera”).PetroliferaisaCanadianbasedinternationaloilandgascompanythattradesontheTorontoStockExchangeandhasoilandgasassetsinArgentina,Colombia,andPeru.UnderthetermsoftheAgreement,Petroliferashareholderswillreceive0.1241ofashareofGranTierraEnergy,foreveryPetroliferashareheld.Inaddition,wewillissuereplacementwarrantsfortheoutstandingwarrantstopurchasePetroliferacommonshares,intheamountof0.1241ofaGranTierrawarrantforeachPetroliferawarrant.Atotalofapproximately19 millionofGranTierra’ssharesareexpectedtobeissuedinthetransaction,whichrepresentsapproximatelyan8%increaseinsharesoutstanding.Totalconsiderationforthetransactionwillbeapproximately$195 million,includingtheassumptionofPetrolifera’sdebt,workingcapitalandinvestmentsasofSeptember30,2010.TheAgreementissubjecttoregulatory,court,stockexchange,andPetroliferasecurityholderapprovalsandisscheduledtocloseinMarch2011.
OnJanuary12,2011, weenteredintoanagreementtosubleaseofficespacetoacompanyforwhichGranTierra’sPresidentandChiefExecutiveOfficerservesasanindependentdirector.ThetermofthesubleaserunsfromFebruary1,2011toJanuary30,2013and,at$4,444permonth,thetermsareconsistentwithmarketconditionsintheCalgary,Alberta,Canadarealestatemarket.
54 | Gran Tierra Energy Annual Report 2010
Outlook
BusinessEnvironmentOurrevenueshavebeenpositivelyimpactedbytheincreaseincrudeoilpricesfromtheprioryear.Crudeoilpricesarevolatileandunpredictableandareinfluencedbyconcernsaboutfinancialmarketsandtheimpactofthedownturnintheworldwideeconomyonoildemandgrowth.Further,followingtheacquisitionofPetroliferathroughashareexchange,announcedJanuary2011andexpectedtocloseinMarch2011,weexpecttoretirePetrolifera’sbankdebt,whichwillreduceourcashbyapproximately$60 million.However,basedonprojectedproduction,prices,costsandourcurrentliquidityposition,webelievethatourcurrentoperationsandcapitalexpenditureprogramcanbemaintainedfromcashflowfromexistingoperationsandcashonhand,barringunforeseeneventsoraseveredownturninoilandgasprices.Shouldouroperatingcashflowdecline,wewouldexaminemeasuressuchasreducingourcapitalexpenditureprogram,issuanceofdebt,dispositionofassets,orissuanceofequity.
Ourfuturegrowthandacquisitionsmaydependonourabilitytoraiseadditionalfundsthroughequityanddebtmarkets.Determinationoftheborrowingbaseunderourcreditfacilitywillmostlikelybedependentonoursuccessinmaintainingorincreasingoilandgasreservesandonfutureoilprices.Shouldweberequiredtoraisedebtorequityfinancingtofundcapitalexpendituresorotheracquisitionanddevelopmentopportunities,suchfundingmaybeaffectedbythemarketvalueofourcommonstock.Ifthepriceofourcommonstockdeclines,ourabilitytoutilizeourstocktoraisecapitalmaybenegativelyaffected.Also,raisingfundsbyissuingstockorotherequitysecuritieswouldfurtherdiluteourexistingstockholders,andthisdilutionwouldbeexacerbatedbyadeclineinourstockprice.Anysecuritiesweissuemayhaverights,preferencesandprivilegesthatareseniortoourexistingequitysecurities.Borrowingmoneymayalsoinvolvepledgingofsomeorallofourassets.Volatilityinthecreditmarketsmayincreasecostsassociatedwithrenewingorissuingdebt,oraffectour,orthirdpartiesweseektodobusinesswith,abilitytoaccessthosemarkets.
2011WorkProgramandCapitalExpenditureProgramInDecember2010,priortothefinalizationandannouncementofthePetroliferaacquisition,weannouncedthedetailsofGranTierra’s2011workprogram.GranTierra’s2011workprogramisintendedtocreatebothgrowthandvalueinourexistingassetsthroughincreasingourreservesandproductionfromexplorationfinancedbycashflow,whileretainingfinancialflexibilitywithastrongcashpositionandnodebt,sothatwecanbepositionedtoundertakefurtherdevelopmentopportunitiesandtopursueacquisitionopportunities.However,actualcapitalexpendituresmayvarysignificantlyfromour2011workprogramifunexpectedeventsorcircumstancesoccur,suchasnewopportunitiespresentthemselves,oranticipatedopportunitiesdonotcometofruition,whichmaythereforeeitherincreaseordecreasetheamountofcapitalexpendituresweincurin2011.CapitalcommitmentsandotherexplorationanddevelopmentopportunitiesarisingfromthePetroliferaacquisitionwerenotcontemplatedintheoriginalcapitalprogramandmayhaveasignificantimpactontheamountandallocationofcapitalexpendituresforeachcountry.Theeffectoftheacquisitiononthecapitalprogramwillbeassessedonanongoingbasis.
Excludingpotentialexplorationsuccess,productionin2011isexpectedtorangebetween16,000and18,000BOEPDnetafterroyalty.
GranTierrahasplanneda2011capitalspendingprogramof$299 millionforexplorationanddevelopmentactivitiesinColombia,Peru,ArgentinaandBrazil.Plannedcapitalexpendituresare$148 millioninColombia,$56 millioninPeru,$39 millioninArgentina,and$55 millioninBrazil.
Weexpectthatourcommittedanddiscretionary2011capitalprogramcanbefundedfromcashflowfromoperationsandcashonhand.ThedetailsofthecapitalprogramsplannedforeachcountrydonotcontemplateanyeffectofthePetroliferaacquisitionandtheportfolioofprospectsandcommitmentsthattheacquisitionincludes.ThefollowingoutlookrepresentsthecapitalprogrambaseduponthecurrentportfolioofGranTierraproperties.
Outlook—ColombiaThe2011capitalprograminColombiais$148 million.FacilityconstructionassociatedwithongoingdevelopmentoftheMoquetafieldandfurtherfacilityworkatCostayacoisexpectedtobe$30 million.$53 millionisbudgetedforseismicand$65 millionforexplorationanddevelopmentdrilling.Thedrillingprogramincludesfourgrossdevelopmentwellsandasixwellexplorationprogramthatcomprisesfourgrossexplorationwellsandtwostratigraphictestwells.
The2011explorationdrillingprograminColombiaincludes4explorationwells,2stratigraphictestwellsandseismicacquisitionsincluding440km2of3Dseismicand370km2of2Dseismic.
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Inadditiontotheaboveexplorationactivityweplantospendapproximately$30 milliononinfrastructure,whichincludesflowlines,gasreinjectionfacilities,roadaccessconstructionandfullfielddevelopmentplanning.
Outlook—ArgentinaThe2011capitalprograminArgentinais$40 million.GranTierra’splannedworkprogramfor2011includescostsrelatedtothere-entryandsidetrackoftheGTE.St.VMor-2001wellandrelatedfacilitiesupgrades,aswellasthedrillingofadevelopmentwellinPalmarLargo,workoversinElVinalar,facilityconstruction,andgeophysicalwork.InFebruary2011,thesidetrackandre-entryoperationsattheGTE.St.VMor-2001wellweresuspendedandthewellborewillbeabandonedwhileGranTierraevaluatesotheroptionsassociatedwithfielddevelopment.Thecapitalbudgetmayberevisedbasedontheresultsoftheevaluation.
Outlook—PeruThe2011capitalprograminPeruis$56 million,including$34 millionrelatedtodrillingexplorationwellsandanadditional$19 millionrelatedtoseismic.
GranTierrabegandrillingthefirstexplorationwellinBlock128inFebruary2011andplanstodrillthesecondexplorationwellonBlock122inthethirdquarterof2011.20%ofBlock128wasalsorelinquishedinFebruary2011.
Seismicactivityisplannedtocontinueinblocks123,124,and129withexplorationdrillingenvironmentalimpactassessmentstobeconductedconcurrentlyinblocks123and129.
UponapprovalofassignmentofintereststoGranTierrabyPerupetroS.A.,GranTierraplanstodrilloneexplorationwellonBlock95inthefourthquarterof2011.
Outlook—BrazilThe2011capitalprograminBrazilis$55 millionandincludes$17 millionbudgetedfordrillingandcompletionsandtheremainderrelatestoacquisitioncostsoftheworkinginterestownershipasdescribedbelow.
UpontheanticipatedregulatoryapprovalfromBrazil’sAgenciaNacionaldePetroleo,GasNaturaleBiocombustiveis(“ANP”),GranTierrawillholda70%workinginterestinBlocksREC-T-129,-142,-155,and-224intheonshoreReconcavoBasin.ThefirstexplorationwellinBlock129isplannedforthesecondquarterof2011andwillbefollowedbyuptothreeadditionalexplorationwellsincludingtwowellsonBlock142andonewellonBlock155.Additionally,twoappraisalwellsonBlock155areplannedtofurtherdeveloptheexisting1-ALV-2-BAwelldiscoveryontheBlock.
Critical Accounting Policies and Estimates
Thepreparationoffinancialstatementsundergenerallyacceptedaccountingprinciples(“GAAP”)intheUnitedStatesrequiresmanagementtomakeestimates,judgmentsandassumptionsthataffectthereportedamountsofassetsandliabilitiesanddisclosureofcontingentassetsandliabilitiesatthedateofthefinancialstatementsandthereportedamountsofrevenuesandexpensesduringthereportingperiod.
Thecriticalaccountingpoliciesusedbymanagementinthepreparationofourconsolidatedfinancialstatementsarethosethatareimportantbothtothepresentationofourfinancialconditionandresultsofoperationsandrequiresignificantjudgmentsbymanagementwithregardstoestimatesused.Webelievethattheassumptions,judgmentsandestimatesinvolvedinoilandgasaccountingandreservesdetermination,establishmentoffairvaluesofassetsandliabilitiesacquiredaspartofacquisitions,impairment,assetretirementobligations,goodwillimpairment,deferredincometaxes,share-basedpaymentarrangements,andwarrantshavethegreatestpotentialimpactonourconsolidatedfinancialstatements.Theseareasarekeycomponentsofourresultsofoperationsandarebasedoncomplexruleswhichrequireustomakejudgmentsandestimates,soweconsiderthesetobeourcriticalaccountingestimates.Ourcriticalaccountingpoliciesandsignificantjudgmentsandestimatesrelatedtothosepoliciesarediscussedbelow.
Actualresultscoulddifferfromtheseestimates,however,historically,ourassumptions,judgmentsandestimatesrelativetoourcriticalaccountingestimateshavenotdifferedmateriallyfromactualresults.
Onaregularbasisweevaluateourassumptions,judgmentsandestimates.WealsodiscussourcriticalaccountingpoliciesandestimateswiththeAuditCommitteeoftheBoardofDirectors.
OilandGasAccounting-ReservesDeterminationWefollowthefullcostmethodofaccountingforourinvestmentinoilandnaturalgasproperties,asdefinedbytheU.S.SecuritiesandExchangeCommission(“SEC”),asdescribedinnote2toourannualconsolidatedfinancialstatements.Fullcostaccountingdependsontheestimatedreserveswebelievearerecoverablefromouroilandgasreserves.The process
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ofestimatingreservesiscomplex.Itrequiressignificantjudgmentsanddecisionsbasedonavailablegeological,geophysical,engineeringandeconomicdata.
Toestimatetheeconomicallyrecoverableoilandnaturalgasreservesandrelatedfuturenetcashflows,weincorporatemanyfactorsandassumptionsincluding:
• Expectedreservoircharacteristicsbasedongeological,geophysicalandengineeringassessments• Futureproductionratesbasedonhistoricalperformanceandexpectedfutureoperatingandinvestmentactivities• Futurecommodityprices • Futureoilandgasqualitydifferentials • Assumedeffectsofregulationbygovernmentalagencies • Futuredevelopmentandoperatingcosts Webelieveourassumptionsarereasonablebasedontheinformationavailabletousatthetimeweprepareour
estimates.However,theseestimatesmaychangesubstantiallyasadditionaldatafromongoingdevelopmentactivitiesandproductionperformancebecomesavailableandaseconomicconditionsimpactingoilandgaspricesandcostschange.
Managementisresponsibleforestimatingthequantitiesofprovedoilandnaturalgasreservesandforpreparingrelateddisclosures.EstimatesandrelateddisclosuresarepreparedinaccordancewithSECrequirementsandgenerallyacceptedindustrypracticesintheUnitedStatesasprescribedbytheSocietyofPetroleumEngineers.Reserveestimatesareauditedatleastannuallybyindependentqualifiedreservesconsultants.
OurBoardofDirectorsoverseestheannualreviewofouroilandgasreservesandrelateddisclosures.TheBoardmeetswithmanagementperiodicallytoreviewthereservesprocess,resultsandrelateddisclosuresandappointsandmeetswiththeindependentreservesconsultantstoreviewthescopeoftheirwork,whethertheyhavehadaccesstosufficientinformation,thenatureandsatisfactoryresolutionofanymaterialdifferencesofopinion,andinthecaseoftheindependentreservesconsultants,theirindependence.
Reservesestimatesarecriticaltomanyofouraccountingestimates,including:• Determiningwhetherornotanexploratorywellhasfoundeconomicallyproduciblereserves• Calculatingourunit-of-productiondepletionrates.Provedreservesestimatesareusedtodetermineratesthatare
appliedtoeachunit-of-productionincalculatingourdepletionexpense.• Assessing,whennecessary,ouroilandgasassetsforimpairment.Estimatedfuturecashflowsaredeterminedusing
provedreserves.Thecriticalestimatesusedtoassessimpairment,includingtheimpactofchangesinreservesestimates,are
discussedbelow:
OilandGasAccountingandImpairmentTheaccountingforanddisclosureofoilandgasproducingactivitiesrequiresthatwechoosebetweenGAAPalternatives.Weusethefullcostmethodofaccountingforouroilandnaturalgasoperations.Underthismethod,separatecostcentersaremaintainedforeachcountryinwhichweincurcosts.Allcostsincurredintheacquisition,explorationanddevelopmentofproperties(includingcostsofsurrenderedandabandonedleaseholds,delayleaserentals,dryholesandoverheadrelatedtoexplorationanddevelopmentactivities)arecapitalized.Thesumofnetcapitalizedcostsandestimatedfuturedevelopmentcostsofoilandnaturalgaspropertiesforeachfullcostcenteraredepletedusingtheunit-of-productionmethod.Changesinestimatesofprovedreserves,futuredevelopmentcostsorassetretirementobligationsareaccountedforprospectivelyinourdepletioncalculation.
Investmentsinunprovedpropertiesarenotdepletedpendingthedeterminationoftheexistenceofprovedreserves.Unprovedpropertiesareassessedperiodicallytoascertainwhetherimpairmenthasoccurred.Unprovedproperties,thecostsofwhichareindividuallysignificant,areassessedindividuallybyconsideringtheprimaryleasetermsoftheproperties,theholdingperiodoftheproperties,andgeographicandgeologicdataobtainedrelatingtotheproperties.Whereitisnotpracticabletoindividuallyassesstheamountofimpairmentofpropertiesforwhichcostsarenotindividuallysignificant,thesepropertiesaregroupedforpurposesofassessingimpairment.Theamountofimpairmentassessedisaddedtothecoststobeamortizedintheappropriatefullcostpool.
TheacquisitionofSolanawasaccountedforusingthepurchasemethod,withGranTierrabeingtheacquirer,wherebytheSolanaassetsacquiredandliabilitiesassumedwererecordedattheirfairvaluesattheacquisitiondatewiththeexcessofthepurchasepriceoverthefairvaluesofthetangibleandintangiblenetassetsacquiredrecordedasgoodwill.Calculationoffairvaluesofassetsandliabilities,whichwasdonewiththeassistanceofindependentadvisors,issubject
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toestimateswhichincludevariousassumptionsincludingtheextentofprovedandunprovedreservesoftheacquiredcompanyaswellasthefutureproductionanddevelopmentcostsandthefutureoilandgasprices.
Whiletheseestimatesoffairvalueforthevariousassetsacquiredandliabilitiesassumedhavenoeffectonourliquidityorcapitalresources,theycanhaveaneffectonthefutureresultsofoperations.Generally,thehigherthefairvalueassignedtobothoilandgaspropertiesandnon-oilandgasproperties,thelowerfuturenetincomewillbeasaresultofhigherfuturedepreciation,depletionandaccretionexpense.Also,ahigherfairvalueassignedtotheoilandgasproperties,basedonhigherfutureestimatesofoilandgasprices,willincreasethelikelihoodofafullcostceilingwritedownintheeventthatfutureoilandgaspricesdropbelowourpriceforecastthatweusedtooriginallydeterminefairvalue.
Companiesthatusethefullcostmethodofaccountingforoilandnaturalgasexplorationanddevelopmentactivitiesarerequiredtoperformaceilingtestcalculationeachquarteronacountry-by-countrybasis.Theceilinglimitsthesepooledcoststotheaggregateoftheafter-tax,presentvalue,discountedat10%,offuturecashflowsattributabletoprovedreserves,knownasthestandardizedmeasure,plusthelowerofcostormarketvalueofunprovedpropertieslessanyassociatedtaxeffects.Cashflowestimatesforourimpairmentassessmentsrequireassumptionsabouttwoprimaryelements—constantpricesandreserves.Itisdifficulttodetermineandassesstheimpactofadecreaseinourprovedreservesonourimpairmenttests.Therelationshipbetweenthereservesestimateandtheestimateddiscountedcashflowsiscomplexbecauseofthenecessaryassumptionsthatneedtobemaderegardingperiodendproductionrates,twelvemonthunweightedaveragepricesandcosts.Ifthesecapitalizedcostsexceedtheceiling,wewillrecordawrite-downtotheextentofsuchexcessasanon-cashchargetoearnings.Anysuchwrite-downwillreduceearningsintheperiodofoccurrenceandresultinlowerDD&Aexpenseinfutureperiods.Awrite-downmaynotbereversedinfutureperiods,eventhoughhigheroilandnaturalgaspricesmaysubsequentlyincreasetheceiling.Duetothecomplexityofthecalculation,weareunabletoprovideareasonablesensitivityanalysisoftheimpactthatareservesestimatedecreasewouldhaveonourassessmentofimpairment.Areductioninoilandnaturalgaspricesand/orestimatedquantitiesofoilandnaturalgasreserveswouldreducetheceilinglimitationandcouldresultinaceilingtestwrite-down.
WeassessedouroilandgaspropertiesforimpairmentasatDecember 31,2010andfoundnoimpairmentwrite-downwasrequiredbasedonourassumptionsforourColombiacostcenter.AsaresultofassessingouroilandgaspropertyimpairmentforourArgentinacostcenter,aceilingtestimpairmentlossof$23.6 millionwasrecordedasaresultoftheabandonmentoftheGTE.St.VMor-2001sidetrackoperations,anincreaseinestimatedfutureoperatingcoststoproduceourremainingArgentineprovedreservesandadecreaseinreservevolumes.WeassessedouroilandgaspropertiesforimpairmentasatDecember 31,2009and2008andfoundthatanimpairmentwrite-downof$1.9 millionwasrequiredin2009forourArgentinacostcenterandthatnoimpairmentwrite-downswererequiredin2008basedonourassumptions.EstimatesofstandardizedmeasureofourfuturecashflowsfromprovedreservesforourDecember31,2010ceilingtestswerebasedonrealizedcrudeoilpricesof$78.23and$3.84permcfinColombiaand$50.18foroilproductioninArgentina.
AssetRetirementObligationsWearerequiredtoremoveorremedytheeffectofouractivitiesontheenvironmentatourpresentandformeroperatingsitesbydismantlingandremovingproductionfacilitiesandremediatinganydamagecaused.Estimatingourfutureassetretirementobligationsrequiresustomakeestimatesandjudgmentswithrespecttoactivitiesthatwilloccurmanyyearsintothefuture.Inaddition,theultimatefinancialimpactofenvironmentallawsandregulationsisnotalwaysclearlyknownandcannotbereasonablyestimatedasstandardsevolveinthecountriesinwhichweoperate.
Werecordassetretirementobligationsinourconsolidatedfinancialstatementsbydiscountingthepresentvalueoftheestimatedretirementobligationsassociatedwithouroilandgaswellsandfacilities.Inarrivingatamountsrecorded,wemakenumerousassumptionsandjudgmentswithrespecttoultimatesettlementamounts,inflationfactors,creditadjusteddiscountrates,timingofsettlementandexpectedchangesinlegal,regulatory,environmentalandpoliticalenvironments.Theassetretirementobligationsresultinanincreasetothecarryingcostofourproperty,plantandequipment.Theobligationsareaccretedwiththepassageoftime.Achangeinanyoneofourassumptionscouldimpactourassetretirementobligations,ourproperty,plantandequipmentandournetincome.
Itisdifficulttodeterminetheimpactofachangeinanyoneofourassumptions.Asaresult,weareunabletoprovideareasonablesensitivityanalysisoftheimpactachangeinourassumptionswouldhaveonourfinancialresults.
GoodwillGoodwillrepresentstheexcessofpurchasepriceofbusinesscombinationsoverthefairvalueofnetassetsacquiredandwetestforimpairmentatleastannually.Theimpairmenttestrequiresallocatinggoodwillandcertainotherassetsand
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liabilitiestoreportingunits.Weestimatethefairvalueofeachreportingunitandcompareittothenetbookvalueofthereportingunit.Iftheestimatedfairvalueofthereportingunitislessthanthenetbookvalue,includinggoodwill,wewritedownthegoodwilltotheimpliedfairvalueofthegoodwillthroughachargetoexpense.Becausequotedmarketpricesarenotavailableforourreportingunits,weestimatethefairvaluesofthereportingunitsbaseduponestimatedfuturecashflowsofthereportingunit.ThegoodwillonourfinancialstatementswasaresultoftheSolanaandArgosyacquisitions,andrelatesentirelytotheColombiareportingsegment.Thisreportingsegmentisnotatriskoffailingthe“Step1”goodwillimpairmenttestunderFinancialAccountingStandardsBoard(“FASB”)AccountingStandardsCodification(“ASC”)350,Intangibles – Goodwill and Others.ThecalculatedfairvalueoftheColombianbusinessunitwassignificantlyinexcessofitsbookvalues.
Differencesintheouractualfuturecashflows,operatingresults,growthrates,capitalexpenditures,costofcapitalanddiscountratesascomparedtotheestimatesutilizedforthepurposeofcalculatingthefairvalueofeachbusinessunit,aswellasadeclineinourstockpriceandrelatedmarketcapitalization,couldaffecttheresultsofourannualgoodwillassessmentand,accordingly,potentiallyleadtofuturegoodwillimpairmentcharges.
IncomeTaxesWefollowtheliabilitymethodofaccountingforincometaxeswherebywerecognizedeferredincometaxassetsandliabilitiesbasedontemporarydifferencesinreportedamountsforfinancialstatementandtaxpurposes.Wecarryonbusinessinseveralcountriesandasaresult,wearesubjecttoincometaxesinnumerousjurisdictions.Thedeterminationofourincometaxprovisionisinherentlycomplexandwearerequiredtointerpretcontinuallychangingregulationsandmakecertainjudgments.Whileincometaxfilingsaresubjecttoauditsandreassessments,webelievewehavemadeadequateprovisionforallincometaxobligations.However,changesinfactsandcircumstancesasaresultofincometaxaudits,reassessments,jurisprudenceandanynewlegislationmayresultinanincreaseordecreaseinourprovisionforincome taxes.
Toassesstherealizationofdeferredtaxassets,managementconsiderswhetheritismorelikelythannotthatsomeportionorallofthedeferredtaxassetswillnotberealized.Theultimaterealizationofdeferredtaxassetsisdependentuponthegenerationoffuturetaxableincomeduringtheperiodsinwhichthosetemporarydifferencesbecomedeductible.Weconsiderthescheduledreversalofdeferredtaxliabilities,projectedfuturetaxableincomeandtaxplanningstrategiesinmakingthisassessment.
Oureffectivetaxrateisbasedonpre-taxincomeandthetaxratesapplicabletothatincomeinthevariousjurisdictionsinwhichweoperate.Anestimatedeffectivetaxratefortheyearisappliedtoourquarterlyoperatingresults.Intheeventthatthereisasignificantunusualordiscreteitemrecognized,orexpectedtoberecognized,inourquarterlyoperatingresults,thetaxattributabletothatitemwouldbeseparatelycalculatedandrecordedatthesametimeastheunusualordiscreteitem.Weconsidertheresolutionofprior-yeartaxmatterstobesuchitems.Significantjudgmentisrequiredindeterminingoureffectivetaxrateandinevaluatingourtaxpositions.Weestablishreserveswhenitismorelikelythannotthatwewillnotrealizethefulltaxbenefitoftheposition.Weadjustthesereservesinlightofchangingfactsandcircumstances.
Share-BasedPaymentArrangementsWerecordshare-basedpaymentarrangementsinaccordancewiththeASC718,Compensation — Stock Compensation,whichrequiresthemeasurementandrecognitionofcompensationexpenseforallshare-basedpaymentawardsmadetoemployeesanddirectorsincludingemployeestockoptionsbasedonestimatedfairvalues.
ASC718requirescompaniestoestimatethefairvalueofshare-basedpaymentawardsonthedateofgrantusinganoption-pricingmodel.ThevalueoftheportionoftheawardthatisultimatelyexpectedtovestisrecognizedasexpenseovertherequisiteserviceperiodsinourConsolidatedStatementofOperations.
UnderASC718,share-basedcompensationexpenserecognizedduringtheperiodisbasedonthevalueoftheportionofshare-basedpaymentawardsthatisultimatelyexpectedtovestduringtheperiod.Compensationexpenseisrecognizedusingtheacceleratedmethod.Asshare-basedcompensationexpenserecognizedintheConsolidatedStatementsofOperationsisbasedonawardsultimatelyexpectedtovest,ithasbeenreducedforestimatedforfeitures.ASC718requiresforfeiturestobeestimatedatthetimeofgrantandrevised,ifnecessary,insubsequentperiodsifactualforfeituresdifferfromthoseestimates.
UnderASC718,weutilizeaBlack-Scholesoptionpricingmodeltomeasurethefairvalueofstockoptionsgrantedtoemployees.Ourdeterminationoffairvalueofshare-basedpaymentawardsonthedateofgrantusinganoption-pricingmodelisaffectedbyourstockpriceaswellasassumptionsregardinganumberofhighlycomplexandsubjectivevariables.
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Thesevariablesinclude,butarenotlimitedto,ourexpectedstockpricevolatilityoverthetermoftheawards,andactualandprojectedemployeestockoptionexercisebehaviors. Weareresponsiblefordeterminingtheassumptionsusedinestimatingthefairvalueofourshare-basedpaymentawards.
WarrantsWefollowthefair-valuemethodofaccountingforwarrantsissuedtopurchaseourcommonstock.
New Accounting Pronouncements
VariableInterestEntitiesInJune2009,theFASBissuedrevisedaccountingstandardstoimprovefinancialreportingbyenterprisesinvolvedwithvariableinterestentities.Thestandardsreplacethequantitative-basedrisksandrewardscalculationfordeterminingwhichenterprise,ifany,hasacontrollingfinancialinterestinavariableinterestentitywithanapproachfocusedonidentifyingwhichenterprisehasthepowertodirecttheactivitiesofavariableinterestentitythatmostsignificantlyimpacttheentity’seconomicperformanceand:(1) theobligationtoabsorblossesoftheentity;or,(2) therighttoreceivebenefitsfromtheentity.ThestandardswereimplementedprospectivelyonJanuary 1,2010anddidnotmateriallyimpactGranTierra’sconsolidatedfinancialposition,operatingresultsorcashflows.
FairValueMeasurementsInJanuary2010,theFASBissuedAccountingStandardsUpdate(“ASU”),“FairValueMeasurementsandDisclosures(Topic820):ImprovingDisclosuresaboutFairValueMeasurements”.ThisASUamendsexistingdisclosurerequirementsaboutfairvaluemeasurementsbyaddingrequireddisclosuresaboutitemstransferredintoandoutoflevels1and2inthefairvaluehierarchy;addingseparatedisclosuresaboutpurchases,sales,issuances,andsettlementsrelativetolevel3measurements;andclarifying,amongotherthings,theexistingfairvaluedisclosuresaboutthelevelofdisaggregation.ThisiseffectiveforinterimandannualreportingperiodsbeginningafterDecember15,2009,exceptforthedisclosuresaboutpurchases,sales,issuances,andsettlementsintherollforwardofactivityinLevel3fairvaluemeasurements. ThosedisclosuresareeffectiveforfiscalyearsbeginningafterDecember15,2010,andforinterimperiodswithinthosefiscalyears. TheimplementationofthisupdateonJanuary1,2010didnotmateriallyimpactGranTierra’sdisclosures.
SubsequentEventsInFebruary2010,theFASBissuedASU,“SubsequentEvents(Topic855).” TheamendmentsremovetherequirementsforanSECfilertodiscloseadate,inbothissuedandrevisedfinancialstatements,throughwhichsubsequenteventshavebeenreviewed.ThisASUwaseffectiveuponissuance. TheimplementationofthisupdatedidnotmateriallyimpactGranTierra’sdisclosures.
StockCompensationInApril2010,theFASBissuedASU,“Compensation–StockCompensation(Topic718).” Theamendmentsclarifythatanemployeeshare-basedpaymentawardwithanexercisepricedenominatedinthecurrencyofamarketinwhichasubstantialportionoftheentity’sequitysecuritiestradesshouldnotbeconsideredtocontainaconditionthatisnotamarket,performance,orservicecondition.Therefore,anentitywouldnotclassifysuchanawardasaliabilityifitotherwisequalifiesasequity. ThisASUiseffectiveforfiscalyears,andinterimperiodswithinthosefiscalyears,beginningonorafterDecember15,2010.TheimplementationofthisupdateisnotexpectedtomateriallyimpactGranTierra’sconsolidatedfinancialposition,operatingresultsorcashflows.
ReceivablesInJuly2010,theFASBissuedASU,“Receivables(Topic310).” Theupdateisintendedtoprovidefinancialstatementuserswithgreatertransparencyaboutanentity’sallowanceforcreditlossesandthecreditqualityofitsfinancingreceivables.ThedisclosuresasoftheendofareportingperiodareeffectiveforinterimandannualreportingperiodsendingonorafterDecember15,2010. TheimplementationofthisupdatedidnotmateriallyimpactGranTierra’sdisclosures.
BusinessCombinationsInDecember2010,theFASBissuedASU,“BusinessCombinations(Topic850),DisclosuresofSupplementaryProFormaInformationforBusinessCombinations.” Theupdateisintendedtoconformreportingofproformarevenueandearningsformaterialbusinesscombinationsincludedinthenotestothefinancialstatementsandexpanddisclosureofnon-
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recurringadjustmentsthataredirectlyattributabletothebusinesscombination.Theproformarevenueandearningsofthecombinedentityarepresentedasiftheacquisitiondatehadoccurredasofthebeginningoftheannualreportingperiod.Ifcomparativesarepresented,theproformadisclosuresforbothperiodspresentedshouldbereportedasiftheacquisitionhadoccurredasofthebeginningofthecomparablepriorannualreportingperiodonly.ThisASUiseffectiveforbusinesscombinationsforwhichtheacquisitiondateisonorafterthebeginningofthefirstannualreportingperiodbeginningonorafterDecember15,2010. TheimplementationofthisupdateisnotexpectedtomateriallyimpactGranTierra’sdisclosures.
GranTierrahasreviewedallotherrecentlyissued,butnotyetadopted,accountingstandardupdatesinordertodeterminetheireffects,ifany,onitsconsolidatedfinancialstatements.Basedonthatreview,GranTierrabelievesthattheimplementationofthesestandardswillnotmateriallyimpactGranTierra’sconsolidatedfinancialposition,operatingresults,cashflows,ordisclosurerequirements.
Quantitative and Qualitative Disclosure About Market Risk
Ourprincipalmarketriskrelatestooilprices.Essentially100%ofourrevenuesarefromoilsalesatpriceswhicharedefinedbycontractrelativetoWTIandadjustedfortransportationandquality,foreachmonth.InArgentina,afurtherdiscountfactorwhichisrelatedtoataxonoilexportsestablishesacommonpricingmechanismforalloilproducedinthecountry,regardlessofitsdestination.
Weconsiderourexposuretointerestraterisktobeimmaterialasweholdonlycashandcashequivalents.Interestrateexposuresrelateentirelytoourinvestmentportfolio,aswedonothaveshorttermorlongtermdebt.Ourinvestmentobjectivesarefocusedonpreservationofprincipalandliquidity.Bypolicy,wemanageourexposuretomarketrisksbylimitinginvestmentstohighqualitybankissuersatovernightrates,orgovernmentsecuritiesoftheUnitedStatesorCanadianfederalgovernmentssuchasGuaranteedInvestmentCertificatesorTreasuryBills.Wedonotholdanyoftheseinvestmentsfortradingpurposes.Wedonotholdequityinvestments.
Foreigncurrencyriskisafactorforourcompanybutisamelioratedtoalargedegreebythenatureofexpendituresandrevenuesinthecountrieswhereweoperate.Wehavenotengagedinanyformalhedgingactivitywithregardtoforeigncurrencyrisk.OurreportingcurrencyisU.S.dollarsandessentially100%ofourrevenuesarerelatedtotheU.S.priceofWestTexasintermediateoil.InColombia,wereceive100%ofourrevenuesinU.S.dollars.ThemajorityofourcapitalexpendituresinColombiaareinU.S.dollarsandthemajorityoflocalofficecostsareinlocalcurrency.InArgentina,referencepricesforoilareinU.S.dollarsandrevenuesarereceivedinArgentinepesosaccordingtocurrentexchangerates.ThemajorityofcapitalexpenditureswithinArgentinahavebeeninU.S.dollarswithlocalofficecostsgenerallyinpesos.WhileweoperateinSouthAmericaexclusively,themajorityofouracquisitionexpenditureshavebeenvaluedandpaidinU.S.dollars.
Additionally,foreignexchangegains/lossesresultfromthefluctuationoftheU.S.dollartotheColombianpesoduetoourdeferredtaxliability,amonetaryliability,whichismainlydenominatedinthelocalcurrencyoftheColombian foreignoperations.Asaresult,aforeignexchangegain/lossmustbecalculatedonconversiontotheU.S.dollarfunctionalcurrency.AstrengtheningintheColombianpesoagainsttheU.S.dollarresultsinforeignexchangelosses,estimatedat$104,000foreachonepesodecreaseintheexchangerateoftheColombianpesotooneU.S.dollar.
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Financial Statements and Supplementary Data
Report of Independent Registered Chartered AccountantsTotheBoardofDirectorsandShareholdersofGranTierraEnergyInc.:
WehaveauditedtheaccompanyingconsolidatedfinancialstatementsofGranTierraEnergyInc.anditssubsidiaries,whichcomprisetheconsolidatedbalancesheetsasatDecember31,2010and2009,andtheconsolidatedstatementsofoperationsandretainedearnings(accumulateddeficit),shareholders’equity,andcashflowsforeachofthethreeyearsintheperiodendedDecember31,2010,andasummaryofsignificantaccountingpoliciesandotherexplanatoryinformation.
Management’sResponsibilityfortheConsolidatedFinancialStatementsManagementisresponsibleforthepreparationandfairpresentationofthese consolidatedfinancialstatementsinaccordancewithaccountingprinciplesgenerallyacceptedintheUnitedStatesofAmerica,andforsuchinternalcontrolasmanagementdeterminesisnecessarytoenablethepreparationofconsolidatedfinancialstatementsthatarefreefrommaterialmisstatement,whetherduetofraudorerror.
Auditor’sResponsibilityOurresponsibilityistoexpressanopinionontheseconsolidatedfinancialstatementsbasedonouraudits.WeconductedourauditsinaccordancewithCanadiangenerallyacceptedauditingstandardsandthestandardsofthePublicCompanyAccountingOversightBoard(UnitedStates).Thosestandardsrequirethatwecomplywithethicalrequirementsandplanandperformtheaudittoobtainreasonableassuranceaboutwhethertheconsolidatedfinancialstatementsarefreefrommaterialmisstatement.
Anauditinvolvesperformingprocedurestoobtainauditevidenceabouttheamountsanddisclosuresintheconsolidatedfinancialstatements.Theproceduresselecteddependontheauditor’sjudgment,includingtheassessmentoftherisksofmaterialmisstatementoftheconsolidatedfinancialstatements,whetherduetofraudorerror.Inmakingthoseriskassessments,theauditorconsidersinternalcontrolrelevanttotheentity’spreparationandfairpresentationoftheconsolidatedfinancialstatementsinordertodesignauditproceduresthatareappropriateinthecircumstances.Anauditalsoincludesevaluatingtheappropriatenessofaccountingpoliciesusedandthereasonablenessofaccountingestimatesmadebymanagement,aswellasevaluatingtheoverallpresentationoftheconsolidatedfinancialstatements.
Webelievethattheauditevidencewehaveobtainedinourauditsissufficientandappropriatetoprovideabasisforourauditopinion.
OpinionInouropinion,theconsolidatedfinancialstatementspresentfairly,inallmaterialrespects,thefinancialpositionofGranTierraEnergyInc.anditssubsidiariesasatDecember31,2010and2009,andtheresultsofitsoperationsanditscashflowsforeachofthreeyearsintheperiodendedDecember31,2010inaccordancewithaccountingprinciplesgenerallyacceptedintheUnitedStatesofAmerica.
OtherMattersWehavealsoaudited,inaccordancewiththestandardsofthePublicCompanyAccountingOversightBoard(UnitedStates),theCompany’sinternalcontroloverfinancialreportingasofDecember31,2010,basedonthecriteriaestablishedinInternal Control — Integrated FrameworkissuedbytheCommitteeofSponsoringOrganizationsoftheTreadwayCommissionandourreportdatedFebruary24,2011 expressedanunqualifiedopinionontheCompany’sinternalcontroloverfinancialreporting.
/s/Deloitte&ToucheLLPIndependentRegisteredCharteredAccountantsCalgary,CanadaFebruary24,2011
62 | Gran Tierra Energy Annual Report 2010
Consolidated Statements of Operations and Retained Earnings (Accumulated Deficit)
YearEndedDecember31,
(ThousandsofU.S.Dollars,ExceptShareandPerShareAmounts) 2010 2009 2008
REVENUEANDOTHERINCOME
Oilandnaturalgassales $ 373,286 $ 262,629 $ 112,805
Interest 1,174 1,087 1,224
374,460 263,716 114,029
EXPENSES
Operating 59,446 40,784 19,218
Depletion,depreciation,accretionandimpairment(Note5) 163,573 135,863 25,737
Generalandadministrative 40,241 28,787 18,593
Derivativefinancialinstruments(gain)loss(Note11) (44) 190 (193)
Foreignexchangeloss 16,838 19,797 6,235
280,054 225,421 69,590
INCOMEBEFOREINCOMETAXES 94,406 38,295 44,439
Incometaxexpense(Note8) (57,234) (24,354) (20,944)
NETINCOMEANDCOMPREHENSIVEINCOME 37,172 13,941 23,495
RETAINEDEARNINGS(ACCUMULATEDDEFICIT),BEGINNINGOFYEAR 20,925 6,984 (16,511)
RETAINEDEARNINGS,ENDOFYEAR $ 58,097 $ 20,925 $ 6,984
NETINCOMEPERSHARE—BASIC $ 0.15 $ 0.06 $ 0.19
NETINCOMEPERSHARE—DILUTED $ 0.14 $ 0.05 $ 0.16
WEIGHTEDAVERAGESHARESOUTSTANDING—BASIC(Note6) 253,697,076 241,258,568 123,421,898
WEIGHTEDAVERAGESHARESOUTSTANDING—DILUTED(Note6) 264,304,831 253,590,103 143,194,590
(Seenotestotheconsolidatedfinancialstatements)
Gran Tierra Energy Annual Report 2010 | 63
Consolidated Balance Sheets
AsatDecember31,
(Thousands of U.S. Dollars) 2010 2009
ASSETS
CurrentAssets
Cashandcashequivalents $ 355,428 $ 270,786
Restrictedcash 250 1,630
Accountsreceivable 43,035 35,639
Inventory(Note2) 5,669 4,879
Taxesreceivable 6,974 1,751
Prepaids 1,940 1,820
Deferredtaxassets(Note8) 4,852 4,252
TotalCurrentAssets 418,148 320,757
OilandGasProperties(usingthefullcostmethodofaccounting)
Proved 442,404 474,679
Unproved 278,753 234,889
TotalOilandGasProperties 721,157 709,568
Othercapitalassets 5,867 3,175
TotalProperty,PlantandEquipment(Note5) 727,024 712,743
OtherLongTermAssets
Restrictedcash 1,190 162
Deferredtaxassets(Note8) – 7,218
Otherlongtermassets 311 347
Goodwill(Note3) 102,581 102,581
TotalOtherLongTermAssets 104,082 110,308
TotalAssets $ 1,249,254 $ 1,143,808
LIABILITIESANDSHAREHOLDERS’EQUITY
CurrentLiabilities
Accountspayable(Note9) $ 76,023 $ 36,786
Accruedliabilities(Note9) 32,120 40,229
Derivativefinancialinstruments(Note11) – 44
Taxespayable 43,832 28,087
Assetretirementobligation(Note7) 338 450
TotalCurrentLiabilities 152,313 105,596
LongTermLiabilities
Deferredtaxliability(Note8) 204,570 216,625
Deferredremittancetaxandother 1,036 903
Assetretirementobligation(Note7) 4,469 4,258
TotalLongTermLiabilities 210,075 221,786
CommitmentsandContingencies(Note10)
SubsequentEvents(Note14)
Shareholders’Equity
Commonshares(Note6) (240,440,830and219,459,361commonsharesand17,681,123and24,639,513exchangeableshares,parvalue$0.001pershare,issuedandoutstandingasatDecember31,2010and2009respectively) 4,797 1,431
Additionalpaidincapital 821,781 766,963
Warrants 2,191 27,107
Retainedearnings 58,097 20,925
TotalShareholders’Equity 886,866 816,426
TotalLiabilitiesandShareholders’Equity $ 1,249,254 $ 1,143,808
(Seenotestotheconsolidatedfinancialstatements)
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Consolidated Statements of Cash Flows
YearEndedDecember31,
(Thousands of U.S. Dollars) 2010 2009 2008
OperatingActivities
Netincome $ 37,172 $ 13,941 $ 23,495
Adjustmentstoreconcilenetincometonetcashprovidedby operating activities:
Depletion,depreciation,accretionandimpairment(Note5) 163,573 135,863 25,737
Deferredtaxes (20,090) (15,355) (6,418)
Stockbasedcompensation 8,025 5,309 2,520
Unrealized(gain)lossonfinancialinstruments(Note11) (44) 277 (2,882)
Unrealizedforeignexchangeloss 14,786 19,496 6,985
Settlementofassetretirementobligations(Note7) (286) (52) (334)
Netchangesinnon-cashworkingcapital
Accountsreceivable (5,323) (27,926) 34,943
Inventory (1,221) (1,849) (107)
Prepaids (120) (717) 261
Accountspayableandaccruedliabilities (3,212) 36,875 10,697
Taxesreceivableandpayable 10,522 (409) 14,840
Netcashprovidedbyoperatingactivities 203,782 165,453 109,737
InvestingActivities
Restrictedcash 352 (1,792) –
Additionstoproperty,plantandequipment (152,299) (80,932) (55,217)
Proceedsfromdispositionofoilandgasproperties(Note5) 7,986 5,400 –
Cashacquiredonacquisitionnetofacquisitioncosts(Note3) – – 81,912
Longtermassetsandliabilities 36 968 446
Netcashprovidedby(usedin)investingactivities (143,925) (76,356) 27,141
FinancingActivities
Proceedsfromissuanceofcommonstock 24,785 4,935 21,687
Netcashprovidedbyfinancingactivities 24,785 4,935 21,687
Netincreaseincashandcashequivalents 84,642 94,032 158,565
Cashandcashequivalents,beginningofyear 270,786 176,754 18,189
Cashandcashequivalents,endofyear $ 355,428 $ 270,786 $ 176,754
Cash $ 272,151 $ 182,197 $ 110,688
Termdeposits 83,277 88,589 66,066
Cashandcashequivalents,endofyear $ 355,428 $ 270,786 $ 176,754
Supplementalcashflowdisclosures:
Cashpaidfortaxes $ 49,088 $ 31,527 $ 11,587
Non-cashinvestingactivities:
Non-cashworkingcapitalrelatedtoproperty,plantandequipment $ 48,640 $ 17,972 $ 11,096
(Seenotestotheconsolidatedfinancialstatements)
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Consolidated Statements of Shareholders’ Equity
YearEndedDecember31,
(ThousandsofU.S.Dollars) 2010 2009 2008
ShareCapital
Balance,beginningofyear $ 1,431 $ 226 $ 95
Issueofcommonshares 3,366 1,205 131
Balance,endofyear 4,797 1,431 226
AdditionalPaidinCapital
Balance,beginningofyear 766,963 754,832 76,805
Issueofcommonshares 19,119 2,650 663,405
Issueofstockoptionsinabusinesscombination(Note3) – – 1,345
Exerciseofwarrants(Note6) 24,916 2,777 10,113
Exerciseofstockoptions 2,300 1,080 72
Stockbasedcompensationexpense 8,483 5,624 3,092
Balance,endofyear 821,781 766,963 754,832
Warrants
Balance,beginningofyear 27,107 29,884 16,403
Issueofwarrants(Note3and6) – – 23,594
Exerciseofwarrants(Note6) (24,916) (2,777) (10,113)
Balance,endofyear 2,191 27,107 29,884
RetainedEarnings(AccumulatedDeficit)
Balance,beginningofyear 20,925 6,984 (16,511)
Netincome 37,172 13,941 23,495
Balance,endofyear 58,097 20,925 6,984
TotalShareholders’Equity $ 886,866 $ 816,426 $ 791,926
(Seenotestotheconsolidatedfinancialstatements)
66 | Gran Tierra Energy Annual Report 2010
Notes to the Consolidated Financial Statements
FortheYearsEndedDecember31,2010,2009and2008ExpressedinU.S.Dollars,unlessotherwisestated
1. Description of BusinessGranTierraEnergyInc.,aNevadacorporation(the“Company”or“GranTierra”),isapubliclytradedoilandgascompanyengagedinacquisition,exploration,developmentandproductionofoilandnaturalgasproperties.The Company’sprincipalbusinessactivitiesareinColombia,Argentina,PeruandBrazil.
2. Significant Accounting PoliciesTheconsolidatedfinancialstatementshavebeenpreparedinaccordancewithgenerallyacceptedaccountingprinciplesintheUnitedStatesofAmerica(“GAAP”).ThepreparationoffinancialstatementsinaccordancewithGAAPrequirestheuseofestimatesandassumptionsthataffectthereportedamountsofassetsandliabilitiesanddisclosuresofcontingentassetsandliabilitiesatthedateoftheconsolidatedfinancialstatements,andrevenuesandexpensesduringthereportingperiod.TheCompanybelievesthattheinformationanddisclosurespresentedareadequatetoensuretheinformationpresentedisnotmisleading.Significantaccountingpoliciesare:
Basis of consolidation
TheseconsolidatedfinancialstatementsincludetheaccountsoftheCompanyanditswholly-ownedsubsidiaries.Allintercompanyaccountsandtransactionshavebeeneliminated.
Use of estimates
ThepreparationoffinancialstatementsinconformitywithGAAPrequiresmanagementtomakeestimatesandassumptionsthataffectthereportedamountsofassetsandliabilitiesanddisclosureofcontingentassetsandliabilitiesatthedateofthefinancialstatementsandthereportedamountsofrevenuesandexpensesduringthereportingperiod.Actualresultscoulddifferfromthoseestimatesandchangesfromthoseestimatesarerecordedwhenknown.Oilandnaturalgasreservesandrelatedpresentvalueoffuturecashflows,impairmentassessmentsofoilandgaspropertiesandgoodwill,stockoptionexpense,incometaxes,assetretirementobligation,derivativefinancialinstrumentvaluation,legalandenvironmentalrisksandexposuresandanyassumptionsassociatedwithvaluationofoilandgaspropertiesareallsubjecttoestimationintheCompany’sfinancialresults.
Foreign currency translation
ThefunctionalcurrencyoftheCompany,includingitssubsidiariesinColombia,Argentina,PeruandBrazil,istheUnitedStatesdollar.Monetaryitemsaretranslatedintothereportingcurrencyattheexchangerateineffectatthebalancesheetdateandnon-monetaryitemsaretranslatedathistoricalexchangerates.Revenueandexpenseitemsaretranslatedinamannerthatproducessubstantiallythesamereportingcurrencyamountsthatwouldhaveresultedhadtheunderlyingtransactionsbeentranslatedonthedatestheyoccurred.Depreciationoramortizationofassetsistranslatedatthehistoricalexchangeratessimilartotheassetstowhichtheyrelate.
Gainsandlossesresultingfromforeigncurrencytransactions,whicharetransactionsdenominatedinacurrencyotherthantheentity’sfunctionalcurrency,areincludedintheconsolidatedstatementofoperationsandretainedearnings(accumulateddeficit).
Fair value of financial instruments
TheCompany’sfinancialinstrumentsarecashandcashequivalents,restrictedcash,accountsreceivable,accountspayableandaccruedliabilitiesandderivatives.Thefairvaluesofthesefinancialinstrumentsapproximatetheircarryingvaluesduetotheirimmediateorshort-termnature
Gran Tierra Energy Annual Report 2010 | 67
Cash and cash equivalents
TheCompanyconsidersallhighlyliquidinvestmentswithanoriginalmaturityofthreemonthsorlesstobecashequivalents.
Restricted cash
Restrictedcashrelatestocashresourcespledgedtosecurelettersofcredit.Alllettersofcreditcurrentlysecuredbycashrelatetorequirementsforworkcommitmentguaranteescontainedinexplorationcontracts.
Allowance for doubtful accounts
TheCompanyestimateslossesonreceivablesbasedonknownuncollectibleaccounts,ifany,andhistoricalexperienceoflossesincurred.Theallowancefordoubtfulreceivableswasniland$0.3 millionatDecember 31,2010and2009,respectively.
Inventory
Inventoryconsistsofcrudeoilintanksandsupplies.Crudeoilintanksisvaluedatthelowerofcostormarketvalue.Suppliesarevaluedatlowerofcostormarketvalue.Thecostofinventoryisdeterminedusingtheweightedaveragemethod.Crudeoilinventoriesincludeexpendituresincurredtoproduce,upgradeandtransporttheproducttothestoragefacilities.CrudeoilinventoriesatDecember31,2010and2009were$3.6 millionand$3.8 million,respectively.SuppliesatDecember31,2010and2009were$2.1and$1.1 million,respectively.
Oil and gas properties
TheCompanyusesthefullcostmethodofaccountingforitsinvestmentinoilandnaturalgasproperties.SeparatecostcentersaremaintainedforeachcountryinwhichtheCompanyincurscosts.Underthismethod,theCompanycapitalizesallacquisition,explorationanddevelopmentcostsincurredforthepurposeoffindingoilandnaturalgasreserves,includingsalaries,benefitsandotherinternalcostsdirectlyattributabletotheseactivities.Costsassociatedwithproductionandgeneralcorporateactivities,however,areexpensedintheperiodincurred.Interestcostsrelatedtounprovedpropertiesandpropertiesunderdevelopmentarealsocapitalizedtooilandnaturalgasproperties.UnlessasignificantportionoftheCompany’sprovedreservequantitiesinaparticularcountryaresold(25%orgreater),proceedsfromthesaleofoilandnaturalgaspropertiesareaccountedforasareductiontocapitalizedcosts,andgainsandlossesarenotrecognized.
TheCompanycomputesdepletionofoilandnaturalgaspropertiesonaquarterlybasisusingtheunit-of-productionmethodbaseduponproductionandestimatesofprovedreservequantities.Unprovedpropertiesareexcludedfromtheamortizablebaseuntilevaluated.Thecostofexploratorydrywellsistransferredtoprovedpropertiesandthussubjecttoamortizationimmediatelyupondeterminationthatawellisdryinthosecountrieswhereprovedreservesexist.Futuredevelopmentcostsareaddedtotheamortizablebase.
Unprovedpropertiesareevaluatedquarterlyforpossibleimpairments.Ifimpairmenthasoccurred,theimpairmentistransferredtoprovedpropertiesandthussubjecttoamortizationimmediately.Forprospectswhereareservebasehasnotyetbeenestablished,theimpairmentischargedtoearnings.Thisevaluationconsidersamongotherfactors,seismicdata,requirementstorelinquishacreage,drillingresults,remainingtimeinthecommitmentperiod,remainingcapitalplans,andpolitical,economic,andmarketconditions.
Inexplorationareas,relatedgeologicalandgeophysical(“G&G”)costsarecapitalizedinunprovedpropertyandevaluatedaspartofthetotalcapitalizedcostsassociatedwithaproperty.G&Gcostsrelatedtodevelopmentprojectsarerecordedinprovedpropertiesandthereforesubjecttoamortizationasincurred.
TheCompanyperformsaceilingtestcalculationeachquarterinaccordancewiththeU.S.SecuritiesandExchangeCommission(“SEC”)Regulation S-XRule 4-10.Inperformingitsquarterlyceilingtest,theCompanylimits,onacountry-by-countrybasis,thecapitalizedcostsofprovedoilandnaturalgasproperties,netofaccumulateddepletionanddeferredincometaxes,totheestimatedfuturenetcashflowsfromprovedoilandnaturalgasreservesdiscountedattenpercent,netofrelatedtaxeffects,plusthelowerofcostorfairvalueofunprovedpropertiesincludedinthecostsbeingamortized.Ifcapitalizedcostsexceedthislimit,theexcessischargedasadditionaldepletionexpense.AsaresultofimplementingSECFinalRule,“ModernizationofOilandGasReporting”whichrevisedtheexistingRegulationS-KandRegulationS-XreportingrequirementstoalignwithcurrentindustrypracticesandtechnologicaladvancesasatDecember31,2009,theCompanycalculatesfuturenetcashflowsbyapplyingthetwelvemonthperiodunweightedarithmeticaverageofthepriceasofthefirstdayofeachmonthwithinthattwelvemonthperiod,unlesspricesaredefinedbycontractualarrangements,
68 | Gran Tierra Energy Annual Report 2010
excludingescalationsbasedonfutureconditions.Inprioryears,theCompanydeterminedfuturenetcashflowsbyapplyingthosepricesineffectforeachcountryattheendofthereportingperiod.
Asset retirement obligations
TheCompanyprovidesforfutureassetretirementobligationsonitsoilandnaturalgaspropertiesbasedonestimatesestablishedbycurrentlegislation.Theassetretirementobligationisinitiallymeasuredatfairvalueandcapitalizedtocapitalassetsasanassetretirementcost,usingthecreditadjustedinterestratetodiscounttheobligation.Theassetretirementobligationaccretesuntilthetimetheassetretirementobligationisexpectedtosettlewhiletheassetretirementcostisamortizedovertheusefullifeoftheunderlyingcapitalassets.
Theamortizationoftheassetretirementcostandtheaccretionoftheassetretirementobligationareincludedindepletion,depreciation,accretionandimpairment(“DD&A”).Actualassetretirementcostsarerecordedagainsttheobligationwhenincurred.Anydifferencebetweentherecordedassetretirementobligationsandtheactualretirementcostsincurredisrecordedasagainorlossintheperiodofsettlement.
Other assets
Otherassets,includingadditionsandreplacements,arerecordedatcostuponacquisitionandincludefurnitureandfixtures,computerequipment,automobilesandassetsundercapitalleases.Thecostofrepairsandmaintenanceischargedtoexpenseasincurred.DepreciationrelatedtoassetsundercapitalleasesisrecordedaspartofDD&Aintheconsolidatedstatementofoperations.Depreciationisprovidedusingthedeclining-balance-basisata30%annualrateforcomputerequipment,furnitureandfixturesandautomobiles.Leaseholdimprovementsaredepreciatedonastraight-linebasisoverthetermoftherelatedlease.
Revenue recognition
Revenuefromtheproductionofcrudeoilandnaturalgasisrecognizedwhentitlepassestothecustomerandwhencollectionoftherevenueisreasonablyassured.FortheCompany’sColombianoperations,GranTierra’scustomerstaketitlewhenthecrudeoilistransferredtotheirpipeline.InArgentina,GranTierratransportsproductfromthefieldtothecustomer’srefinerybytruck,wheretitleistransferred.RevenuerepresentstheCompany’sshareandisrecordednetofroyaltypaymentstogovernmentsandothermineralinterestowners.
Goodwill
Goodwillrepresentstheexcessofthepurchasepriceofbusinesscombinationsoverthefairvalueofnetassetsacquiredandistestedforimpairmentatleastannuallyunlessbusinesseventsindicateanimpairmenttestisrequired.Theimpairmenttestrequiresallocatinggoodwillandcertainotherassetsandliabilitiestoassignedreportingunits.Thefairvalueofeachreportingunitisestimatedandcomparedtothenetbookvalueofthereportingunit.Iftheestimatedfairvalueofthereportingunitislessthanthenetbookvalue,includinggoodwill,thenthegoodwilliswrittendowntotheimpliedfairvalueofthegoodwillthroughachargetoexpense.BecausequotedmarketpricesarenotavailablefortheCompany’sreportingunits,thefairvaluesofthereportingunitsareestimatedbaseduponestimatedfuturecashflowsofthereportingunit.ThegoodwillontheCompany’sfinancialstatementswasaresultoftheacquisitionsofSolanaResourcesLimited(“Solana”)andArgosyEnergyInternationalL.P.(“Argosy”),andrelatesentirelytotheColombiareportingsegment.TheCompanyperformedannualimpairmenttestsofgoodwillatDecember31,2010and2009.Basedontheseassessments,no impairmentofgoodwillwasidentified.
Income taxes
Deferredincometaxesarerecognizedusingtheliabilitymethod,wherebydeferredtaxassetsandliabilitiesarerecognizedforthefuturetaxconsequencesattributabletodifferencesbetweentheconsolidatedfinancialstatementcarryingamountsofexistingassetsandliabilitiesandtheirrespectivetaxbase,andoperatinglossandtaxcreditcarryforwards.Deferredtaxassetsandliabilitiesaremeasuredusingenactedtaxratesexpectedtoapplytotaxableincomeintheyearsinwhichthosetemporarydifferencesandcarryforwardsareexpectedtoberecoveredorsettled.Valuationallowancesareprovidedif,afterconsideringavailableevidence,itismorelikelythannotthatsomeorallofthedeferredtaxassetswillberealized.
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Theevaluationofanuncertaintaxpositionisatwo-stepprocess.Thefirststepisrecognition:TheCompanydetermineswhetheritismorelikelythannotthatataxpositionwillbesustaineduponexamination,includingresolutionofanyrelatedappealsorlitigationprocesses,basedonthetechnicalmeritsoftheposition.Inevaluatingwhetherataxpositionhasmetthemore-likely-than-notrecognitionthreshold,theCompanypresumesthatthepositionwillbeexaminedbytheappropriatetaxingauthoritythathasfullknowledgeofallrelevantinformation.Thesecondstepismeasurement:Ataxpositionthatmeetsthemore-likely-than-notrecognitionthresholdismeasuredtodeterminetheamountofbenefittorecognizeinthefinancialstatements.Thetaxpositionismeasuredatthelargestamountofbenefitthatisgreaterthan50percentlikelyofbeingrealizeduponsettlement.TheCompanyrecognizespotentialaccruedinterestandpenaltiesrelatedtounrecognizedtaxbenefitsasacomponentofincometaxexpenseintheconsolidatedstatementofoperations.ThisisanaccountingpolicyelectionmadebytheCompanythatisacontinuationoftheCompany’shistoricalpolicyandwillcontinuetobeconsistentlyappliedinthefuture.
Income per share
Basicincomepersharecalculationsarebasedonthenetincomeattributabletocommonshareholdersfortheperioddividedbytheweightedaveragenumberofcommonsharesissuedandoutstandingduringtheperiod.Thedilutedincomepersharecalculationisbasedontheweightedaveragenumberofcommonsharesoutstandingduringtheperiod,plustheeffectsofdilutivecommonshareequivalents.Thismethodrequiresthatthedilutiveeffectofoutstandingoptionsandwarrantsissuedshouldbecalculatedusingthetreasurystockmethod.Thismethodassumesthatallcommonshareequivalentshavebeenexercisedatthebeginningoftheperiod(oratthetimeofissuance,iflater),andthatthefundsobtainedtherebywereusedtopurchasecommonsharesoftheCompanyattheaveragetradingpriceofcommonsharesduringtheperiod.
Stock based compensation
TheCompanyfollowsthefair-valuebasedmethodofaccountingforstockoptionsgrantedtodirectors,officersandemployees.Compensationexpenseforoptionsgrantedisbasedontheestimatedfairvalue,usingtheBlack-Scholesoptionpricingmodel,atthetimeofgrantandtheexpenseisrecognizedovertherequisiteserviceperiodoftheoption.Stockbasedcompensationexpenseisincludedaspartofoilandnaturalgasproperties,operatingexpenses,andgeneralandadministrativeexpenseswithacorrespondingincreasetocontributedsurplusandrecognizedusingtheaccelerated method.
Accounting for oil and gas derivative instruments
TheCompanyrecognizesallderivativeinstrumentsaseitherassetsorliabilitiesatfairvalueinitsfinancialstatements.TheCompanymayormaynotelecttodesignateaderivativeinstrumentasahedgeagainstchangesinthefairvalueofanassetoraliability(a“fairvaluehedge”)oragainstexposuretovariabilityinexpectedfuturecashflows(a“cashflowhedge”).Theaccountingtreatmentforthechangesinfairvalueofa derivativeinstrumentisdependentuponwhetherornotaderivativeinstrumentisacashflowhedgeorafairvaluehedge,anduponwhetherornotthederivativeisdesignatedasahedgeasnotedabove.Changesinfairvalueofaderivativeinstrumentdesignatedasacashflowhedgearerecognized,totheextentthehedgeiseffective,inothercomprehensiveincomeuntilthehedgeditemisrecognizedinearnings.Changesinthefairvalueofaderivativeinstrumentdesignatedasafairvaluehedgearerecognizedintheconsolidatedstatementofoperationsalongwiththechangesinfairvalueofthehedgeditemattributabletothehedgedrisk.Wherehedgeaccountingisnotelectedorifaderivativeinstrumentdoesnotqualifyaseitherafairvaluehedgeoracashflowhedge,changesinfairvaluearerecognizedinearningsasaderivativefinancialinstrumentgainorloss.TheCompany’sderivativeinstruments,outstandinguntilFebruary2010,didnotqualifyaseitherafairvaluehedgeoracashflowhedgeand,atDecember31,2010,theCompanyhasnoderivativeinstrumentsoutstanding.
Warrants
Uponissuance,theCompanyrecordswarrantsissuedtopurchaseitscommonstockatfair-value;subsequently,thewarrantsarecarriedatamortizedcost.TheCompanydeterminesthefairvalueofwarrantsissuedbyusingtheBlack-Scholesoptionpricingmodel.WarrantswereassumedontheacquisitionofSolanaandtheirfairvalueof$23.6 millionwas recordedaspartoftheconsiderationpaidfortheacquisition(Note3).
70 | Gran Tierra Energy Annual Report 2010
New accounting pronouncements
VariableInterestEntitiesInJune2009,theFinancialAccountingStandardsBoard(the“FASB”)issuedrevisedaccountingstandardstoimprovefinancialreportingbyenterprisesinvolvedwithvariableinterestentities.Thestandardsreplacethequantitative-basedrisksandrewardscalculationfordeterminingwhichenterprise,ifany,hasacontrollingfinancialinterestinavariableinterestentitywithanapproachfocusedonidentifyingwhichenterprisehasthepowertodirecttheactivitiesofavariableinterestentitythatmostsignificantlyimpacttheentity’seconomicperformanceand:(1) theobligationtoabsorblossesoftheentity;or,(2) therighttoreceivebenefitsfromtheentity.ThisstandardwaseffectiveforinterimandannualreportingperiodsbeginningafterNovember15,2009.TheimplementationofthisstandarddidnotmateriallyimpacttheCompany’sconsolidatedfinancialposition,operatingresultsorcashflows.
FairValueMeasurementsInJanuary2010,theFASBissuedAccountingStandardsUpdate(“ASU”),“FairValueMeasurementsandDisclosures(Topic820):ImprovingDisclosuresaboutFairValueMeasurements”.ThisASUamendsexistingdisclosurerequirementsaboutfairvaluemeasurementsbyaddingrequireddisclosuresaboutitemstransferredintoandoutoflevels1and2inthefairvaluehierarchy;addingseparatedisclosuresaboutpurchases,sales,issuances,andsettlementsrelativetolevel 3measurements;andclarifying,amongotherthings,theexistingfairvaluedisclosuresaboutthelevelofdisaggregation.ThisiseffectiveforinterimandannualreportingperiodsbeginningafterDecember15,2009,exceptforthedisclosuresaboutpurchases,sales,issuances,andsettlementsintherollforwardofactivityinLevel3fairvaluemeasurements.ThosedisclosuresareeffectiveforfiscalyearsbeginningafterDecember15,2010,andforinterimperiodswithinthosefiscalyears. TheimplementationofthisupdateonJanuary1,2010didnotmateriallyimpacttheCompany’sdisclosures.
SubsequentEventsInFebruary2010,theFASBissuedASU,“SubsequentEvents(Topic855).” TheamendmentsremovetherequirementsforanSECfilertodiscloseadate,inbothissuedandrevisedfinancialstatements,throughwhichsubsequenteventshavebeenreviewed.ThisASUwaseffectiveuponissuance. TheimplementationofthisupdatedidnotmateriallyimpacttheCompany’sdisclosures.
StockCompensationInApril2010,theFASBissuedASU,“Compensation–StockCompensation(Topic718).” Theamendmentsclarifythatanemployeesharebasedpaymentawardwithanexercisepricedenominatedinthecurrencyofamarketinwhichasubstantialportionoftheentity’sequitysecuritiestradesshouldnotbeconsideredtocontainaconditionthatisnotamarket,performance,orservicecondition.Therefore,anentitywouldnotclassifysuchanawardasaliabilityifitotherwisequalifiesasequity. ThisASUiseffectiveforfiscalyears,andinterimperiodswithinthosefiscalyears,beginningonorafterDecember15,2010.TheimplementationofthisupdateisnotexpectedtomateriallyimpacttheCompany’sconsolidatedfinancialposition,operatingresultsorcashflows.
ReceivablesInJuly2010,theFASBissuedASU,“Receivables(Topic310).” Theupdateisintendedtoprovidefinancialstatementuserswithgreatertransparencyaboutanentity’sallowanceforcreditlossesandthecreditqualityofitsfinancingreceivables.ThedisclosuresasoftheendofareportingperiodareeffectiveforinterimandannualreportingperiodsendingonorafterDecember15,2010. TheimplementationofthisupdatedidnotmateriallyimpacttheCompany’sdisclosures.
Gran Tierra Energy Annual Report 2010 | 71
BusinessCombinationsInDecember2010,theFASBissuedASU,“BusinessCombinations(Topic850),DisclosuresofSupplementaryProFormaInformationforBusinessCombinations.” Theupdateisintendedtoconformreportingofproformarevenueandearningsformaterialbusinesscombinationsincludedinthenotestothefinancialstatementsandexpanddisclosureofnon-recurringadjustmentsthataredirectlyattributabletothebusinesscombination.Theproformarevenueandearningsofthecombinedentityarepresentedasiftheacquisitiondatehadoccurredasofthebeginningoftheannualreportingperiod.Ifcomparativesarepresented,theproformadisclosuresforbothperiodspresentedshouldbereportedasiftheacquisitionhadoccurredasofthebeginningofthecomparablepriorannualreportingperiodonly.ThisASUiseffectiveforbusinesscombinationsforwhichtheacquisitiondateisonorafterthebeginningofthefirstannualreportingperiodbeginningonorafterDecember15,2010. TheimplementationofthisupdateisnotexpectedtomateriallyimpacttheCompany’s disclosures.
3. Business Combinations
Solana Resources Limited (“Solana”)OnJuly29,2008,GranTierraannouncedthatithadenteredintoanagreementprovidingforthebusinesscombinationofGranTierraandSolana,aninternationalresourcecompanyengagedintheacquisition,exploration,developmentandproductionofoilandnaturalgasinColombiawithitsheadofficelocatedinCalgary,Alberta,Canada. UnderthetermsoftheagreementwithSolana,eachSolanashareholderreceived,foreachSolanacommonshareheld,either:(1)0.9527918ofashareofGranTierracommonstock;or(2)0.9527918ofacommonshareofaCanadiansubsidiaryofGranTierra(the“exchangeableshares”).Theexchangeableshares:(a)havethesamevotingrights,dividendentitlementsandotherattributesasGranTierracommonstock;(b)areexchangeable,ateachstockholder’soption,onaone-for-onebasisintoGranTierracommonstock.Exchangeableshares,issuedupontheacquisition,arelistedontheTorontoStockExchangeunderthesymbolGTXandwillautomaticallybeexchangedforGranTierracommonstockfiveyearsfromclosing,andincertainotherevents.Inaddition,certainSolanastockoptionswereexchangedforstockoptionsofGranTierrabasedontheaboveexchangeratio,andholdersofSolanawarrantselectedtocontinuetoholdtheirwarrants,whichareexercisableintosharesofcommonstockofGranTierrapursuanttothetermsofsuchwarrantsandbasedontheaboveexchangeratio.
ThetransactionwascompletedNovember14,2008pursuanttoaplanofarrangementinaccordancewiththeBusinessCorporationsAct(Alberta). Uponcompletionofthetransaction,Solanabecameanindirectwholly-ownedsubsidiaryofGranTierra.Onadilutedbasis,upontheclosingoftheplanofarrangement,Solanasecurityholdersownedapproximately49%ofthecombinedcompanyandGranTierrasecurityholdersownedapproximately51%ofthecombinedcompany.
Theacquisitionwasaccountedforusingthepurchasemethod,withGranTierrabeingtheacquirer,wherebytheSolanaassetsacquiredandliabilitiesassumedarerecordedattheirfairvaluesattheacquisitiondateofNovember14,2008andtheresultsofSolanahavebeenconsolidatedwiththoseofGranTierrafromthatdate. ThefairvalueofGranTierra’sshareswasdeterminedastheweightedaverageclosingpriceofthecommonsharesofGranTierraforthefive-dayperiodaroundtheannouncementdateofJuly29,2008,beingtwodayspriortoandaftertheacquisitionwasagreedtoandannounced,andtheannouncementdate.ThefairvalueofeachexchangeableshareissuedisequaltothefairvalueofacommonshareofGranTierra.
Underthetermsoftheacquisition,GranTierraacquiredalloftheissuedandoutstandingcommonsharesofSolanainexchangefor120,620,967sharescomprisedof51,516,332GranTierracommonsharesand69,104,635exchangeablesharesofGranTierraExchangeCo,awholly-ownedsubsidiaryofGranTierra.Inaccordancewiththeprovisionsoftheagreement,490,001Solanastockoptionswereexchangedfor466,869GranTierrastockoptions.Also,7,500,000Solanawarrantswereassumedonthedateoftheacquisitionandwereexchangeablefor7,145,938GranTierracommonshares.ThefairvalueoftheoptionsandwarrantswasincludedaspartoftheconsiderationforthisacquisitionandwasdeterminedbasedonmarketpriceoverafivedayperiodbeforeandaftertheannouncementdateusingtheBlack-Scholesoptionpricingmodelwiththefollowingassumptions:
72 | Gran Tierra Energy Annual Report 2010
Warrants:Exerciseprice(Canadiandollarsperwarrant) $ 2.00
Risk-freeinterestrate 2.28%
Expectedlife 1.7years
Volatility 75%
Expectedannualdividendpershare Nil
Fairvalueperwarrant $ 3.39
Stock Options:Exerciseprice(Canadiandollarsperstockoption) $ 2.36-$4.33
Risk-freeinterestrate 2.28%
Expectedlife 1.3-4.8years
Volatility 71%—75%
Expectedannualdividendpershare Nil
Weightedaveragefairvalueperoption $ 2.75
Basedontheconditionsexistingatthecompletiondate,November14,2008,thefairvalueoftheSolana warrants,asdeterminedbyGranTierra,exceededthefairvalueoftheSolana warrants, asdeterminedbySolana,byapproximately$0.6 million,andwasrecordedbyGranTierraimmediatelyascompensationexpenseandreportedaspartofgeneralandadministrativeexpenses.
OnNovember14,2008andpriortotheNovember15,2008deadline,ascontractuallyagreed,GranTierraissued2 millioncommonsharestoacquiretheparticipatinginterestinSolana’spropertiesthat,undertheColombianParticipationAgreemententeredintoin2006withCrosbyCapitalLLC(“Crosby”)aspartoftheacquisitionofArgosy,wouldotherwiseaccruetotheformerownersofArgosy.Theascribedvalueofcommonsharesissuedhasbeenincludedinthepurchaseconsiderationfortheacquisitionasthecompletionoftheacquisitionwasdependentonthesuccessfulacquisitionofthisparticipatinginterest.Theshareswereissuedinaprivateplacement,subjecttoaregistrationrightsagreement,andwereregisteredwiththeSECinFebruary2009.
Thefollowingtableshowstheallocationofthepurchasepricebasedonthefairvaluesoftheassetsandliabilitiesacquired:(Thousands of U.S. Dollars)
PurchasePrice:
CommonShares/ExchangeableSharesissuednetofshareissuecosts $ 631,451
Warrants 23,594
Stockoptions 1,345
Two millioncommonsharesissuedunderColombianParticipationAgreement 10,470
Transactioncosts 4,938
$ 671,798
PurchasePriceAllocated:
OilandGasProperties
Proved $ 320,773
Unproved 360,493
Otherassets 1,113
Otherlong-termassets 1,329
Goodwill(1)(2) 87,576
Networkingcapital(includingcashacquired)(2) 95,356
Assetretirementobligations (3,148)
Deferredincometaxes (191,694)
$ 671,798(1) Goodwill is not deductible for tax purposes and is subject to annual impairment test. (2) Due to new information received during 2009, the Company reclassified $4.4 million from taxes payable to goodwill in the purchase price allocation
relating to the Solana acquisition.
Gran Tierra Energy Annual Report 2010 | 73
TheunauditedproformaresultsfortheyearendedDecember 31,2008isshownbelow,asiftheacquisitionhadoccurredonJanuary 1,2008.Proformaresultsarenotindicativeofactualresultsorfutureperformance.
Year Ended
December 31,
(Unaudited)(ThousandsofU.S.DollarsExceptPerShareAmounts) 2008
Oilandnaturalgassalesandinterest $ 221,043
Netincome $ 66,886
Netincomepershare—basic $ 0.29
Netincomepershare—diluted $ 0.26
Argosy Energy International L.P. (“Argosy”)
In2006,theCompanyrecorded$15.0 millionofgoodwillinrelationtotheArgosyacquisition.This$15.0 millioncombinedwiththe$87.6recordedinrelationtotheSolanaacquisition,totalsthegoodwillbalanceof$102.6 millionatDecember31,2010and2009.
4. Segment and Geographic ReportingTheCompany’sreportableoperatingsegmentsareColombiaandArgentinabasedonageographicorganization.TheCompanyisprimarilyengagedintheexplorationandproductionofoilandnaturalgas.PeruandBrazilarenotreportablesegmentsbecausethelevelofactivityontheselandholdingsisnotsignificantatthistimeandareincludedaspartoftheCorporatesegment.Theaccountingpoliciesofthereportableoperatingsegmentsarethesameasthosedescribedinthesummaryofsignificantaccountingpolicies.TheCompanyevaluatesperformancebasedonprofitorlossfromoilandnaturalgasoperationsbeforeincometaxes.
TheresultsofColombiaandCorporatesegmentsincludetheoperationsofSolanasubsequenttotheCompany’sacquisitionofSolana(Note3)onNovember14,2008.
ThefollowingtablespresentinformationontheCompany’sreportablegeographicsegments: YearEndedDecember31,2010
(ThousandsofU.S.Dollarsexceptperunit ofproductionamounts) Colombia Argentina Corporate Total
Revenues $ 359,302 $ 13,984 $ – $ 373,286Interestincome 460 26 688 1,174Depreciation,depletion,accretionandimpairment 133,728 29,416 429 163,573Depreciation,depletion,accretionandimpairment— perunitofproduction 26.80 103.56 – 31.02Segmentincome(loss)beforeincometaxes 142,486 (27,247) (20,833) 94,406Segmentcapitalexpenditures(1) $ 105,482 $ 33,930 $ 37,627 $ 177,039
YearEndedDecember31,2009
(ThousandsofU.S.Dollarsexceptperunit ofproductionamounts) Colombia Argentina Corporate Total
Revenues $ 248,834 $ 13,795 $ – $ 262,629
Interestincome 466 127 494 1,087
Depreciation,depletion,accretionandimpairment 127,213 8,339 311 135,863
Depreciation,depletion,accretionandimpairment— perunitofproduction 29.64 24.72 – 29.35
Segmentincome(loss)beforeincometaxes 55,827 (4,230) (13,302) 38,295
Segmentcapitalexpenditures $ 81,364 $ 4,532 $ 2,228 $ 88,124
74 | Gran Tierra Energy Annual Report 2010
YearEndedDecember31,2008
(ThousandsofU.S.Dollarsexceptperunitof productionamounts) Colombia Argentina Corporate Total
Revenues $ 103,202 $ 9,603 $ – $ 112,805
Interestincome 995 23 206 1,224
Depreciation,depletionandaccretion 22,199 3,390 148 25,737
Depreciation,depletionandaccretion— perunitofproduction 20.41 13.95 – 19.34
Segmentincome(loss)beforeincometaxes 58,490 (3,157) (10,894) 44,439
Segmentcapitalexpenditures $ 31,725 $ 11,690 $ 3,313 $ 46,728
AsatDecember31,2010
(ThousandsofU.S.Dollars) Colombia Argentina Corporate Total
Property,plantandequipment $ 654,416 $ 29,031 $ 43,577 $ 727,024Goodwill 102,581 – – 102,581Otherassets 155,798 15,220 248,631 419,649TotalAssets $ 912,795 $ 44,251 $ 292,208 $ 1,249,254
AsatDecember31,2009
(ThousandsofU.S.Dollars) Colombia Argentina Corporate Total
Property,plantandequipment $ 681,854 $ 24,510 $ 6,379 $ 712,743
Goodwill 102,581 – – 102,581
Otherassets 123,380 12,574 192,530 328,484
TotalAssets $ 907,815 $ 37,084 $ 198,909 $ 1,143,808(1) Net of net proceeds from the disposition of the Garibay overriding royalty in 2010 (see Note 5) and the Guachiria Blocks in 2009 (see Note 5).
TheCompany’srevenuesarederivedprincipallyfromuncollateralizedsalestocustomersintheoilandnaturalgasindustry.TheconcentrationofcreditriskinasingleindustryaffectstheCompany’soverallexposuretocreditriskbecausecustomersmaybesimilarlyaffectedbychangesineconomicandotherconditions.In2010,theCompanyhadonesignificantcustomerforitsColombiancrudeoil,EcopetrolS.A.(“Ecopetrol”),aColombianmajoritystateownedagency.SalestoEcopetrolaccountedfor96%oftheCompany’srevenuesin2010,94%in2009,and89%in2008.InArgentina,theCompanyhadonesignificantcustomer,RefineriadelNorteS.A.(“Refinor”).SalestoRefinoraccountedfor4%oftheCompany’srevenuesin2010,6%in2009,and9%in2008.
Gran Tierra Energy Annual Report 2010 | 75
5. Property, Plant and Equipment AsatDecember31,2010
(ThousandsofU.S.Dollars) CostAccumulated
DD&ANet
book value
Oilandnaturalgasproperties Proved $ 777,262 $ (334,858) $ 442,404Unproved 278,753 – 278,753 1,056,015 (334,858) 721,157Furnitureandfixturesandleaseholdimprovements 5,233 (2,831) 2,402Computerequipment 5,521 (2,358) 3,163Automobiles 779 (477) 302TotalProperty,PlantandEquipment $ 1,067,548 $ (340,524) $ 727,024
AsatDecember31,2009
(ThousandsofU.S.Dollars) CostAccumulated
DD&ANet
book value
Oilandnaturalgasproperties
Proved $ 648,061 $ (173,382) $ 474,679
Unproved 234,889 – 234,889
882,950 (173,382) 709,568
Furnitureandfixturesandleaseholdimprovements 3,843 (2,185) 1,658
Computerequipment 3,148 (1,907) 1,241
Automobiles 513 (237) 276
TotalProperty,PlantandEquipment $ 890,454 $ (177,711) $ 712,743
DD&Afor2010includeda$23.6 millionceilingtestimpairmentlossintheCompany’sArgentinacostcenterascomparedtoa$1.9 millionimpairmentlossforDecember31,2009. Ofthe2010impairmentloss,$17.9 millionrelatedtotheabandonmentoftheValleMoradosidetrackoperationsandtheremaining$5.7 millionresultedfromadecreaseinreservescombinedwithhigherforecastedoperatingcoststoproducetheremainingprovedreserves.The2009impairmentlossresultedfromhigherforecastedoperatingcoststoproducetheremainingprovedreserves.
TheCompanycapitalized$4.1 million(2009—$1.6 million;2008—$1.9 million)ofgeneralandadministrativeexpensesrelatedtotheColombianfullcostcenter,including$0.3 million(2009—$0.2 million;2008—$0.4 million)ofstockbasedcompensationexpense,and$1.2 million(2008—$0.6 million;2007—$0.8 million)ofgeneralandadministrativeexpensesintheArgentinafullcostcenter,including$0.2 million(2009—$0.1 million;2008—$0.1 million)ofstockbasedcompensation.
TheunprovedoilandnaturalgaspropertiesconsistofexplorationlandsheldinColombia,ArgentinaandPeru.TheCompanyhad$228.8 million(December31,2009—$229.1 million)inunprovedassetsinColombia,$9.4 million(December 31,2009—$0.4 million)ofunprovedassetsinArgentinaand$28.2 million(December31,2009—$5.4 million)ofunprovedassetsinPeru,and$12.4 million(December31,2009—nil)ofunprovedassetsinBrazilforatotalof$278.8 million(December31,2009—$234.9 million).Thesepropertiesarebeingheldfortheirexplorationvalueandarenotbeingdepletedpendingdeterminationoftheexistenceofprovedreserves.GranTierrawillcontinuetoassesstheunprovedpropertiesoverthenextseveralyearsasprovedreservesareestablishedandasexplorationdictateswhetherornotfutureareaswillbe developed.
InApril2009,GranTierraclosedthesaleoftheCompany’sinterestsintheGuachiriaNorte,Guachiria,andGuachiriaSurblocksinColombia.Principaltermsincludedconsiderationof$7.0 millioncomprisinganinitialcashpaymentof$4.0 millionatclosing,followedby15monthlyinstallmentsof$200,000eachwhichbeganonJune1,2009andendedonAugust3,2010.TheCompanyrecordednetproceedsof$6.3 millionin2009.GranTierraretaineda10%overridingroyaltyinterestontheGuachiriaSurBlock,which,intheeventofadiscovery,isdesignedtoreimburse200%oftheCompany’scostsforpreviouslyacquiredseismicdata.
InOctober2010,theCompanyrecordedproceedsof$6.4 millionforthesaleofanoverridinginterestintheGaribayBlockinColombia.
76 | Gran Tierra Energy Annual Report 2010
ThefollowingisasummaryofGranTierra’soilandnaturalgaspropertiesnotsubjecttodepletionasatDecember31,2010: CostsIncurredin
(ThousandsofU.S.Dollars) 2010 2009 2008 2007 2006 Total
Acquisitioncosts—Colombia $ 5,000 $ – $ 188,001 $ – $ 1,637 $ 194,638
Acquisitioncosts—Peru 2,000 – – – – 2,000
Acquisitioncosts—Brazil 12,395 – – – – 12,395
Explorationcosts—Argentina 3,933 163 229 – – 4,325
Explorationcosts—Colombia 27,812 3,376 487 – – 31,675
Explorationcosts—Peru 20,847 1,969 2,767 656 – 26,239
Developmentcosts—Argentina 5,021 – – – – 5,021
Developmentcosts—Colombia 2,460 – – – – 2,460
Totaloilandnaturalgasproperties notsubjecttodepletion $ 79,468 $ 5,508 $ 191,484 $ 656 $ 1,637 $ 278,753
6. Share CapitalTheCompany’sauthorizedsharecapitalconsistsof595,000,002sharesofcapitalstock,ofwhich570 millionaredesignatedascommonstock,parvalue$0.001pershare,25 millionaredesignatedaspreferredstock,parvalue$0.001pershare(collectively,“commonstock”),andtwosharesaredesignatedasspecialvotingstock,parvalue$0.001pershare.OnJune16,2009,theshareholdersofGranTierraapprovedanamendmenttotheArticlesofIncorporationtoincreasetheauthorizednumberofsharesofcommonstockfrom300,000,000to570,000,000shares.AsatDecember31,2010,outstandingsharecapitalconsistsof240,440,830commonvotingsharesoftheCompany,9,870,011exchangeablesharesofGranTierraExchangeCo.,automaticallyexchangeableonNovember14,2013,and7,811,112exchangeablesharesofGoldstrikeExchangeCo.,automaticallyexchangeableonNovember10,2012.TheexchangeablesharesofGranTierraExchangeCo,wereissueduponacquisitionofSolana.TheexchangeablesharesofGranTierraGoldstrikeInc.wereissueduponthebusinesscombinationbetweenGranTierraEnergyInc.,anAlbertacorporation,andGoldstrike,Inc.,whichisnowtheCompany.EachexchangeableshareisexchangeableintoonecommonvotingshareoftheCompany.TheholdersofcommonstockareentitledtoonevoteforeachshareonallmatterssubmittedtoastockholdervoteandareentitledtoshareinalldividendsthattheCompany’sboardofdirectors,initsdiscretion,declaresfromlegallyavailablefunds.Theholdersofcommonstockhavenopre-emptiverights,noconversionrights,andtherearenoredemptionprovisionsapplicabletothecommonstock.Holdersofexchangeableshareshavesubstantiallythesamerightsasholdersofcommonvotingshares.
Warrants
AtDecember31,2010,theCompanyhad7,769,864warrantsoutstandingtopurchase3,884,932commonsharesfor$1.05 pershare,expiringbetweenJune20,2012andJune30,2012.FortheyearendedDecember31,2010,11,127,527commonshareswereissuedupontheexerciseof15,109,116warrants(yearendedDecember31,2009,4,221,193commonshareswereissuedupontheexerciseof10,913,660warrants;yearendedDecember31,2008,20,479,546commonshareswereissuedupontheexerciseof41,138,370warrants).Includedinwarrantsexercisedin2010were7,145,938warrantstopurchase7,145,938commonsharesfor$14.4 million,assumedintheacquisitionofSolanainNovember2008.
Stock Options
AsatDecember31,2010,theCompanyhasa2007EquityIncentivePlan,formedthroughtheapprovalbyshareholdersoftheamendmentandrestatementofthe2005EquityIncentivePlan,underwhichtheCompany’sboardofdirectorsisauthorizedtoissueoptionsorotherrightstoacquiresharesoftheCompany’scommonstock.OnNovember14,2008,theshareholdersofGranTierraapprovedanamendmenttotheCompany’s2007EquityIncentivePlan,whichincreasedthenumberofsharesofcommonstockavailableforissuancethereunderfrom9,000,000sharesto18,000,000shares.OnJune16,2010,anotheramendmenttotheCompany’s2007EquityIncentiveplanwasapprovedbyshareholders,whichincreasedthenumberofsharesofcommonstockavailableforissuancethereunderfrom18,000,000sharesto23,306,100 shares.
TheCompanygrantsoptionstopurchasecommonsharestocertaindirectors,officers,employeesandconsultants.Eachoptionpermitstheholdertopurchaseonecommonshareatthestatedexerciseprice.Theoptionsvestoverthree
Gran Tierra Energy Annual Report 2010 | 77
yearsandhaveatermoftenyears,orthegrantee’sendofservicetotheCompany,whicheveroccursfirst.Atthetimeofgrant,theexercisepriceequalsthemarketprice.FortheyearendedDecember31,2010,2,895,553commonshareswereissuedupontheexerciseof2,895,553stockoptions(yearendedDecember31,2009—1,391,028;yearendedDecember 31,2008—209,164).ThefollowingoptionsareoutstandingasofDecember31,2010:
Number ofOutstanding
Options
WeightedAverage
Exercise Price$/Option
Number ofNonvestedOptions
WeightedAverage
Grant-DateFair Value$/Option
Balance,December31,2009 11,088,616 $ 2.43 5,959,212 $ 1.74
Grantedin2010 3,045,000 5.97 3,045,000 3.36
Exercisedin2010 (2,895,553) (1.95) – –
Vestedin2010 – – (3,192,516) 1.61
Forfeitedin2010 (295,005) (4.09) (295,005) 1.69
Balance,December31,2010 10,943,058 $ 3.49 5,516,691 $ 2.68
Theweightedaveragegrantdatefairvalueforoptionsgrantedin2010was$3.36(2009—$2.43;2008—$1.55).Theintrinsicvalueofoptionsexercisedin2010was$12.8 million(2009—$2.9 million;2008—$0.8 million).Thetotalfairvalueofsharesvestedduring2010was$5.1 million(2009—$4.7 million;2008—$2.0 million).
ThetablebelowsummarizesstockoptionsoutstandingatDecember31,2010:
RangeofExercisePrices($/option)
NumberofOutstanding
Options
Weighted Average
ExercisePrice$/Option
WeightedAverage
ExpiryYears
0.50to1.30 1,280,836 $ 1.10 5.5
1.31to2.00 88,334 1.72 6.9
2.01to3.50 5,675,555 2.45 7.8
3.51to5.50 478,333 4.45 8.8
5.51to7.75 3,420,000 6.02 9.1
Total 10,943,058 $ 3.49 8.0
TheaggregateintrinsicvalueofoptionsoutstandingatDecember31,2010is$49.9 million(2009—$39.0 million)basedontheCompany’sclosingstockpriceof$8.05(2009—$5.73)forthatdate.AtDecember31,2010,therewas$6.1 million(2009—$5.4 million)ofunrecognizedcompensationcostrelatedtounvestedstockoptionswhichisexpectedtoberecognizedoverthenextthreeyears.
ThetablebelowsummarizesexercisablestockoptionsatDecember31,2010:
Range of Exercise Prices($/option)
Number of Exercisable
Options
Weighted Average
Exercise Price$/Option
Weighted Average ExpiryYears
0.50to1.30 1,280,836 $ 1.1 5.5
1.31to2.00 88,334 $ 1.72 6.9
2.01to3.50 3,747,200 $ 2.42 7.7
3.51to5.50 111,665 $ 4.77 8.8
5.51to7.75 198,332 $ 6.54 8.4
Total 5,426,367 $ 2.30 7.2
Theweightedaveragegrantdatefairvalueforoptionsvestedin2010was$1.61(2009—$1.38).TheaggregateintrinsicvalueofoptionsexercisableatDecember31,2010is$49.9 million(2009—$19.8 million)basedontheCompany’sclosingstockpriceof$8.05forthatdate.
In2010,thestockbasedcompensationexpensewas$8.5 million(2009—$5.6 million;2008—$3.1 million)ofwhich$7.2 million(2009—$4.5 million;2008—$2.3 million)wasrecordedingeneralandadministrativeexpenseand$0.8 million(2009—$0.8 million;2008—$0.2 million)wasrecordedinoperatingexpenseintheconsolidatedstatementofoperations.In2010,$0.5 million(2009—$0.3 million;2008—$0.6 million)ofstockbasedcompensationwascapitalizedaspartofexplorationanddevelopmentcosts.
78 | Gran Tierra Energy Annual Report 2010
ThefairvalueofeachstockoptionawardisestimatedonthedateofgrantusingtheBlack-Scholesoptionpricingmodelbasedonassumptionsnotedinthefollowingtable.TheCompanyuseshistoricaldatatoestimateoptionexercises,expectedtermandemployeedeparturebehaviorusedintheBlack-Scholesoptionpricingmodel.ExpectedvolatilitiesusedinthefairvalueestimatearebasedonhistoricalvolatilityoftheCompany’sstock.Therisk-freerateforperiodswithinthecontractualtermofthestockoptionsisbasedontheU.S.Treasuryyieldcurveineffectatthetimeofgrant. YearEndedDecember31,
2010 2009 2008
Dividendyield(pershare) $ nil $ nil $ nil
Volatility 84% to 90% 94%to98% 75%to103%
Risk-freeinterestrate 0.2% to 0.5% 0.4%to0.6% 1.1%to2.1%
Expectedterm 3 years 3years 3years
Estimatedforfeiturepercentage(peryear) 10% 10% 10%
Weighted average shares outstanding
YearEndedDecember31,
2010 2009 2008
Weightedaverage numberofcommonandexchangeablesharesoutstanding 253,697,076 241,258,568 123,421,898
Sharesissuablepursuanttowarrants 3,750,781 9,503,818 14,663,885
Sharesissuablepursuanttostockoptions 7,402,966 5,797,322 6,020,738
Sharestobepurchasedfromproceedsofstockoptions (545,992) (2,969,605) (911,931)
Weightedaveragenumberofdilutedcommonandexchangeable sharesoutstanding 264,304,831 253,590,103 143,194,590
Income (loss) per share
AtDecember 31,2010,2009and2008,290,000,1,080,000and100,000optionstopurchasecommonshareswereexcludedfromthedilutedincomepersharecalculationastheinstrumentswereanti-dilutive.
7. Asset Retirement ObligationAsat December31,2010theCompany’sassetretirementobligationwascomprisedofaColombianobligationintheamountof$3.7 million(December31,2009—$3.5 million)andanArgentineobligationintheamountof$1.1 million(December31,2009—$1.2 million).Theundiscountedassetretirementobligationis$8.7 million.ChangesinthecarryingamountsoftheassetretirementobligationsassociatedwiththeCompany’soilandnaturalgaspropertieswereasfollows: AsatDecember31,
(ThousandsofU.S.Dollars) 2010 2009
Balance,beginningofyear $ 4,708 $ 4,251
Settlements (286) (52)
Disposal (720) (734)
Liabilityincurred 719 921
Foreignexchange 58 24
Accretion 328 298
Balance,endofyear $ 4,807 $ 4,708
Assetretirementobligation—current $ 338 $ 450
Assetretirementobligation—longterm 4,469 4,258
Balance,endofyear $ 4,807 $ 4,708
Gran Tierra Energy Annual Report 2010 | 79
8. Income TaxesTheincometaxexpensereporteddiffersfromtheamountcomputedbyapplyingtheUSstatutoryratetoincomebeforeincometaxesforthefollowingreasons: YearEndedDecember31,
(ThousandsofU.S.Dollars) 2010 2009 2008
Incomebeforeincometaxes $ 94,406 $ 38,295 44,439
35% 35% 35%
Incometaxexpense(benefit)expected 33,042 13,403 15,554
Foreigncurrencytranslationadjustments 6,409 1,099 4,636
Impactofforeigntaxes (3,094) (1,565) (1,337)
Enhancedtaxdepreciationincentive (7,971) (3,380) (4,560)
Stockbasedcompensation 2,381 1,814 707
Non-deductibleroyalty 5,506 3,532 3,129
Increaseinvaluationallowance 19,991 16,199 8,537
Partnershipandbranch(loss)incomepick-upintheUnitedStates andCanada (3,957) (5,931) 21,673
Utilizationofforeigntaxcredits – 71 (26,989)
Otherpermanentdifferences 4,927 (888) (406)
Totalincometaxexpense $ 57,234 $ 24,354 $ 20,944
Currentincometax 76,913 38,795 25,256
Deferredtaxrecovery (19,679) (14,441) (4,312)
Totalincometaxexpense $ 57,234 $ 24,354 $ 20,944
AsatDecember31,
(ThousandsofU.S.Dollars) 2010 2009
DeferredTaxAssets
Taxbenefitoflosscarryforwards $ 27,527 $ 22,318
Taxbasisinexcessofbookbasis 7,975 1,691
Foreigntaxcreditsandotheraccruals 16,895 15,508
Capitallosses 1,413 1,481
Deferredtaxassetsbeforevaluationallowance 53,810 40,998
Valuationallowance (48,958) (29,528)
$ 4,852 $ 11,470
Deferredtaxassets—current $ 4,852 $ 4,252
Deferredtaxassets—long-term – 7,218
4,852 11,470
DeferredTaxLiabilities
Long-term—bookvalueinexcessoftaxbasis (204,570) (216,625)
(204,570) (216,625)
NetDeferredTaxLiabilities $ (199,718) $ (205,155)
TheCompanywasrequiredtocalculateadeferredremittancetaxinColombiabasedon7%ofprofitswhicharenotreinvestedinthebusinessonthepresumptionthatsuchprofitswouldbetransferredtotheforeignownersuptoDecember 31,2006.AsofJanuary1,2007,theColombiangovernmentrescindedthislaw;therefore,nofurtherremittancetaxliabilitieswillbeaccrued.ThehistoricalbalancewhichwasincludedintheCompany’sfinancialstatementsasofDecember31,2010was$0.5 million(December31,2008—$0.9 million).
TheCompanyanditssubsidiariesfileincometaxreturnsintheU.S.federalandstatejurisdictionsandcertainotherforeignjurisdictions.TheCompanyissubjecttoincometaxexaminationsforthecalendartaxyearsended2004through2010inmostjurisdictions.
AsatDecember31,2010,theCompanyhasdeferredtaxassetsrelatingtonetoperatinglosscarryforwardsof$27.5 million(December31,2009—$22.3 million)andcapitallossesof$1.4 million(December31,2009—$1.5 million)beforevaluationallowances.Oftheselosses,$20.5 million(December31,2009—$18.2 million)arelossesgeneratedby
80 | Gran Tierra Energy Annual Report 2010
theforeignsubsidiariesoftheCompany.Ofthetotallosses nil(December31,2009—$0.1 million)willbegintoexpireby2011and$28.9 millionofnetoperatinglosses(December31,2009—$23.7 million)willbegintoexpirethereafter.
9. Accounts Payable and Accrued LiabilitiesThebalancesinaccountspayableandaccruedliabilitiesarecomprisedofthefollowing: AsatDecember31,2010
(ThousandsofU.S.Dollars) Colombia Argentina Corporate Total
Property,plantandequipment $ 32,854 $ 10,452 $ 9,815 $ 53,121Payroll 3,256 186 2,300 5,742Audit,legal,consultants – 140 1,692 1,832Generalandadministrative 1,039 590 433 2,062Operating 43,037 2,141 208 45,386Total $ 80,186 $ 13,509 $ 14,448 $ 108,143
AsatDecember31,2009
(ThousandsofU.S.Dollars) Colombia Argentina Corporate Total
Property,plantandequipment $ 17,723 $ 844 $ 213 $ 18,780
Payroll 1,792 339 1,052 3,183
Audit,legal,consultants – 137 1,472 1,609
Generalandadministrative 2,542 284 213 3,039
Operating 48,756 1,648 – 50,404
Total $ 70,813 $ 3,252 $ 2,950 $ 77,015
10. Commitments and Contingencies
LeasesGranTierraholdsthreecategoriesofoperatingleases:office,vehicleandhousing.TheCompanypaysmonthlyamountsof$0.2 millionforofficeleases,$11,000forvehicleleasesand$5,000forcertainemployeeaccommodationleasesinColombia,ArgentinaandPeru.FutureleasepaymentsasatDecember31,2010areasfollows: As at December 31, 2010
Payments Due in Period
Contractual Obligations(ThousandsofU.S.Dollars) Total
Less than 1Year
1 to 3years
3 to 5years
More than 5years
Operatingleases $ 5,444 $ 2,476 $ 2,068 $ 900 $ –
Softwareandtelecommunication 1,456 1,137 319 – –
Drilling,completion,facilityConstruction andoiltransportationservices 71,412 62,754 8,658 – –
Consulting 393 393 – – –
Total $ 78,705 $ 66,760 $ 11,045 $ 900 $ –
Totalrentexpensefor2010was$2.3 million(2009—$2.1 million;2008—$0.9 million).
GuaranteesCorporateindemnitieshavebeenprovidedbytheCompanytodirectorsandofficersforvariousitemsincluding,butnotlimitedto,allcoststosettlesuitsoractionsduetotheirassociationwiththeCompanyanditssubsidiariesand/oraffiliates,subjecttocertainrestrictions.TheCompanyhaspurchaseddirectors’andofficers’liabilityinsurancetomitigatethecostofanypotentialfuturesuitsoractions.Themaximumamountofanypotentialfuturepaymentcannotbereasonablyestimated.
TheCompanymayprovideindemnificationsinthenormalcourseofbusinessthatareoftenstandardcontractualtermstocounterpartiesincertaintransactionssuchaspurchaseandsaleagreements.Thetermsoftheseindemnificationswillvarybaseduponthecontract,thenatureofwhichpreventstheCompanyfrommakingareasonableestimateofthemaximumpotentialamountsthatmayberequiredtobepaid.ManagementbelievestheresolutionofthesematterswouldnothaveamaterialadverseimpactontheCompany’sliquidity,consolidatedfinancialpositionorresultsofoperations.
Gran Tierra Energy Annual Report 2010 | 81
ContingenciesEcopetrol andGranTierra EnergyColombia Ltd. “GranTierraColombia”,thecontractingpartiesoftheGuayuyacoAssociationContract,areengagedinadisputeregardingtheinterpretationoftheprocedureforallocationofoilproducedandsoldduringthelongtermtestoftheGuayuyaco-1andGuayuyaco-2wells.ThereisamaterialdifferenceintheinterpretationoftheprocedureestablishedinClause3.5ofAttachment-BoftheGuayuyacoAssociationContract.Ecopetrolinterpretsthecontracttoprovidethattheextendedtestproductionuptoavalueequalto30%ofthedirectexplorationcostsofthewellsisforEcopetrol’saccountonlyandservesasreimbursementofits30%back-intotheGuayuyacodiscovery.GranTierraColombia’scontentionisthatthisamountismerelytherecoveryof30%ofthedirectexplorationcostsofthewellsandnotexclusivelyforbenefitofEcopetrol.Therehasbeennoagreementbetweentheparties,and EcopetrolhasfiledalawsuitintheContraventionAdministrativeCourtintheDistrictof Caucaregardingthismatter.GranTierraColombiafiledaresponseonApril29,2008inwhichitrefutedallofEcopetrol’sclaimsandrequestedachangeofvenuetothecourtsinBogotá. AtthistimenoamounthasbeenaccruedinthefinancialstatementsastheCompanydoesnotconsideritprobablethatalosswillbeincurred.Ecopetrolisclaimingdamagesofapproximately$5.5 million.
GranTierrahasseverallawsuitsandclaimspendingforwhichtheCompanycurrentlycannotdeterminetheultimateresult.GranTierrarecordscostsastheyareincurredorbecomedeterminable.GranTierrabelievestheresolutionofthesematterswouldnothaveamaterialadverseeffectontheCompany’sconsolidatedfinancialpositionorresultsofoperations.
11. Financial Instruments, Fair Value Measurements and Credit RiskTheCompany’sfinancialinstrumentsrecognizedinthebalancesheetconsistofcashandcashequivalents,restrictedcash,accountsreceivable,accountspayable,accruedliabilities,andderivativefinancialinstruments.TheestimatedfairvaluesofthefinancialinstrumentshavebeendeterminedbasedontheCompany’sassessmentofavailablemarketinformationandappropriatevaluationmethodologies;however,theseestimatesmaynotnecessarilybeindicativeoftheamountsthatcouldberealizedorsettledinamarkettransaction.AsatDecember31,2010,thefairvaluesoffinancialinstrumentsapproximatetheirbookamountsduetotheshorttermmaturityoftheseinstruments.MostoftheCompany’saccountsreceivablerelatetooilandnaturalgassalesandareexposedtotypicalindustrycreditrisks.TheCompanymanagesthiscreditriskbyenteringintosalescontractswithonlycreditworthyentitiesandreviewingitsexposuretoindividualentitiesonaregularbasis.Thebookvalueoftheaccountsreceivablereflectsmanagement’sassessmentoftheassociatedcreditrisks.TheCompanyholdsnoderivativeinstrumentsatDecember31,2010.
Additionally,foreignexchangegains/lossesresultfromthefluctuationoftheU.S.dollartotheColombianpesoduetoGranTierra’sdeferredtaxliability,amonetaryliability,whichismainlydenominatedinthelocalcurrencyoftheColombian foreignoperations.Asaresult,aforeignexchangegain/lossmustbecalculatedonconversiontotheUSdollarfunctionalcurrency.AstrengtheningintheColombianpesoagainsttheU.S.dollarresultsinforeignexchangelosses,estimatedat$104,000)foreachonepesodecreaseintheexchangerateoftheColombianpesotooneU.S.dollar.
TheCompany’srevenuesarederivedprincipallyfromuncollateralizedsalestocustomersintheoilandnaturalgasindustry.TheconcentrationofcreditriskinasingleindustryaffectstheCompany’soverallexposuretocreditriskbecausecustomersmaybesimilarlyaffectedbychangesineconomicandotherconditions.In2010,theCompanyhadonesignificantcustomerforitsColombiancrudeoil,Ecopetrol.InArgentina,theCompanyhadonesignificantcustomer,Refinor.
TheCompanyrecognizesthefairvalueofitsderivativeinstrumentsasassetsorliabilitiesonthebalancesheet. NoneoftheCompany’sderivativeinstruments,whichexpiredinFebruary2010,qualifiedasfairvaluehedgesorcashflowhedges,andaccordingly,changesinfairvalueofthederivativeinstrumentswererecognized asincomeorexpenseintheconsolidatedstatementofoperationsandretainedearnings(accumulateddeficit)withacorrespondingadjustmenttothefairvalueofderivativeinstrumentsrecordedonthebalancesheet.UnderthetermsoftheCreditFacilitywithStandardBank(Note12),theCompanywasrequiredtoenterintoaderivativeinstrumentforthepurposeofobtainingprotectionagainstfluctuationsinthepriceofoilinrespectofatleast50%oftheJune30,2006IndependentReserveEvaluationReportprojectedaggregatenetshareofColombianproductionafterroyaltiesforthethreeyeartermoftheFacility.InaccordancewiththetermsoftheFacility,theCompanyenteredintoacostlesscollarderivativeinstrumentforcrudeoilbasedonWestTexasIntermediate(“WTI”)price,withafloorof$48.00andaceilingof$80.00,forathreeyearperiodendingFebruary2010,for400barrelsperdayfromMarch2007toDecember2007,300barrelsperdayfromJanuary 2008toDecember 2008,and200barrelsperdayfromJanuary 2009toFebruary 2010.ThecompanyhadnoderivativecontractsoutstandingatDecember31,2010.
82 | Gran Tierra Energy Annual Report 2010
YearEndedDecember31,
(ThousandsofU.S.Dollars) 2010 2009 2008
Realizedfinancialderivative(gain)loss $ – $ (87) $ 2,689
Unrealizedfinancialderivative(gain)loss (44) 277 (2,882)
Derivativefinancialinstruments(gain)loss $ (44) $ 190 $ (193)
As at December31,
Assets(Liabilities) 2010 2009
Derivativefinancialinstruments $ – $ (44)
CertainofGranTierra’sassetsandliabilitiesarereportedatfairvalueintheaccompanyingconsolidatedbalancesheets.ThefollowingtablesprovidefairvaluemeasurementinformationforsuchassetsandliabilitiesasatDecember31,2010andDecember31,2009.
Thecarryingvaluesofcashandcashequivalents,restrictedcash,accountsreceivableandaccountspayable(includingaccruedliabilities)includedintheaccompanyingconsolidatedbalancesheetsapproximatedfairvalueatDecember31,2010andDecember31,2009.Theseassetsandliabilitiesarenotpresentedinthefollowingtables. AsatDecember31,2010
Fair Value Measurements Using:
Carrying Amount
Total Fair Value
Quoted Prices in
Active Markets (Level 1)
Significant Other
Observable Inputs
(Level 2)
Significant
Unobservable Inputs
(Level 3)
FinancialAssets(Liabilities)(ThousandsofU.S.Dollars)
Crudeoilcollar $ – $ – $ – $ – $ –
As at December 31, 2009
Fair Value Measurements Using:
CarryingAmount
Total FairValue
QuotedPrices inActive
Markets(Level 1)
SignificantOther
ObservableInputs
(Level 2)
Significant
UnobservableInputs
(Level 3)
FinancialAssets(Liabilities)(ThousandsofU.S.Dollars)
Crudeoilcollar $ (44) $ (44) $ – $ (44) $ –
GAAPestablishesafairvaluehierarchythatprioritizestheinputstovaluationtechniquesusedtomeasurefairvalue.Aspresentedinthetableabove,thishierarchyconsistsofthreebroadlevels.Level1inputsonthehierarchyconsistofunadjustedquotedpricesinactivemarketsforidenticalassetsandliabilitiesandhavethehighestpriority.Level2and3inputshavelowerpriorities.TheCompanyusesappropriatevaluationtechniquesbasedontheavailableinputstomeasurethefairvaluesofassetsandliabilities.Whenavailable,GranTierrameasuresfairvalueusingLevel1inputsbecausetheygenerallyprovidethemostreliableevidenceoffairvalue.
TheCompanyusesaLevel2methodtomeasurethefairvalueofitscrudeoilcollars.Thefairvaluesofthecrudeoilareestimatedusinginternaldiscountedcashflowcalculationsbaseduponforwardcommoditypricecurves,non-bindingquotesobtainedfrombrokersforcontractswithsimilartermswhichcanbesubstantiallyobservedorcorroboratedinthemarketplace,orquotesobtainedfromcounterpartiestotheagreements.TheCompanydoesnothaveanyotherassetsorliabilitieswhosefairvalueismeasuredusingLevel1or3methods.
Thefollowingmethodsandassumptionswereusedtoestimatethefairvaluesoftheassetsandliabilitiesinthetableabove.
Level1FairValueMeasurementsTheCompanydoesnothaveanyassetsorliabilitieswhosefairvalueismeasuredusingthismethod.
Gran Tierra Energy Annual Report 2010 | 83
Level2FairValueMeasurementsCrude oil collars—Thefairvaluesofthecrudecollarswereestimatedusinginternaldiscountedcashflowcalculationsbaseduponforwardcommoditypricecurves,non-bindingquotesobtainedfrombrokersforcontractswithsimilartermswhichcouldbesubstantiallyobservedorcorroborateinthemarketplace,orquotesobtainedfromcounterpartiestotheagreements.
Level3FairValueMeasurementsTheCompanydoesnothaveanyfinancialassetsorfinancialliabilitieswhosefairvalueismeasuredusingthismethod.
12. Credit FacilitiesEffectiveFebruary28,2007,theCompanyenteredintoacreditfacilitywithStandardBankPlc.Asaresultofre-negotiationsconcludedinAugust2009,themaximumamountofthecreditfacilitywas$200 millionwitha$7 millionborrowingbasethatcouldbere-determinedsemi-annuallybasedonreserveevaluationreports.AmountsdrawndownunderthefacilityboreinterestattheEurodollarrateplus4%.Astand-byfeeof1%perannumwaschargedontheun-drawnamountoftheborrowingbase.ThefacilitywassecuredprimarilybytheassetsofGranTierraColombiaandSolanaPetroleumExploration(Colombia)Ltd.AsatDecember31,2009,noamountwasdrawn-downunderthisfacility.ThisfacilityexpiredFebruary 22, 2010.
EffectiveJuly30,2010,asubsidiaryofGranTierra,Solana,establishedacreditfacilitywithBNPParibasforathree-yeartermwhichmaybeextendedoramendedbyagreementbetweentheparties. Thisreservebasedfacilityhasamaximumborrowingbaseupto$100 millionandissupportedbythepresentvalueofthepetroleumreservesoftheCompany’stwosubsidiarieswithoperatingbranchesinColombia—GranTierraEnergyColombiaLtd.andSolanaPetroleumExploration(Colombia)Ltd. Theinitialcommittedborrowingbaseis$20 million. AmountsdrawndownunderthefacilitybearinterestattheUSDLIBORrateplus3.5%.Inaddition,astand-byfeeof1.50%perannumischargedontheunutilizedbalanceofthecommittedborrowingbaseandisincludedingeneralandadministrativeexpense. Underthetermsofthefacility,theCompanyisrequiredtomaintainandwasincompliancewithcertainfinancialandoperatingcovenants.AsatDecember31,2010,theCompanyhadnotdrawndownanyamountsunderthisfacility.
13. Related Party TransactionsOnFebruary1,2009,theCompanyenteredintoasubleaseforofficespacewithacompany,ofwhichoneofGranTierra’sdirectorsisashareholderanddirector.ThetermofthesubleaserunsfromFebruary1,2009toAugust31,2011andthesubleasepaymentis$7,800permonthplusapproximately$4,000foroperatingandotherexpenses.ThetermsofthesubleasewereconsistentwithmarketconditionsintheCalgary,Alberta,Canadarealestatemarket.
OnAugust3,2010,GranTierraenteredintoacontractrelatedtothePerudrillingprogramwithacompanyforwhichoneofGranTierra’sdirectorsisashareholderanddirector.AtDecember31,2010,$0.8 millionwascapitalizedandincludedinaccountspayablerelatedtothiscontract,thetermsofwhichareconsistentwithmarketconditions.
14. Subsequent EventsOnJanuary12,2011,theCompanyenteredintoanagreementtosubleaseofficespacetoacompanyforwhichGranTierra’sPresidentandChiefExecutiveOfficerservesasanindependentDirector.ThetermofthesubleaserunsfromFebruary1,2011toJanuary30,2013and,at$4,444permonth,thetermsareconsistentwithmarketconditionsintheCalgary,Alberta,Canadarealestatemarket.
OnJanuary17,2011,theCompanyenteredintoanArrangementAgreement(the“Agreement”)toacquirealltheissuedandoutstandingsharesandwarrantsofPetroliferaPetroleumLimited(“Petrolifera”).PetroliferaisaCanadianbasedinternationaloilandgascompanythattradesontheTorontoStockExchangeandhasoilandgasassetsinArgentina,Colombia,andPeru. UnderthetermsoftheAgreement,Petroliferashareholderswillreceive0.1241ofashareofGranTierraEnergy,foreveryPetroliferashareheld.Inaddition,wewillissuereplacementwarrantsfortheoutstandingwarrantstopurchasePetroliferacommonshares,intheamountof0.1241ofaGranTierrawarrantforeachPetroliferawarrant.Atotalofapproximately19 millionofGranTierra’ssharesareexpectedtobeissued,whichrepresentsapproximatelyan8%increaseinsharesoutstanding.Totalconsiderationforthetransactionwillbeapproximately$195 million,includingtheassumptionofPetrolifera’sdebt,workingcapitalandinvestmentsasofSeptember30,2010.TheAgreementissubjecttoregulatory,court,stockexchange,andPetroliferasecurityholderapprovalsandisscheduledtocloseinMarch2011.
84 | Gran Tierra Energy Annual Report 2010
Supplementary Data (Unaudited)
1) Oil and Gas Producing Activities
A. Reserve Quantity InformationGranTierra’snetprovedreservesandchangesinthosereservesforoperationsaredisclosedbelow.Thenetprovedreservesrepresentmanagement’sbestestimateofprovedoilandnaturalgasreservesafterroyalties.Reserveestimatesforeachpropertyarepreparedinternallyeachyearand100%ofthereserveshavebeenassessedbyindependentqualifiedreservesconsultants,GLJPetroleumConsultants.
Estimatesofcrudeoilandnaturalgasprovedreservesaredeterminedthroughanalysisofgeologicalandengineeringdata,anddemonstratereasonablecertaintythattheyarerecoverablefromknownreservoirsundereconomicandoperatingconditionsthatexistedatyearend.SeeCriticalAccountingEstimatesinItem7foradescriptionofGranTierra’sreservesestimationprocess.
PROVEDRESERVESNETOFROYALTIES(1) Colombia Argentina Total
Crudeoilisinbarrelsandnaturalgasisinmillioncubicfeet Oil Gas Oil Gas Oil Gas
ProvedDevelopedandUndevelopedReserves, December 31,2007 4,383,000 – 2,035,000 – 6,418,000 –
ExtensionsandDiscoveries 5,344,202 – 377,300 – 5,721,502 –
PurchasesofReservesinPlace 9,016,148 1,179 – – 9,016,148 1,179
Production (1,085,198) (15) (242,947) – (1,328,145) (15)
RevisionsofPreviousEstimates 22,848 (2) (612,353) – (589,505) (2)
ProvedDevelopedandUndevelopedreserves, December 31,2008 17,681,000 1,162 1,557,000 – 19,238,000 1,162
ExtensionsandDiscoveries 2,025,000 – – – 2,025,000 –
PurchasesofReservesinPlace (113,000) – – – (113,000) –
Production (4,284,230) (49) (337,316) – (4,621,546) (49)
RevisionsofPreviousEstimates 5,482,230 – 71,316 756 5,553,546 756
ProvedDevelopedandUndevelopedReserves, December 31,2009 20,791,000 1,113 1,291,000 756 22,082,000 1,869
ExtensionsandDiscoveries 3,107,400 – 43,300 – 3,150,700 –PurchasesofReservesinPlace – – – – – –Production (4,877,600) (277) (296,800) – (5,174,400) (277)RevisionsofPreviousEstimates 3,464,400 396 75,200 (756) 3,539,600 (360)ProvedDevelopedandUndevelopedReserves, December 31,2010 22,485,200 1,232 1,112,700 – 23,597,900 1,232ProvedDevelopedReserves,December 31,2008(2) 7,832,000 – 1,134,000 – 8,966,000 –
ProvedDevelopedReserves,December 31,2009(2) 20,194,000 1,113 1,080,000 756 21,274,000 1,869
ProvedDevelopedReserves,December 31,2010(2) 18,528,000 1,232 940,000 – 19,468,000 1,232(1) Proved oil and gas reserves are the estimated quantities of natural gas, crude oil, condensate and natural gas liquids that geological and engineering
data demonstrate with reasonable certainty can be recovered in future years from known reservoirs under existing economic and operating conditions. Reserves are considered “proved” if they can be produced economically, as demonstrated by either actual production or conclusive formation testing.
(2) Proved developed oil and gas reserves are expected to be recovered through existing wells with existing equipment and operating methods.
Gran Tierra Energy Annual Report 2010 | 85
B. Capitalized Costs
Proved
PropertiesUnprovedProperties
AccumulatedDD&A
CapitalizedCosts
CapitalizedCosts,December 31,2009 $ 648,061 $ 229,497 $ (173,382) $ 704,176
Colombia 104,504 (332) (132,050) (27,878)Argentina 24,697 8,954 (29,426) 4,225CapitalizedCosts,December 31,2010 $ 777,262 $ 238,119 $ (334,858) $ 680,523
C. Costs Incurred OilandGas
Colombia Argentina Total
TotalCostsIncurredbeforeDD&A
AsatDecember31,2007 $ 52,726 $ 23,360 $ 76,086
PropertyAcquisitionCosts
Proved $ 320,773 $ – $ 320,773
Unproved 360,493 – 360,493
ExplorationCosts 3,443 7,990 11,433
DevelopmentCosts 27,597 3,874 31,471
AsatDecember 31,2008 $ 765,032 $ 35,224 $ 800,256
PropertyAcquisitionCosts
Proved $ – $ – $ –
Unproved – – –
ExplorationCosts 24,103 246 24,349
DevelopmentCosts 48,232 4,721 52,953
AsatDecember 31,2009 $ 837,367 $ 40,191 $ 877,558
PropertyAcquisitionCosts Proved $ – $ – $ – Unproved – – –ExplorationCosts 63,115 26,404 89,519DevelopmentCosts 41,057 7,248 48,305AsatDecember 31,2010 $ 941,539 $ 73,843 $ 1,015,382
86 | Gran Tierra Energy Annual Report 2010
D. Results of Operations for Producing Activities Colombia Argentina Total
YearendedDecember 31,2008
NetSales $ 103,202 $ 9,603 $ 112,805
ProductionCosts (12,117) (7,027) (19,144)
ExplorationExpense – – –
DD&A (22,183) (3,355) (25,538)
IncomeTax(Expense)Recovery (22,063) 1,122 (20,941)
ResultsofOperations $ 46,839 $ 343 $ 47,182
YearendedDecember 31,2009
NetSales $ 248,834 $ 13,795 $ 262,629
ProductionCosts (33,091) (7,537) (40,628)
ExplorationExpense – – –
DD&A (126,261) (8,312) (134,573)
IncomeTax(Expense)Recovery (25,824) 1,470 (24,354)
ResultsofOperations $ 63,658 $ (585) $ 63,073
YearendedDecember 31,2010 NetSales $ 359,302 $ 13,984 $ 373,286 ProductionCosts (50,431) (8,808) (59,239) ExplorationExpense – – – DD&A (132,050) (29,426) (161,476) IncomeTax(Expense)Recovery (51,047) (5,687) (56,734)ResultsofOperations $ 125,774 $ (29,937) $ 95,837
E. Standardized Measure of Discounted Future Net Cash Flows and ChangesThefollowingdisclosureisbasedonestimatesofnetprovedreservesandtheperiodduringwhichtheyareexpectedtobeproduced.Futurecashinflowsfor2010and2009arecomputedbyapplyingthetwelvemonthperiodunweightedarithmeticaverageofthepriceasofthefirstdayofeachmonthwithinthattwelvemonthperiod,unlesspricesaredefinedbycontractualarrangements,excludingescalationsbasedonfutureconditionstoGranTierra’safterroyaltyshareofestimatedannualfutureproductionfromprovedoilandgasreserves.Futurecashinflowsfor2008arecomputedbyapplyingyearendpricestoGranTierra’safterroyaltyshareofestimatedannualfutureproductionfromprovedoilandgasreserves.The2010twelvemonthperiodunweightedarithmeticaverageofthepriceasofthefirstdayofeachmonthwithinthattwelvemonthperiodwas$78.23(2009—$61.04)forColombiaand$50.18(2009—$40.98)forArgentina.TheperiodendoilpricesatDecember31,2008were$44.60forColombiaand$33.94forArgentina.ThecalculatedweightedaverageproductioncostsatDecember31,2010were$10.48(2009—$14.92;2008—$12.21)forColombiaand$18.87(2009—$20.73;2008—$13.05)forArgentina.Futuredevelopmentandproductioncoststobeincurredinproducingandfurtherdevelopingtheprovedreservesarebasedonyearendcostindicators.Futureincometaxesarecomputedbyapplyingyearendstatutorytaxrates.Theseratesreflectallowabledeductionsandtaxcredits,andareappliedtotheestimatedpre-taxfuturenetcashflows.
Discountedfuturenetcashflowsarecalculatedusing10%mid-yeardiscountfactors.Thecalculationsassumethecontinuationofexistingeconomic,operatingandcontractualconditions.However,sucharbitraryassumptionshavenotprovedtobethecaseinthepast.Otherassumptionscouldgiverisetosubstantiallydifferentresults.
TheCompanybelievesthisinformationdoesnotinanywayreflectthecurrenteconomicvalueofitsoilandgasproducingpropertiesorthepresentvalueoftheirestimatedfuturecashflowsas:
• noeconomicvalueisattributedtoprobableandpossiblereserves;• useofa10%discountrateisarbitrary;and• priceschangeconstantlyfromthetwelvemonthperiodunweightedarithmeticaverageofthepriceasofthefirstday
ofeachmonthwithinthattwelvemonthperiod.
Gran Tierra Energy Annual Report 2010 | 87
Colombia Argentina Total
December 31,2008
FutureCashInflows $ 734,727 $ 52,856 $ 787,583
FutureProductionCosts (131,317) (19,154) (150,471)
FutureDevelopmentCosts (159,219) (4,279) (163,498)
FutureSiteRestorationCosts (1,738) (226) (1,964)
FutureIncomeTax (123,634) (8,588) (132,222)
FutureNetCashFlows 318,819 20,609 339,428
10%DiscountFactor (60,180) (4,126) (64,306)
StandardizedMeasure $ 258,639 $ 16,483 $ 275,122
December 31,2009
FutureCashInflows $ 1,117,879 $ 55,076 $ 1,172,955
FutureProductionCosts (312,950) (29,140) (342,090)
FutureDevelopmentCosts (91,867) (4,923) (96,790)
FutureSiteRestorationCosts (1,415) (566) (1,981)
FutureIncomeTax (208,237) (5,771) (214,008)
FutureNetCashFlows 503,410 14,676 518,086
10%DiscountFactor (109,043) (2,659) (111,702)
StandardizedMeasure $ 394,367 $ 12,017 $ 406,384
December 31,2010
FutureCashInflows $ 1,621,461 $ 55,833 $ 1,677,294FutureProductionCosts (373,467) (27,314) (400,781)FutureDevelopmentCosts (136,688) (4,965) (141,653)FutureSiteRestorationCosts (8,070) (385) (8,455)FutureIncomeTax (295,146) – (295,146)FutureNetCashFlows 808,090 23,169 831,25910%DiscountFactor (225,990) (4,270) (230,260)StandardizedMeasure $ 582,100 $ 18,899 $ 600,999
ChangesintheStandardizedMeasureofDiscountedFutureNetCashFlowsThefollowingaretheprincipalsourcesofchangeinthestandardizedmeasureofdiscountedfuturenetcashflows: 2010 2009 2008
BeginningofYear $ 406,384 $ 275,122 $ 196,284
SalesandTransfersofOilandGasProduced,NetofProductionCosts (313,840) (222,479) (94,598)
NetChangesinPricesandProductionCostsRelatedtoFutureProduction 208,649 147,810 (109,116)
Extensions,DiscoveriesandImprovedRecovery,LessRelatedCosts 32,194 54,388 115,089
DevelopmentCostsIncurredduringthePeriod 107,856 59,024 28,084
RevisionsofPreviousQuantityEstimates 140,893 149,597 (28,716)
AccretionofDiscount 58,043 38,934 28,970
PurchasesofReservesinPlace – – 184,470
SalesofReservesinPlace – 3,035 –
NetchangeinIncomeTaxes (39,180) (99,047) (45,345)
EndofYear $ 600,999 $ 406,384 $ 275,122
88 | Gran Tierra Energy Annual Report 2010
2) Summarized Quarterly Financial Information
Revenue andother Income Expenses
Income (Loss)Before Income
TaxesIncomeTaxes
Net Income(Loss)
BasicEarningsNetIncome
(Loss)PerShare—
Basic
Diluted NetIncome (Loss)Per Share—
Diluted
2010 FirstQuarter $ 93,110 $ 71,968 $ 21,142 $ 11,182 $ 9,960 $ 0.04 $ 0.04SecondQuarter 84,114 53,890 30,224 12,853 17,371 0.07 0.07ThirdQuarter 84,569 81,952 2,617 5,894 (3,277) (0.01) (0.01)FourthQuarter 112,667 72,244 40,423 27,305 13,118 0.05 0.04 $ 374,460 $ 280,054 $ 94,406 $ 57,234 $ 37,172 $ 0.15 $ 0.142009
FirstQuarter $ 33,565 $ 19,518 $ 14,047 $ (85) $ 14,132 $ 0.06 $ 0.06
SecondQuarter 58,511 82,586 (24,075) 4,125 (28,200) (0.12) (0.12)
ThirdQuarter 75,354 70,211 5,143 7,959 (2,816) (0.01) (0.01)
FourthQuarter 96,286 53,106 43,180 12,355 30,825 0.13 0.12
$ 263,716 $ 225,421 $ 38,295 $ 24,354 $ 13,941 $ 0.06 $ 0.05
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Market for Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
OurcommonstocktradesontheNYSE,Amex,andontheTSXunderthesymbol“GTE”.Inaddition,theexchangeablesharesinoneofoursubsidiaries,GranTierraExchangeco,arelistedontheTSXandaretradingunderthesymbol“GTX”.
AsofFebruary18,2011therewereapproximately:51holdersofrecordofsharesofourcommonstockand240,857,632sharesoutstandingwith$0.001parvalue;andoneshareofSpecialAVotingStock,$0.001parvaluerepresentingapproximately9holdersofrecordof7,811,112exchangeableshareswhichmaybeexchangedona1-for-1basisintosharesofourCommonStock;andoneshareofSpecialBVotingStock,$0.001parvalue,representing10holdersofrecordof9,539,042sharesofGranTierraExchangecoInc.,whichareexchangeableona1-for-1basisintosharesofourcommon stock.
ForthequartersindicatedfromJanuary1,2009throughtheendofthefourthquarterof2010,thefollowingtableshowsthehighandlowclosingsalepricespershareofourcommonstockasreportedontheNYSEAmex. High Low
FourthQuarter2010 $ 8.39 $ 7.23ThirdQuarter2010 $ 7.72 $ 5.06SecondQuarter2010 $ 6.64 $ 4.70FirstQuarter2010 $ 6.08 $ 4.68FourthQuarter2009 $ 6.00 $ 3.99
ThirdQuarter2009 $ 4.26 $ 2.92
SecondQuarter2009 $ 3.51 $ 2.31
FirstQuarter2009 $ 3.50 $ 2.06
Gran Tierra Energy Annual Report 2010 | 89
Dividend PolicyWehaveneverdeclaredorpaiddividendsonthesharesofcommonstockandweintendtoretainfutureearnings,ifany,tosupportthedevelopmentofthebusinessandthereforedonotanticipatepayingcashdividendsfortheforeseeablefuture.Paymentoffuturedividends,ifany,willbeatthediscretionofourboardofdirectorsaftertakingintoaccountvariousfactors,includingcurrentfinancialcondition,operatingresultsandcurrentandanticipatedcashneeds.Underthetermsofourcreditfacilitywecannotpayanydividendsifweareindefaultunderthefacility,andifwearenotindefaultthenarerequiredtoobtainbankapprovalforanydividendpaymentsmadebyusexceeding$2 millioninanyfiscalyear.
Performance Graph
12/05 12/06 12/07 12/08 12/09 12/10
GranTierraEnergyInc 100 43.12 94.93 101.45 207.61 291.67RussellSmallCapCompleteness 100 114.89 120.46 73.51 101.22 128.18DowJonesUSExploration&ProductionTSM 100 105.08 147.43 86.94 123.04 145.68
TheDowJonesUSExplorationandProductionTSMwaspreviouslynamedtheDJWilshireExplorationandProduction.
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Gran Tierra Energy Inc
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Dow Jones US Exploration & Production TSM
90 | Gran Tierra Energy Annual Report 2010
Glossary of Commonly Used Terms
3DSeismic—Threedimensionalseismic2DSeismic—Twodimensionalseismic2P—ProvedandprobablereservesBBO—BillionbarrelsofoilBCF—Billioncubicfeet(gas)BO—BarrelsofoilBOPD—BarrelsofoilperdayBOE—Barrelsofoilequivalent*EUR—Estimatedultimaterecoverykm2—Squarekilometerskm—KilometersMCF—Thousandcubicfeet(gas)MM—MillionMMBO—MillionbarrelsofoilMMSCF—Millionstandardcubicfeet(gas)NAR—Netafterroyalty
*ABOEconversionratioofsixthousandcubicfeetofgastoonebarrelofoilisbasedonanenergyequivalencyconversionmethodprimarilyapplicableattheburnertipanddoesnotrepresentavalueequivalencyatthewellhead.
DirectorsJeffrey Scott Chairman of the Board President, Postell Energy Co. Ltd.
Ray Antony, CA Corporate Director
Dana Coffield President, Chief Executive Officer, Director
Gerald Macey Corporate Director
Verne Johnson President, KristErin Resources Inc.
Nicholas G. Kirton, FCA, ICD.D Corporate Director
J. Scott Price President, Prospect International Inc.
Executive Officers Dana Coffield President, Chief Executive Officer, Director
Martin Eden Chief Financial Officer
Shane O’Leary Chief Operating Officer
David Hardy General Counsel and Corporate Secretary
Foreign Subsidiary Managers Rafael Orunesu President, Gran Tierra Energy Argentina
Julian Garcia President, Gran Tierra Energy Colombia
Júlio César Moreira President, Gran Tierra Energy Brazil
Carlos Monges President, Gran Tierra Energy Peru
Legal Counsel For United States matters Cooley LLPFive Palo Alto Square 3000 El Camino Real Palo Alto, California 94306–2155, U.S.A.
For Canadian matters Blake, Cassels & Graydon LLP 855–2nd Street S.W. Suite 3500, Bankers Hall East Tower Calgary, Alberta T2P 4J8, Canada
Transfer Agents For Gran Tierra Energy Inc.Computershare — USA350 Indiana Street, Suite 800, Golden, Colorado 80401, USA800·962·4284For Gran Tierra Exchangeco Inc.Computershare — Canada600, 530–8th Avenue SW, Calgary, Alberta T2P 3S8, Canada800·736·1755
Exchangeable SharesOlympia Trust Company2300, 125–9 Avenue SE, Calgary, Alberta T2G 0P6phone: 403·261·0900 fax: 403·265·1455toll free: 1·800·727·4493 Stock Exchange ListingTSX: GTE & NYSE AMEX:GTE
Investor RelationsJason CrumleyDirector, Investor Relations300, 625 11 Avenue S.W. Calgary, Alberta, Canada, T2R 0E1403·265·3221 [email protected]
Independent AccountantsDeloitte and Touche LLP3000, 700 Second Street SWCalgary, Alberta T2P 0S7, Canada
Annual General MeetingThe 2010 annual meeting of Shareholders will be held on June 28, 2011 at 3:00 pm MDT at:Calgary Petroleum Club, Devonian Room319 Fifth Avenue SW, Calgary, Alberta T2P 0L5, Canada
Material RequestsGran Tierra Energy will supply a copy of the Form 10-K, including financial statements and schedules, without charge, upon receiving a written request for these materials. Please submit your requests to Jason Crumley by email at [email protected] or by mail to: 300, 625 11 Avenue S.W, Calgary, Alberta, Canada, T2R 0E1. Gran Tierra Energy’s filings are also available on a Website maintained by the Securities and Exchange Commission at www.sec.gov and on SEDAR at www.sedar.com.
Youth Singers of Calgary
Gran Tierra Energy is a proud supporter of the Safe Haven Foundation
in Calgary, the Youth Singers of Calgary and the Glenbow Museum.
Visit www.safehavenfoundation.ca, www.youthsingers.org
and www.glenbow.org.
Design and production by TMX Equicom
300, 625 11 Avenue S.W.Calgary, Alberta, Canada, T2R 0E1Phone: 403·265·3221Fax 403·265·3242 www.grantierra.com
36 | Gran Tierra Energy Annual Report 2010