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OVERVIEW OF BUSINESS AND OVERALL PERFORMANCE
About Falcon
The Company is an international energy company engaged in the business of acquiring, exploring and developing petroleum and natural gas properties, with offices in Vancouver, British Columbia, Dublin, Ireland, Budapest, Hungary and Sydney, Australia. The Company’s registered office is located at 810-675 West Hastings Street, Vancouver, British Columbia, Canada V6B 1N2. On October 2, 2012, the Company announced that further to the communication on June 18, 2012, the Denver office had been closed on September 28, 2012 and the headquarters had been moved to Dublin, Ireland.
The Company’s primary focus is the acquisition, exploration and development of conventional and unconventional petroleum and natural gas projects in Central Europe (specifically Hungary), Australia and South Africa.
Beetaloo Basin, Northern Territory, Australia
Falcon Australia is the registered owner of four exploration permits (“the Permits”), comprising 7,000,000 acres in the Beetaloo Basin, Northern Territory, Australia.
The Permits are subject to a government royalty of 10% and non-government royalties of 13%-14%.
Hess Participation Agreement
In June 2011, Falcon Australia and Hess Australia (Beetaloo) Pty Ltd. (“Hess”) closed on an Evaluation and Participation Agreement (the “E&P Agreement”). Under the terms of the E&P Agreement, Hess has the exclusive right to conduct operations for the exploration, drilling, development and production of hydrocarbons from three of the four Permits excluding an area comprising 100,000 acres surrounding the Shenandoah-1 well (the “Area of Interest”). Initially, Hess had agreed to acquire seismic data, at its sole cost of at least $40.0 million, over the Area of Interest within 18 months of the execution of the E&P Agreement. After acquiring the seismic data, Hess shall have the right to acquire a 62.5% working interest in the Area of Interest. If Hess acquires the working interest, they commit to drill and evaluate five exploration wells at their sole cost, one of which must be a horizontal well. All costs to plug and abandon the five exploration wells will also be borne solely by Hess. The drilling and evaluation of the five exploration wells must meet the minimum work requirements of the work program. On September 10, 2012, Falcon Australia obtained Northern Territory Department of Resources (“DoR”) approval for a 12 month extension of the Permits until December 31, 2013. Hess has agreed, subject to Hess proceeding to the “development phase”, to carry Falcon, on the first development well, up to a gross cost of US$10 million. Costs to drill wells after the five exploration wells and the first development well will be borne 62.5% by Hess and 37.5% by Falcon Australia. Under a revised work program approved by the Northern Territory of Australia Government, Department of Resources on September 9, 2012, the Company is obligated to complete a minimum work program of $27,500,000 before the end of 2013, of which $25,900,000 will be borne by Hess as part of the acquisition of seismic under the E&P Agreement.
Operational Highlights
As of September 30, 2012, Hess has acquired over 2,600km of the 3,600 km of the 2D seismic program under the E&P Agreement. Hess continues to work in acquiring more 2D seismic in order to complete the work program by year end. The cost of the program, at the sole cost of Hess, has increased from the original $40 million to an anticipated $55 million.
Falcon Australia is in the process of finalizing a seismic acquisition program in EP99 for 2013. This will consist of 150km of 2D seismic data as required in the exploration permit minimum work requirements. This seismic data will provide the necessary information to plan a potential well program in the coming years. The Company has received expressions of interest from a number of third parties regarding a possible farm-out on the combined area including the 100,000 acres around the Shenandoah well, measuring approximately 670,000 acres in total.
Hungary
The Company holds a long-term Mining Plot (the “Production License”) granted by the Hungarian Mining Authority. The lands within the Production License were formerly part of the Company’s two petroleum and natural gas exploration licenses – the Tisza License and the Makó License (collectively, the “Exploration Licenses”). The Production License, covering approximately 245,700 acres, gives the Company the exclusive right to explore for and appraise petroleum and natural gas on properties located in south central Hungary near the town of Szolnok. The Production License further gives the Company the exclusive right to commercially develop petroleum and natural gas within the area covered by that license. The Production License incorporates depths beginning at 7,546 feet (2,300 meters) from the surface, and extends to the basement of the Makó Trough, Pannonian hydrocarbon accumulation.
The existing well bores in the Makó Trough are currently under review for potential re-entry and re-completion to test the deeper play in the Szolnok, Endrőd or Basal Conglomerate formations.
Makó Production License Letter of Intent
On June 9, 2011, the Company’s wholly owned Hungarian subsidiary, TXM, entered into a Letter of Intent (“LOI”) with Naftna Industrija Srbije, j.s.c. Novi Sad (“NIS”) (“Agreement”) for the earning by NIS of an interest in producing the Algyö play within the Makó Production License in Hungary in an area of approximately 995 square kilometers, from a depth of 2,300 meters down to the base of the Algyö Formation (the “Agreement Area”). Under the terms of the LOI, TXM will retain all rights within the entire Production License deeper than the base of the Algyö Formation such as the Szolnok and Endröd formations and, upon signing of a participation agreement, NIS would be required to make a $1,500,000 payment to TXM. NIS shall then, at its sole cost, drill, test and complete three wells in the Agreement Area. These wells, to be drilled and tested within 18 months from the effective date of the Agreement, shall be located such that each well tests an independent Algyö prospect. NIS will earn a 50% interest in production from each prospect if the discovery well is tied in and placed on production at the sole cost of NIS. After the drilling of the three wells is completed, NIS has the right to acquire a 50% interest in production from the entire Agreement Area by paying TXM an additional $2,750,000 (the “NIS earn-in”). If NIS does not fulfill their drilling obligations under the Agreement, TXM will retain 100 percent interest in the Agreement Area.
If the NIS earn-in is completed, NIS and TXM will share future exploration, appraisal and development costs and production in the Agreement Area in accordance with their participating interests held under a joint operating agreement. TXM shall be the Operator under both the participation agreement and the joint operating agreement.
The Agreement between NIS and TXM was finalized, but not signed on the July 31, 2012, as the transaction remains subject to a favorable ruling of the negotiated tax and accounting treatment by the Hungarian Ministry of Finance. The company has now received the tax ruling, but has appealed one aspect of the tax treatment. The outcome of the appeal is not expected to affect the ability of TXM to sign the Agreement with NIS.
Karoo Basin, South Africa
On October 27, 2009, the Company secured a Technical Cooperation Permit (the “TCP”) to evaluate the Karoo Basin in central South Africa. The TCP covers approximately 7.5 million acres and is located approximately 120 miles northeast of Cape Town, South Africa.
Falcon’s application for an Exploration Right covering the TCP was submitted on September 7, 2010 but in April 2011 a moratorium on shale gas exploration was put in place by the South African Government This moratorium was subsequently lifted on the September 7, 2012. Falcon’s exploration application does not include any well drilling or fracture stimulation in the first 3 year exploration period and is limited to geophysical data acquisition and the study of drilling opportunities and environmental impact. Upon receipt of an approved Exploration Right, the Company will be required to make a payment of one South African Rand per hectare (a total of approximately $400,000), and obtain an approved work program. An additional payment will be required as a contribution to a South African government sponsored training program in the same amount required to obtain the exploration license.
