| HARKEN ENERGY CORP ITEM 1A RISK FACTORS Because of the following factors, as well as other variables affecting our operating results, past financial performance may not be a reliable indicator of future performance, and historical trends should not be used to anticipate results or trends in future periods |
| Risk factors associated with our financial condition: If we fail to achieve and maintain effective internal controls in accordance with Section 404 of the Sarbanes-Oxley Act, we may not be able to accurately report our financial results |
| Our management determined that we had a material weakness in internal control over financial reporting as of December 31, 2004 which was associated with the Company’s level of complex transactions and the lack of accounting personnel to ensure ongoing compliance with relevant accounting and financial reporting requirements |
| Subsequent to our remediation efforts during 2005, our management determined that we continued to have a material weakness in our internal control over financial reporting relating to the accounting for complex transactions as of September 30, 2005 |
| We concluded that the weakness in our internal controls disclosed in our Annual Report on Form 10-K for the year ended December 31, 2004 was the result of insufficient staff with technical accounting expertise to apply accounting requirements, as they relate to non-routine and highly complex transactions, in accordance with generally accepted accounting principles |
| During 2005, we hired additional experienced accounting personnel, specifically the Global Controller, the GEM Vice President—Finance and Chief Financial Officer, GEM Financial Reporting Manager and the Global Financial Analyst, as well as further realigned the financial reporting duties and responsibilities |
| Despite our efforts to remediate the material weakness that existed in the Company’s internal control over financial reporting at December 31, 2004, we failed to maintain an effective system of internal control over financial reporting through September 30, 2005 |
| During the third quarter of 2005, our consolidated companies and we continued to enter into highly complex transactions |
| Although we had implemented additional processes designed to address the accounting treatment for complex transactions; we could have other failures in our internal controls which may result in material misstatements in our financial statements and cause investors to lose confidence in our reported financial information |
| During the quarter ended December 31, 2005, we implemented an additional procedure where all journal entries and related calculations which underlie these complex transactions are referenced to the 19 ______________________________________________________________________ [39]Table of Contents supporting accounting literature and accounting memoranda |
| Based on our evaluation conducted on our internal control over financial reporting as of December 31, 2005, we concluded that these controls were effective as of that date |
| If we do not continue to meet the listing requirements of the American Stock Exchange, our common stock could be delisted |
| The American Stock Exchange requires companies to fulfill certain requirements in order for their shares to continue to be listed |
| The securities of a company may be considered for delisting if the company fails to meet certain financial thresholds, including if the company has sustained losses from continuing operations and/or net losses in its five most recent fiscal years |
| As of December 31, 2005, we have sustained losses in five out of the last six fiscal years |
| There can be no assurance that we will not report additional losses in the future or that the American Stock Exchange will not delist our common stock |
| The potential delisting of our common stock could adversely affect our ability to raise capital in the future by issuing common stock or securities convertible into common stock |
| We have a history of losses and may suffer losses in the future |
| We have reported losses in four of the last five fiscal years, including a net loss of approximately dlra17dtta9 million for the year ended December 31, 2004 |
| We have reported cumulative net losses of approximately dlra27 million over the last five fiscal years |
| Our ability to generate net income is strongly affected by, among other factors, our ability to successfully drill undeveloped reserves as well as the market price of crude oil and natural gas |
| If we are unsuccessful in drilling productive wells or the market price of crude oil and natural gas declines, we may report additional losses in the future |
| Consequently, future losses may adversely affect our business, prospects, financial condition, results of operations and cash flows |
| Further sales of our interest in Global Energy Development plc would be expected to cause our revenues to decrease |
| During the twelve months ended December 31, 2005, we sold certain of our common shares of Global through numerous individual transactions in the market to various purchasers throughout the year in exchange for total cash consideration, net of fees, of approximately dlra40 million |
| Other investors, including Lyford, exercised warrants and stock options to purchase additional shares of Global |
| As a result of the exercise of those warrants and stock options and through sales of our shares in Global, our direct ownership interest in Global decreased from 85prca at December 31, 2004 to approximately 34prca at December 31, 2005 |
| Global represented 65prca of our total proved reserves at December 31, 2005 and approximately 51prca of our consolidated oil and gas revenues in 2005 |
| As of December 31, 2005, Lyford owned approximately 20prca of the common shares of Global as a result of exercising its Global warrants |
| Also at December 31, 2005, Lyford beneficially owned approximately 30prca of the combined voting power of our common stock |
| Therefore, our direct equity interest of approximately 34prca, combined with Lyford’s approximate 20prca equity interest in Global (which totals to a combined ownership percentage of 54prca), was deemed to provide us with the legal power to control the operating policies and procedures of Global |
| As a result, we continued to consolidate the operations of Global as of December 31, 2005 |
| Lyford has informed us that it may liquidate a portion of its equity interest in Global through strategic sales under certain conditions |
| If Lyford reduces its equity ownership interest in Global, such that the combined equity interest in Global is less than 50prca, we may no longer be deemed to hold the legal power to control the operating policies and procedures of Global |
| As a result, we would no longer report Global’s operating results in our consolidated financial statements, but we would account for our investment in Global on the equity 20 ______________________________________________________________________ [40]Table of Contents method of accounting |
| Under the equity method of accounting, our investment in Global will be presented on a single line in the consolidated balance sheet |
| Likewise, our share of Global’s earnings will be reflected on a single line in the consolidated statement of operations |
| Our financial condition may suffer if estimates of its oil and gas reserve information are adjusted, and fluctuations in oil and gas prices and other factors affect our oil and gas reserves |
| Our oil and gas reserve information is based upon criteria mandated by the SEC, and reflects only estimates of the accumulation of oil and gas and the economic recoverability of those volumes |
| Our future production, revenues and expenditures with respect to such oil and gas reserves could be different from estimates, and any material differences may negatively affect our business, financial condition and results of operations |
| Petroleum engineering is a subjective process of estimating underground accumulations of oil and gas that cannot be measured in an exact manner |
| Estimates of economically recoverable oil and gas reserves and of future net cash flows necessarily depend upon a number of variable factors and assumptions |
| Because all reserve estimates are to some degree subjective, each of the following items may prove to differ materially from that assumed in estimating reserves: • the quantities of oil and gas that are ultimately recovered, • the production and operating costs incurred, • the amount and timing of future development expenditures, and • future oil and gas sales prices |
| Furthermore, different reserve engineers may make different estimates of reserves and cash flow based on the same available data |
| The estimated discounted future net cash flows described in this Annual Report for the year ended December 31, 2005 should not be considered as the current market value of the estimated oil and gas reserves attributable to our properties from proved reserves |
| Such estimates are based on prices and costs as of the date of the estimate, in accordance with SEC requirements, while future prices and costs may be materially higher or lower |
| The SEC requires that we report our oil and natural gas reserves using the price as of the last day of the year |
| Using lower values in forecasting reserves will result in a shorter life being given to producing oil and natural gas properties because such properties, as their production levels are estimated to decline, will reach an uneconomic limit, with lower prices, at an earlier date |
| There can be no assurance that a decrease in oil and gas prices or other differences in our estimates of its reserve will not adversely affect our financial condition and results of operations |
| If estimated discounted future net cash flows decrease, we may be required to take additional writedowns |
| We periodically review the carrying value of our oil and gas properties under applicable full-cost accounting rules |
| These rules require a writedown of the carrying value of oil and gas properties if the carrying value exceeds the applicable estimated discounted future net cash flows from proved oil and gas reserves |
| Given the volatility of oil and gas prices, it is reasonably possible that the estimated discounted future net cash flows could change in the near term |
| If oil and gas prices decline in the future, even if only for a short period of time, it is possible that additional writedowns of oil and gas properties could occur |
| Whether we will be required to take such a charge will depend on the prices for oil and gas at the end of any quarter and the effect of reserve additions or revisions, property sales and capital expenditures during such quarter |
| 21 ______________________________________________________________________ [41]Table of Contents Lyford owns a significant amount of our common stock and exercises significant control over us |
| As of December 31, 2005, Lyford beneficially owned approximately 30prca of the combined voting power of our outstanding common stock |
| Lyford is in a position to significantly influence decisions with respect to: • our direction and policies, including the election and removal of directors, • mergers or other business combinations, • the acquisition or disposition of our assets, • future issuances of our common stock or other securities, • our incurrence of debt, and • the payment of dividends, if any, on our common stock, and amendments to our certificate of incorporation and bylaws |
| Lyford’s concentration of ownership may also have the effect of delaying, deferring or preventing a future change of control |
| Risks associated with market conditions: Our stock price is volatile and the value of any investment in our common stock may fluctuate |
| Our stock price has been and is highly volatile, and we believe this volatility is due to, among other things: • the results of our drilling, • current expectations of our future financial performance, • commodity prices of oil and natural gas, • the volatility of the market in general |
| For example, the common stock price has fluctuated from a high of dlra1dtta30 per share to a low of dlra0dtta16 per share over the three years ended December 31, 2005 |
| This volatility may affect the market value of our common stock in the future |
| See Part II, Item 5: Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities |
| Future sales of our common stock pursuant to outstanding registration statements may affect the market price of our common stock |
| There are currently several registration statements with respect to our common stock that are effective, pursuant to which certain of our stockholders may sell shares of common stock |
| Any such sale of stock may also decrease the market price of our common stock |
| 22 ______________________________________________________________________ [42]Table of Contents Any conversions Series M Preferred of Stock or exercise of warrants issued to holders of our Series L and Series M Preferred Stock involving a large issuance of shares of our common stock could result in a dilution of stockholders’ ownership percentage of our common stock and may result in a decrease in the market value of our common stock |
| In addition, we may elect to issue a significant number of additional shares of common stock for financing or other purposes, which could result in a decrease in the market price of our common stock |
| We have issued shares of preferred stock with greater rights than our common stock and may issue additional shares of preferred stock in the future |
| We are permitted under our charter to issue up to 10 million shares of preferred stock |
| We can issue shares of our preferred stock in one or more series and can set the terms of the preferred stock without seeking any further approval from our common stockholders |
| Any preferred stock that we issue may rank ahead of our common stock in terms of dividend priority or liquidation premiums and may have greater voting rights than our common stock |
| At December 31, 2005, we had outstanding 1cmam600 shares of Series G1 Preferred, 1cmam000 shares of Series G2 Preferred and 50cmam000 shares of Series M Preferred |
| These shares of preferred stock have rights senior to our common stock with respect to dividends and liquidation |
| In addition, such preferred stock may be converted into shares of common stock, which could dilute the value of common stock to current stockholders and could adversely affect the market price of our common stock |
| At December 31, 2005, each share of Series G1 Preferred, Series G2 Preferred and Series M Preferred, may be converted into shares of common stock at conversion prices of dlra12dtta50, dlra3dtta00 and dlra0dtta59 per share of common stock, respectively, for each dlra100dtta00 liquidation value of a share of such preferred stock, plus the amount of any accrued and unpaid dividends |
| Risks associated with our operations: Oil and gas price fluctuations in the market may adversely affect the results of our operations |
| The results of our operations are highly dependent upon the prices received for our oil and natural gas production |
| Substantially all of our sales of oil and natural gas are made in the spot market, or pursuant to contracts based on spot market prices, and not pursuant to long-term, fixed-price contracts |
| Accordingly, the prices received for our oil and natural gas production are dependent upon numerous factors beyond our control |
| These factors include the level of consumer product demand, governmental regulations and taxes, the price and availability of alternative fuels, the level of foreign imports of oil and natural gas and the overall economic environment |
| Significant declines in prices for oil and natural gas could have a material adverse effect on our financial condition, results of operations and quantities of reserves recoverable on an economic basis |
| Any significant decline in prices of oil or gas could have a material adverse effect on our financial condition and results of operations |
| Recently, the price of oil and natural gas has been volatile |
| For example, during 2004, based on NYMEX pricing, the price for a bbl of oil ranged from a high of dlra55dtta46 to a low of dlra32dtta48 and the price for a Mcf of gas ranged from a high of dlra8dtta725 to a low of dlra4dtta570 |
| Our operations require significant expenditures of capital that may not be recovered |
| We require significant expenditures of capital in order to locate and acquire producing properties and to drill exploratory and exploitation wells |
| In conducting exploration, exploitation and development activities from a particular well, the presence of unanticipated pressure or irregularities in formations, miscalculations or accidents may cause our exploration, exploitation, development and production activities to be unsuccessful, potentially resulting in abandoning the well |
| This could result in a total loss of our investment |
| In addition, the cost and timing of drilling, completing and operating wells is difficult to predict |
| 23 ______________________________________________________________________ [43]Table of Contents The oil and gas we produce may not be readily marketable at the time of production |
| Crude oil, natural gas, condensate and other oil and gas products are generally sold to other oil and gas companies, government agencies and other industries |
| The availability of ready markets for oil and gas that we might discover and the prices obtained for such oil and gas depend on many factors beyond our control, including: • the extent of local production and imports of oil and gas, • the proximity and capacity of pipelines and other transportation facilities, • fluctuating demand for oil and gas, • the marketing of competitive fuels, and • the effects of governmental regulation of oil and gas production and sales |
| Natural gas associated with oil production is often not marketable due to demand or transportation limitations and is often flared at the producing well site |
| Pipeline facilities do not exist in certain areas of exploration and, therefore, any actual sales of discovered oil and gas might be delayed for extended periods until such facilities are constructed |
| Our domestic operating strategic plan includes the acquisition of additional reserves through business combinations |
| Our domestic operations have shifted from primarily an exploration and development focus to an acquisition and exploitation growth strategy |
| We are seeking acquisition opportunities to expand our domestic operations and increase our oil and gas reserves in North America |
| We may not be able to consummate future acquisitions on favorable terms |
| Additionally, any such future transactions may not achieve favorable financial results |
| Inherent in any future acquisitions are certain risks, such as the difficulty of assimilating operations and facilities of the acquired business, which could have a material adverse effect on our operating results, particularly during the period immediately following such acquisition |
| Future business combinations may also involve the issuance of shares of our common stock, which could have a dilutive effect on stockholders’ percentage ownership |
| We may not have a sufficient number of authorized shares to issue in any such business combinations and we may need to obtain stockholder approval to authorize additional shares for issuance |
| Further, the use of shares in business combinations will reduce the number of shares available for the redemption of existing convertible notes and preferred stock |
| In addition, acquisitions may require substantial financial expenditures that will need to be financed through cash flow from operations or future debt and our equity offerings, and we may not be able to acquire companies or oil and gas properties using its equity as currency |
| In the case of cash acquisitions, we may not be able to generate sufficient cash flow from operations or obtain debt or equity financing sufficient to fund future acquisitions of reserves |
| We may suffer losses through futures trading |
| In February 2006, we reduced our investment in IBA Through our remaining investment in IBA, however, we may be investing capital in the trading of energy futures contracts |
| The results of these investments can be significantly impacted by factors such as the volatility of the relationship between the value of futures contracts and the cash prices of the underlying commodity, counterparty contract defaults, and 24 ______________________________________________________________________ [44]Table of Contents general volatility of the capital markets |
| The changes in the market value of such futures contracts may fluctuate significantly from time to time, and gains or losses on any particular futures contract may contribute to fluctuations in our quarterly results of operations and may lead to additional losses related to our investment in IBA We may encounter operating hazards that may result in substantial losses |
| We are subject to operating hazards normally associated with the exploration and production of oil and gas, including blowouts, explosions, oil spills, cratering, pollution, earthquakes, labor disruptions and fires |
| The occurrence of any such operating hazards could result in substantial losses to us due to injury or loss of life and damage to or destruction of oil and gas wells, formations, production facilities or other properties |
| We maintain insurance coverage limiting financial loss resulting from certain of these operating hazards |
| We do not maintain full insurance coverage for all matters that may adversely affect our operations, including war, terrorism, nuclear reactions, government fines, treatment of waste, blowout expenses and business interruptions |
| Losses and liabilities arising from uninsured or underinsured events could reduce our revenues or increase our costs |
| There can be no assurance that any insurance will be adequate to cover losses or liabilities associated with operational hazards |
| We cannot predict the continued availability of insurance, or its availability at premium levels that justify its purchase |
| During the third and fourth quarters of 2005, our operations in the Gulf of Mexico were affected by one tropical storm and two hurricanes that interrupted both production and certain drilling operations |
| As much as 75prca of our Gulf Coast domestic production was shut in during September and approximately 13prca of our pre-storm production level remains curtailed as of February 28, 2006 |
| Restoration of curtailed production is also dependent on resumption of downstream infrastructure of third-parties and the availability of service and equipment contractors necessary for over-water transportation repairs |
| We do not maintain full insurance coverage for all matters that may adversely affect our operations, including war, terrorism, nuclear reactions, government fines, treatment of waste, blowout expenses and business interruptions |
| Losses and liabilities arising from uninsured or underinsured events could reduce our revenues or increase our costs |
| There can be no assurance that any insurance will be adequate to cover losses or liabilities associated with operational hazards |
| We cannot predict the continued availability of insurance, or its availability at premium levels that justify its purchase |
| Drilling oil and gas wells particularly in certain regions of the United States and foreign countries could be hindered by hurricanes, earthquakes and other weather-related operating risks |
| Our operations in the Texas and Louisiana Gulf Coast area and our investment in Global which operates in Colombia, Peru and Panama are subject to risks from hurricanes and other natural disasters |
| Damage caused by hurricanes, earthquakes or other operating hazards could result in substantial losses to us |
| For example, during 2004 our domestic operations were affected by Hurricane Ivan resulting in reduced oil and gas volumes in the fourth quarter of 2004 |
| During the third and fourth quarters of 2005, our Gulf Coast operations were affected by one tropical storm and Hurricanes Katrina and Rita |
| ” We face strong competition from larger oil and gas companies, which could result in adverse effects on our business |
| The exploration, exploitation and production business is highly competitive |
| Many of our competitors have substantially larger financial resources, staffs and facilities |
| Our competitors in the United States include numerous major oil and gas exploration and production companies |
| Our investment in Global may be affected as a result of the competition faced by Global in Colombia, Peru and Panama that includes such major oil and gas companies as BP Amoco, Exxon/Mobil, Texaco/Shell and Conoco/Phillips |
| These major oil and gas companies are often better positioned to obtain the rights to exploratory acreage for which we compete |
| 25 ______________________________________________________________________ [45]Table of Contents Our operations are subject to various litigation that could have an adverse effect on our business |
| From time to time our subsidiaries are defendants in various litigation matters |
| The nature of our and our subsidiaries’ operations expose us to further possible litigation claims in the future |
| There is risk that any matter in litigation could be adversely decided against us or our subsidiaries, regardless of our belief, opinion and position, which could have a material adverse effect on our financial condition and results of operations |
| Litigation is highly costly and the costs associated with defending litigation could also have a material adverse effect on our financial condition |
| Compliance with, or breach of, environmental laws can be costly and could limit our operations |
| Our operations are subject to numerous and frequently changing laws and regulations governing the discharge of materials into the environment or otherwise relating to environmental protection |
| We own or lease, and have in the past owned or leased, properties that have been used for the exploration and production of oil and gas and these properties and the wastes disposed on these properties may be subject to the Comprehensive Environmental Response, Compensation and Liability Act, the Oil Pollution Act of 1990, the Resource Conservation and Recovery Act, the Federal Water Pollution Control Act and analogous state laws |
| Under such laws, we could be required to remove or remediate previously released wastes or property contamination |
| Laws and regulations protecting the environment have generally become more stringent and, may in some cases, impose “strict liability” for environmental damage |
| Strict liability means that we may be held liable for damage without regard to whether we were negligent or otherwise at fault |
| Environmental laws and regulations may expose us to liability for the conduct of or conditions caused by others or for acts that were in compliance with all applicable laws at the time they were performed |
| Failure to comply with these laws and regulations may result in the imposition of administrative, civil and criminal penalties |
| Although we believe that our operations are in substantial compliance with existing requirements of governmental bodies, our ability to conduct continued operations is subject to satisfying applicable regulatory and permitting controls |
| Our current permits and authorizations and ability to get future permits and authorizations, particularly in foreign countries, may be susceptible, on a going forward basis, to increased scrutiny, greater complexity resulting in increased costs, or delays in receiving appropriate authorizations |
| In particular, Global has experienced and may continue to experience delays in obtaining permits and authorization in Colombia necessary for Global’s operations |
| Global is required to obtain an environmental permit or approval from the governments in Colombia, Peru and Panama prior to conducting seismic operations, drilling a well or constructing a pipeline in such foreign locations |
| Our investment in Global may be affected as a result of Global’s operations in foreign countries which have been delayed in the past and could be delayed in the future through the process of obtaining an environmental permit |
| Compliance with these laws and regulations may increase our costs of operations, as well as further restrict Global’s foreign operations |
| Our investment in Global is subject to risks associated with foreign operations and involve substantial costs since the oil and gas industries in such countries are less developed |
| The oil and gas industries in Colombia, Peru and Panama are not as developed as the oil and gas industry in the United States |
| As a result, our drilling and development operations in many instances take longer to complete and often cost more than similar operations in the United States |
| The availability of technical expertise, specific equipment and supplies is more limited in Colombia, Peru and Panama than in the United States |
| We expect that such factors will continue to subject Global’s international operations to economic and operating risks not experienced in our domestic operations |
| 26 ______________________________________________________________________ [46]Table of Contents Our investment in Global may be affected if Global fails to comply with the terms of certain contracts related to Global’s foreign operations, Global could lose its rights under each of those contracts |
| The terms of each of the Colombian Association and Exploration and Production Contracts, the Technical Evaluation Agreement, the Peruvian License Contract and the anticipated Panamanian Concession Contract require that Global perform certain activities, such as seismic interpretations and the drilling of required wells, in accordance with those contracts and agreements |
| Global’s failure to timely perform those activities as required could result in the loss of Global’s rights under a particular contract, which would likely result in a significant loss being reflected in our investment in Global |
| As of December 31, 2005, Global was in compliance with the requirements of each of the existing Association and Concession Contracts and the Technical Evaluation Agreement |
| Global may require significant additional financing for Global’s foreign operations, which financing may not be available |
| We anticipate that full development of Global’s existing and future oil and gas discoveries and prospects in Colombia, Peru and Panama may take several years and require significant additional capital expenditures |
| If Global is unable to timely obtain adequate funds to finance these investments, Global’s ability to develop oil and gas reserves in these countries may be severely limited or substantially delayed |
| Such limitations or delay would likely result in substantial losses being reflected in our investment in Global |
| We anticipate that amounts required to fund Global’s foreign activities, will be funded from Global’s existing cash balances, operating cash flows, third-party financing and from joint venture partners |
| The exact usage of other future funding sources is unknown at this time, and there can be no assurance that Global will have adequate funds available to finance its foreign operations |
| Our investment in Global is subject to political, economic and other uncertainties |
| Global, in which we hold a 34prca equity interest as of December 31, 2005, currently conducts significant operations in Colombia, Peru and Panama and may also conduct operations in other foreign countries in the future |
| At December 31, 2005, approximately 65prca of our consolidated proved reserve volumes and 51prca of our consolidated revenues were related to Global’s Colombian operations |
| Exploration and production operations in foreign countries are subject to political, economic and other uncertainties, including: • the risk of war, revolution, border disputes, expropriation, renegotiation or modification of existing contracts, import, export and transportation regulations and tariffs resulting in loss of revenue, property and equipment, • taxation policies, including royalty and tax increases and retroactive tax claims, • exchange controls, currency fluctuations and other uncertainties arising out of foreign government sovereignty over international operations, • laws and policies of the United States affecting foreign trade, taxation and investment, and • the possibility of being subjected to the jurisdiction of foreign courts in connection with legal disputes and the possible inability to subject foreign persons to the jurisdiction of courts in the United States |
| Central and South America have a history of political and economic instability |
| This instability could result in new governments or the adoption of new policies, laws or regulations that might assume a substantially more hostile attitude toward foreign investment |
| In an extreme case, such a change could result in 27 ______________________________________________________________________ [47]Table of Contents termination of contract rights and expropriation of foreign-owned assets |
| Any such activity could result in a significant loss to Global |
| Guerrilla activity in Colombia could disrupt or delay Global’s operations, and we are concerned about safeguarding Global’s operations and personnel in Colombia |
| Colombia has suffered through more than 40 years of armed conflict between the government and leftist guerrilla groups, which has escalated from time to time during that time period |
| The current government has taken a strong approach against the guerilla movement after peace overtures by the preceding Colombian administration failed |
| The increased military action by the Colombian government directed against the rebel groups operating in Colombia may result in escalated guerilla activity |
| Also, the increased activity of right-wing paramilitary groups, formed in opposition to the left-wing guerilla groups, has contributed to the escalation in violence |
| Targeting such enterprises as symbols of foreign exploitation, particularly in the North of the country, the rebel groups have attempted to hamper production of hydrocarbons |
| The cumulative effect of escalation in the armed conflict and the resulting unstable political and security situation has led to increased risks and costs and the downgrading of Colombia’s country risk rating |
| Global’s oil and gas operations are in areas outside guerrilla control and with the exception of its increased security requirements, Global’s operations continue mostly unaffected, although from time to time, guerilla activity in Colombia has delayed Global’s projects there |
| This guerilla activity has increased over the last few years, causing delays in the development of Global’s fields in Colombia |
| Guerilla activity, such as road blockades, has also from time to time slowed Global’s deployment of workers in the field and affected our operations |
| In addition, guerillas could attempt to disrupt the flow of Global’s production through pipelines |
| In addition to these security issues, Global and our investment in Global have also become the subject of media focus in Colombia that may further compromise our security position in the country |
| There can be no assurance that attempts to reduce or prevent guerilla activity will be successful or that guerilla activity will not disrupt Global’s operations in the future |
| There can also be no assurance that Global can maintain the safety of its operations and personnel in Colombia or that this violence will not affect its operations in the future |
| Continued or heightened security concerns in Colombia could also result in a significant loss to us as a consequence of our investment in Global |
| The United States government may impose economic or trade sanctions on Colombia that could result in a significant loss to our investment in Global |
| Colombia is among several nations whose progress in stemming the production and transit of illegal drugs is subject to annual certification by the State Department of the United States |
| Although Colombia was so certified in 2005, there can be no assurance that, in the future, Colombia will receive certification or a national interest waiver |
| The failure to receive certification or a national interest waiver may result in any of the following: • all bilateral aid, except anti-narcotics and humanitarian aid, would be suspended, • the Export-Import Bank of the United States and the Overseas Private Investment Corporation would not approve financing for new projects in Colombia, • United States representatives at multilateral lending institutions would be required to vote against all loan requests from Colombia, although such votes would not constitute vetoes, and • the President of the United States and Congress would retain the right to apply future trade sanctions |
| 28 ______________________________________________________________________ [48]Table of Contents Each of these consequences could result in adverse economic consequences in Colombia and could further heighten the political and economic risks associated with our operations there |
| Any changes in the holders of significant government offices could have adverse consequences on Global’s relationship with the Colombian national oil company and the Colombian government’s ability to control guerrilla activities and could exacerbate the factors relating to Global’s operations discussed above |
| Any sanctions imposed on Colombia by the United States government could threaten Global’s ability to obtain necessary financing to develop the Colombian properties or cause Colombia to retaliate against Global, including by nationalizing our Colombian assets |
| Accordingly, the imposition of the foregoing economic and trade sanctions on Colombia would likely result in a substantial loss and a decrease in the price of our common stock |
| There can be no assurance that the United States will not impose sanctions on Colombia in the future or predict the effect in Colombia that these sanctions might cause |
| We may suffer losses from exchange rate fluctuations |
| We account for our Colombian, Peruvian and Panamanian operations using the US dollar as the functional currency |
| The costs associated with our exploration efforts in Colombia, Peru and Panama have typically been denominated in US dollars |
| A portion of Colombian revenues are denominated in Colombian pesos |
| To the extent that the amount of our revenues denominated in Colombian pesos is greater than the amount of costs denominated in Colombian pesos, we could suffer a loss if the value of the Colombian peso were to drop relative to the value of the US dollar |
| Any substantial currency fluctuations could have a material adverse effect on our results of operations |
| In recent years the value of the Colombian peso relative to the US dollar has declined |
| For example, the average exchange rate for the Colombian peso into US dollars for December 2005 was |
| 00039, as compared to an average of 0dtta00036 for December 2004 and December 2003 |