Oceanic also provides management services to various entities with which our Chairman of the Board of Directors and Chief Executive Officer is affiliated. The Company provides:
• Management, administrative and bookkeeping services to San Miguel Valley Corporation (San Miguel),
• Management, administrative and professional services to Cordillera Corporation (Cordillera), and
• Consulting services, including monitoring exploration and production activities on a world-wide basis to identify potential investment opportunities for Harvard International Resources Ltd. (HIRL).
Together, these management services provided substantially all of the Company’s total revenue in 2006.
As of December 31, 2006, Oceanic had nine employees in Colorado who provide general and administrative services to the oil and gas operations and/or management services to San Miguel and Cordillera. The corporate offices are located at 7800 East Dorado Place, Suite 250, Englewood, Colorado 80111 and the telephone number is (303) 220-8330.
Mr. James N. Blue is Chairman of Oceanic and also serves as Chairman of the Board of Directors and President of NWO Resources, Inc. NWO Resources, Inc. owns approximately 89.2% of Oceanic common stock and is Oceanic’s largest shareholder. Mr. Blue is also Chairman of the Board of Directors, President and indirect beneficial owner of a majority of the common stock of Cordillera, the major stockholder of NWO Resources, Inc.
OPERATIONS
(a) Litigation
On March 1, 2004, Oceanic and Petrotimor filed suit in the United States seeking to recover damages relating to the disputed Timor Gap concession. See ‘Pending Litigation’ in Item (3). Preparation and prosecution of the lawsuit has been the primary cause of major expenditures for 2006 and we anticipate that the U.S. lawsuit will continue to be our primary cause of expenditures for 2007. A substantial portion of the Company resources expended in 2006 has been in connection with this litigation over the Timor Gap concession. See Item (3) ‘Legal Proceedings.’
(b) Management Services
Oceanic provides bookkeeping, administrative and day-to-day management services to San Miguel, a real estate company. Oceanic also provides management, professional and administrative services to Cordillera, a holding company. Oceanic’s management is responsible for the day-to-day management of real estate and other activities of Cordillera. The subsidiary Petrotimor provides exploration and consulting services to HIRL, a related company. These contracts have no contractual termination date, but management cannot be certain that some or all of these contracts will continue in the future. Most of the management contracts contain clauses requiring sixty days termination notice.
Management Fee Revenue
| 2006 | 2005 | |||||||||||||||
San Miguel Valley Corporation |
$ | 591,720 | 56 | % | $ | 427,440 | 45 | % | ||||||||
Cordillera Corporation |
438,060 | 41 | % | 473,640 | 50 | % | ||||||||||
Harvard International Resources, Ltd. |
33,685 | 3 | % | 46,678 | 5 | % | ||||||||||
Total management fee revenue |
$ | 1,063,465 | $ | 947,758 | ||||||||||||
Except for the contract with HIRL, all labor services are provided at payroll cost plus benefits and include a 5% markup on that total to cover the administrative expense. This charge is calculated annually and readjusted at year-end. All expenses are billed at cost. The contract with HIRL differs from the management contracts with the other related companies, as it is a flat charge of $2,500 per month plus expenses directly incurred in providing those consulting services. The purpose for the management agreements is to avoid duplication of functions and costs for the economic benefit of all of the companies involved.
Karsten Blue, an employee of Cordillera and son of Oceanic’s Chairman of the Board of Directors and Chief Executive Officer, coordinates various activities relating to the East Timor situation. On September 1, 2002, the Company entered into a Service Agreement with Cordillera. This contract, as amended, states that Oceanic compensates and reimburses Cordillera for Karsten Blue’s services at the rate of $1,467 per week, not to exceed $76,260 per year, and for any out-of-pocket business expenses incurred in connection with these activities. The Company expensed $76,337 in 2006 and $71,731 in 2005 for Karsten Blue’s services.
(c) Oil and Gas
Oceanic is not currently conducting any oil and gas exploration or production activities. The Company did not receive any significant revenue from oil and gas properties in 2006 or 2005. Other than the potential recovery of damages from the Timor Gap concession, the Company is currently not conducting any activities that would result in material oil and gas revenue in 2007.
When exploration or production activities occur, Oceanic conducts operations directly or through subsidiaries. Historically, when a discovery of oil or gas occurs, the Company pursued the development of reserves and the production of oil or gas to the extent considered economically feasible by farming out, or selling a portion of our interest in the discovery to finance development. Property interests are located in the North Aegean Sea, offshore Greece, in the East China Sea and in the Timor Gap that lies between East Timor and Australia. Since 1994, Oceanic has not been able to participate in exploration and development in any of these areas for various reasons.
The Company has generally undertaken exploration of concessions through various forms of joint arrangements with unrelated companies, whereby the parties agree to share the costs of exploration, as well as the costs of, and any revenue from, a discovery. Such arrangements do not always equate the proportion of expenditures undertaken by a party with the share of revenues to be received by such party.
The Company usually obtains concessions directly from a government or governmental agency. Oceanic then enters into arrangements with other participants whereby it receives cash payments and its share of exploration expenditures paid (either before or after being expended) in whole or in part by other participants.
Historically, sales of partial interest in Oceanic’s concessions have been part of the Company’s normal course of business and have provided funds for the acquisition of further concessions and for exploration of existing concessions.
In order to maintain the Company’s concessions in good standing, Oceanic is usually required to expend substantial sums for exploration and, in many instances, for surface rentals or other cash payments. Additionally, the development of any discoveries made upon concessions in which the Company holds an interest generally involves the expenditure of substantial sums of money. Oceanic has, in the past, satisfied required expenditures on its concessions. The Company cannot be certain that its resources in the future will be sufficient to satisfy expenditures it is required to make in its business.
GOVERNMENTAL APPROVALS AND REGULATIONS
Other than obtaining the concessions from foreign and U.S. governments for oil and gas exploration, no material governmental approvals are required for Oceanic’s business. Oceanic has filed for East Timor governmental approval on the expansion of the East Timor concession. See Item (2) ‘Description of Property under Commercial Opportunity in East Timor’ for additional details. Currently, no development is occurring on any of the Company’s oil and gas concessions. Historically, Oceanic has entered into participation agreements with other entities who conduct exploration and drilling
activities. Such other entities obtain any governmental approvals and comply with any governmental regulations required to conduct such activities. Currently, neither Oceanic nor any of its participation partners are conducting any development activity on any of our properties.
The Company is not affected by any governmental approvals or regulations pertaining to the activities carried out as part of the Company’s management agreements.
COMPETITION
The oil and gas industry is competitive and Oceanic must compete with many long-established companies having far greater resources and operating experience. Furthermore, the demand for financing of oil and gas, mineral exploration and development programs substantially exceeds the available supply, and the Company competes for such financing with much larger exploration and development companies. There is no independent competition for the management services activities, but each of the related parties to which Oceanic provides services could elect to have its own employees provide those services.
