he Company's primary business consists of the exploration and, development of oil and gas properties. There are anumber of inherent risks associated with the exploration, development and production of oil and gas reserves. Manyof these risks are beyond the control of the Company
Oil and Gas Exploration and Development - General
The future value of the Company is dependent on the success or otherwise of the Company's activities which are principally directed toward the further exploration, and development of oil and gas properties. The Company has aright to explore and appraise such assets but does not have a right to produce same until such time as the reserves are determined to be commercial. Exploration, appraisal and development of oil and gas reserves are speculative and involve a significant degree of risk. There is no guarantee that exploration or appraisal of the properties in which the Company holds rights will lead to a commercial discovery or, if there is commercial discovery, that the Companywill be able to realize such reserves as intended. Few properties that are explored are ultimately developed into new reserves. If at any stage the Company is precluded from pursuing its exploration or development programs, or such programs are otherwise not continued, the Company's business, financial condition and/or results of operations and, accordingly, the trading price of the Common Shares, is likely to be materially adversely affected.
Oil and gas exploration involves a high degree of risk and there is no assurance that expenditures made on future exploration or development activities by the Company will result in discoveries of oil, condensate or natural gas thatare commercially or economically possible. It is difficult to project the costs of implementing any exploratory drilling program due to the inherent uncertainties of drilling in unknown formations, the costs associated with encountering various drilling conditions such as overpressured zones and tools lost in the hole, and changes in drilling plans and locations as a result of prior exploratory wells or additional seismic data and interpretations thereof.
The Company's operations are subject to the general risks of exploration, development and operation of oil, condensate and natural gas properties and the drilling of wells thereon, including encountering unexpected formations or pressure, premature declines of reservoirs, blow-outs, cratering, sour gas releases, fires and spills. Losses resulting from the occurrence of any of these risks could have a materially adverse effect on the Company. The Company may become subject to liability for pollution, blow-outs or other hazards. The payment of such liabilities could reduce the funds available to the Company or could result in a total loss of its properties and assets.
Oil and natural gas exploration and development activities are dependent on the availability of skilled personnel, drilling and related equipment in the particular areas where such activities will be conducted. Demand for such personnel or equipment, or access restrictions may affect the availability of such equipment to the Company and may delay exploration and development activities.
Prices and Markets for Crude Oil, Condensate and Natural Gas
Oil, condensate and natural gas are commodities whose prices are determined based on global demand, supply and other factors all of which are beyond the control of the Company. World prices for oil and condensate have fluctuated widely in recent years. Future price fluctuations in world oil prices will have a significant impact upon the projected revenue of the Company and the projected return from and the financial viability of the Company's existing and future reserves.
General economic and business conditions may adversely affect the interests of the Company.
There is no assurance that a market will exist for oil or natural gas reserves discovered within the Company's properties. Although recent history suggests that ready and growing oil and gas markets exist, access to such markets cannot be assured. There is no assurance that the Company will be able to access the pipeline transportation system for the transportation to the marketplace of any oil or gas that may be produced from the Company's properties due to construction, capacity or other reasons.
Gemini Loan Liquidity Risk
The Company and Gemini Oil & Gas Fund II, L.P. ("Gemini") were in arbitration regarding the loan agreement signed September 8, 2008 from November 2011 to December 2014. While the Company was in arbitration, the Company recorded a provision at its best estimate as a provision to settle the disputed amount. On December 2, 2014, the Company received the final decision by the arbitrator awarding against NSE and NSE UK the amount of US$5,820,907 plus simple interest at the rate of LIBOR +3% from September 1, 2014 to the date of payment. The arbitrator ordered that each party bear its own legal costs and that half of the costs of the arbitration be paid by each party. Therefore, the Company has reclassified the amount as payable from a provision. The Company is currently in negotiations with Gemini in efforts to find a solution to satisfy the liability with respect to the arbitration award. The Company has made proposals to Gemini who is evaluating them and management will continue to work toward appropriate settlement of the award. A settlement with Gemini may entail the sale of assets and/or an exchange of debt for shares. However, while management anticipates that the Company will be able to settle with Gemini there is no assurance that the Company will be successful in its negotiations.
Financial Risks and Financing Risks
The Company will require substantial capital expenditures for the exploration, development and production of its properties and the acquisition of additional oil properties. The development of the Company’s properties and the acquisition of additional properties will depend upon the Company’s ability to obtain financing through joint ventures, farm-ins, equity financing, debt financing or other means. Such financing may not be available on favourable terms or at all. The inability of the Company to access sufficient capital for its operations could have a material adverse effect on the Company's financial condition, results of operations or prospects.
Under the farm-in agreement signed in August, 2013 and completed in November, 2013, Maersk Oil is to carry 100% of NSE's costs, subject to a cap, to drill the initial Bagpuss Prospect exploration well including a site survey and agreed past costs. In addition, Maersk Oil is to carry 50% of NSE's costs, subject to a cap, on a Bagpuss Prospect appraisal well, should one be drilled. However, there is a risk that the actual costs may exceed the cap and accrue to NSE.
Any additional equity financing may be dilutive to existing shareholders and debt financing, if available, may involve restrictions on financing operating activities. Failure to obtain additional financing on a timely basis could cause the Company to forfeit its interest in certain properties, miss certain acquisition opportunities, and reduce or terminate its operations.
From time to time, the Company may enter into transactions to acquire assets or the shares of other corporations. These transactions may be financed partially or wholly with debt, which may increase the Company’s debt levels above industry standards. The level of the Company’s indebtedness from time to time could impair the Company’s ability to obtain additional financing in the future on a timely basis to take advantage of business opportunities that may arise.
Exploration and Development Risks
The Company's rights to explore its oil assets will be limited in time. There is no guarantee or assurance that such rights can be extended or that new rights can be obtained to replace any rights that expire. The business of exploration and production of oil resources involves a high degree of risk. A limited number of properties that are explored are ultimately developed into producing oil fields.
Significant expenditure is required to establish the extent of oil reserves through seismic surveys, electromagnetic surveys, and drilling and there can be no certainty that oil reserves will be realized. The exploration and development of oil assets may be curtailed, delayed or cancelled by unusual or unexpected geological formation pressures, oceanographic conditions, hazardous weather conditions or other factors.
It is difficult to project the costs of implementing drilling programs due to the inherent uncertainties of drilling in unknown formations, the costs associated with encountering various drilling conditions such as over-pressured zones, wireline tools lost in the hole and changes in drilling plans and locations as a result of prior wells or additional seismic data and interpretations thereof.
Oil exploration, development and production activities are dependent on the availability of drilling and facilities related equipment in the particular areas where such activities will be conducted. Demand for such limited equipment or access restrictions may affect the availability of such equipment to the Company and may delay exploration, development and production activities. In particular, the Company may be subject to the relatively limited availability of drilling rigs to proceed with its North Sea drilling programs.
There are numerous risks inherent in drilling and operating wells, many of which are beyond the Company's control. The Company's operations may be curtailed, delayed or cancelled as a result of weather conditions, environmental hazards, industrial accidents, occupational and health hazards, technical failures, shortage or delays in the delivery of rigs and/or other equipment, labour disputes and compliance with governmental requirements.
Drilling may involve unprofitable efforts, not only with respect to dry wells, but also with respect to wells which, though yielding some petroleum, are not sufficiently productive to justify commercial development or cover operating and other costs. Completion of a well does not assure a profit on the investment or recovery of drilling, completion and operating costs. In addition, drilling hazards or environmental damage could greatly increase the cost of operations and various field operating conditions may adversely affect the production from successful wells. These conditions include delays in obtaining governmental approvals or consents, shut-ins of connected wells resulting from extreme weather conditions, insufficient storage or transportation capacity, or other geological and mechanical conditions. Production delays and declines from normal field operating conditions cannot be eliminated and can be expected to adversely affect revenue and cash flow levels to varying degrees.
Project delays may delay expected revenues from operations. Significant project cost over-runs could make a project uneconomic. The Company's ability to execute projects and market oil depends upon numerous factors beyond the Company's control, including the availability of drilling and related equipment; the availability and proximity of pipeline capacity; the availability of processing capacity; the availability and productivity of skilled labour; the effects of inclement weather; unexpected cost increases; currency fluctuations; the supply of and demand for oil; the availability of alternative fuel sources; accidental events; and regulation of the oil industry by various levels of government and governmental agencies. As a result of these factors, the Company could be unable to execute projects on time, on budget or at all, and may not be able to effectively market the oil that it hopes to produce.
The Company faces certain risks due to its concentration on offshore activities. In particular, drilling conditions, drilling hazards or environmental damage could greatly increase the cost of operations, and various field operating conditions may adversely affect the production from successful wells. These conditions include delays in obtaining governmental approvals or consents, shut-ins of connected wells resulting from extreme weather conditions, insufficient storage or transportation capacity, or other geological and mechanical conditions. Sub-sea tiebacks in the UK North Sea, while common, are also affected by weather conditions in the UK North Sea, and potential pipeline tie-back installations can only be conducted from April to late September. The Company's offshore production facilities would also be subject to hazards inherent in marine operations, such as capsizing, sinking, grounding, collision and damage from severe weather or tidal conditions. These hazards can cause substantial damage to facilities and interrupt production. Offshore oil activities can also be affected by ocean phenomena arising from occurrences such as hurricanes and tsunamis.
Access to facilities to process field production is an important consideration when developing fields in the North Sea. Such access is not guaranteed and directly affects the economics of a project. The UK government with the assistance of the DECC has a policy which has been adopted by the major operators of facilities in the North Sea that allows access to facilities at a reasonable rate. These types of initiatives are intended to ensure that reserves that cannot support facilities on a stand-alone basis can be developed.
Interests in Licenses
The Company expects that its properties will be generally held by the Company in the form of United Kingdom Continental Shelf (“UKCS”) licences, ("Authorizations"). The Company's activities are dependent upon the grant and maintenance of appropriate Authorizations, which may not be granted; may be made subject to limitations which, if not met, will result in the termination or withdrawal of the Authorizations; or may be otherwise withdrawn. There can be no assurance that any of the obligations required to maintain each Authorization will be met. Although the Company believes that the Authorizations will be renewed following expiry or granted (as the case may be), there can be no assurance that such Authorizations will be renewed or granted or as to the terms of such renewals or grants. The termination or expiration of the Company's Authorizations may have a material adverse effect on the Company's results of operations and business. A description of the Authorizations applicable to the Company is set out below.
There are five countries with North Sea oil production, all of which operate tax and royalty licensing regimes. The respective sectors are divided by median lines that were agreed to in the late 1960s.
Licenses in the United Kingdom are administered by DECC. The UKCS (UKCS) is divided into quadrants of one degree latitude and one degree longitude. Each quadrant is divided into 30 blocks measuring 10 minutes of latitude and 12 minutes of longitude. Some blocks are further divided into "part blocks" where areas have been relinquished by previous licensees. As an example, block 13/24a is located in quadrant 13 of block 24, and it would consist of part block "a". The UK government typically holds annual licensing rounds. Blocks are awarded on the basis of the work program bid by the participants. DECC has been very active in attracting new entrants to the UKCS via Promote licensing rounds (less demanding terms) and the fallow acreage initiative where non-active licences have had to be relinquished
DECC operates three alternative licence award systems for UK-based hydrocarbon exploration that are applicable to NSE and NSE's joint venture partners. These are the traditional license, promote license and frontier license application systems. In general, all licenses are awarded under a competitive tendering process during specific license rounds. All seaward production licenses run for three successive periods, or terms. The initial term, after which, if the agreed work programme has been completed and if a minimum amount of acreage has been relinquished, the license may continue into a second term. The second term, after which, if a development plan has been approved and if all of the acreage outside that development has been relinquished, the license may continue into a third term. The terms are of different lengths according to the license type.
License holders are encouraged and expected to exploit the area granted by them by DECC in the form of contracted licence commitments. Promote licences and frontier licenses are specialized variations of the traditional licenses and each differs with regards to the permissible timeframes and required commitments. In general, license evolution may be divided into three stages; exploration, appraisal and production.
These are awarded by DECC under a competitive tendering process. DECC assesses applicants on their financial, technical and environmental capability as well as the extent of the applicant's plan for the exploration and exploitation of the relevant area. Subsequently, awards are made to applicants on the basis of this assessment.
Traditional licenses offer an initial term, usually focused on exploration, which may last up to four years. At the end of this initial term, the license holder is required to relinquish a portion of the acreage, generally 50%. Subsequent to the completion of the initial term and the fulfillment of the proposed work program, a secondary term will be awarded if required. The secondary term, which also lasts up to four years, is most often associated with further exploration, appraisal or development in the event of a successful discovery. License holders are expected to write a field development program for any commercial discovery which they intend to progress into a production development or third term. The field development program details the proposed development of the field as well as the principles and objectives that govern the field's management, and consequently require DECC approval and sanction. The third and final term is generally associated with production and lasts for 18 years, although an application for extension may be submitted if production is forecast to continue beyond the license expiry date.
DECC imposes an annual rental charge on license holders determined by the square acreage of the license in order to encourage License holders not to allow areas to fall fallow. These charges escalate with the age of the license.
The promote license is similar to the traditional license and was introduced in the 21st round and provides a 2 year period in which to work up and promote the potential of the acreage, while benefiting from a 90 per cent reduction on the rental fee, and no obligation to commit to exploration drilling or acquiring new seismic data. Entry requirements are also less rigorous, and the license can be extended for up to 2 additional years. At the end of this, conversion to a traditional license or relinquishment becomes mandatory.
Therefore, the promote license has two years after award to attract the technical, environmental and financial capacity to complete the agreed work programme. To implement this each promote license caries a "drill-or-drop" initial term work programme. The license will expire after two years if the licensee has not satisfied DECC of its technical, environmental and financial capacity to complete the work programme (i.e. to drill a well), and made a firm commitment to DECC to do so.
The promote license has had a direct positive impact on exploration activity, helping to arrest the decline, which started in 2000 and turned around in 2003; with activity levels increasing each year since.
The Company may relinquish certain blocks based on its risk-reward analysis of the economics and potential commerciality of the resource and its ability to fund its drilling program.
In the course of exploration, development and production of oil and gas properties, certain risks, and in particular, blowouts, pollution, premature decline of reservoirs and invasion of water into producing formations may occur. Hazards such as unusual or unexpected geological formations, pressures or other conditions may be encountered in drilling and operating wells as the Company will initially have interests in a limited number of properties, such risk is more significant than if spread over a number of properties. It is not always possible to fully insure against such risks and the Company may decide not to take out insurance against such risks as a result of high premiums or other reasons. Should such liabilities arise, they could reduce or eliminate any future profitability and result in increasing costs and a decline in the value of the securities of the Company. Insurance against damages caused by terrorism, and acts of war, is generally not available.
Although the Company intends to obtain insurance to address such risks, such insurance has limitations on liability that may not be sufficient to cover the full extent of such liabilities. In addition, such risks may not, in all circumstances, be insurable or, in certain circumstances, the Company may elect not to obtain insurance to deal with specific risks due to the high premiums associated with such insurance or other reasons. The payment of such uninsured liabilities would reduce the funds available to the Company. The occurrence of a significant event that the Company is not fully insured against, or the insolvency of the insurer of such event, could have a material adverse effect on the Company's financial position, results of operations or prospects. There can be no assurance that insurance will be available in the future.
The Company's ability to acquire reserves will depend on its ability to select and acquire suitable producing properties or prospects. Competitive factors in the distribution and marketing of oil and gas include price methods and reliability of delivery. The marketability of oil and natural gas produced by the Company, if any, will also be affected by numerous other factors beyond the control of the Company. These factors include market fluctuations, the world price of oil, the supply and demand for oil and natural gas, the proximity and capacity of oil and natural gas pipelines and processing equipment and government regulations, including regulations relating to prices, taxes, royalties, land tenure, production allowable, the import and export of oil and natural gas and environmental protection. The effect of these factors cannot be accurately predicted.
Permits and Licenses
The operations of the Company may require licenses and permits for various governmental authorities. There can be no assurance that the Company will be able to obtain all necessary licenses and permits that may be required to carry out exploration, development and operations of its projects.
No Assurance of Continuing Title
Title to or rights in oil and gas properties may involve certain inherent risks due to problems arising from the ambiguous conveyancing history characteristic of many such properties. Although the Company will conduct reasonable investigations (including the employment of local legal counsel to inform itself as to the status of properties) with respect to the validity of ownership of and the ability of sellers to transfer interests to it, there can be no assurance that it will hold good and marketable title to all of its properties. If a title defect does exist, it is possible that the Company may lose all or a portion of its interest in properties to which the title defect relates.
Dependence on Key Personnel
The success of the Company is dependent on the services of a number of members of senior management. The experience of these individuals will be a factor contributing to the Company's continued success and growth. The Company does not have any key man insurance policies, and therefore there is a risk that the death or departure of one or more of these individuals could have a material adverse effect on the Company.
Alternatives to/Changing Demand for Petroleum Products
Fuel conservation measures, alternative fuel requirements, increasing consumer demand for alternatives to oil and natural gas, and technological advances in fuel economy and energy generation devices will reduce the demand for crude oil and other liquid hydrocarbons. The Company cannot predict the impact of changing demand for oil and natural gas products and any major changes would have a material adverse effect on the Company's business, financial condition, results of operations and cash flow.
The Company's operations are, and its future operations will be, subject to environmental regulations promulgated by the United Kingdom or other governments from time to time in the regions where the Company carries on business. Current environmental legislation provides for restrictions and prohibitions on spills, releases or emissions of various substances produced in association with oil, condensate and natural gas operations. In addition, certain types of operations may require the submission and approval of environmental impact assessments. Environmental legislation and policy is periodically amended. Such amendments may result in stricter standards and enforcement, and in more stringent fines and penalties for non-compliance. Environmental assessments of existing and proposed projects carry a heightened degree of responsibility for companies and their directors, officers and employees. The costs of compliance associated with changes in environmental regulations could require significant expenditures, and breaches of such regulations may result in the imposition of fines and penalties, any of which may be material. There can be no assurance that these environmental costs will not have a material adverse effect on the Company's financial condition or results of operations in the future.
Decommissioning Security Risk
Actual decommissioning expenditures related to a given field may not incur for several years although security for decommissioning costs may be required to be posted in advance. If the Company fails to provide the decommissioning security it may lose its working interest in the asset and other default provisions may apply. Security on the decommissioning costs may be up to 150% of the estimated decommissioning costs although NSE has obtained a decommissioning security deed from the UK government that provides for 50% of this amount.
The oil and gas industry is intensely competitive and the Company will compete with a substantial number of other companies, many of which have greater financial resources. Many such companies not only explore for and produce oil, condensate and natural gas, but also carry on refining operations and market petroleum and other products on a global basis. There is also competition between the petroleum industry and other industries supplying energy and fuel to industrial, commercial and individual consumers. There is no assurance that the Company will be able to successfully compete against such competitors.
The oil and gas business is subject to regulation and intervention by governments in such matters as the awarding of exploration and production interests, the imposition of specific drilling obligations, environmental protection controls, control over the development and abandonment of fields (including restrictions on production) and possible expropriation or cancellation of contract rights, as well as with respect to prices, taxes, export quotas, royalties and the exportation of oil and natural gas. Such regulations may be changed from time to time in response to economic or political conditions. The implementation of new regulations or the modification of existing regulations affecting the oil and gas industry could reduce demand for oil and natural gas, increase the Company's costs and have a material adverse effect on the Company.
The Company's future oil and natural gas reserves, productions, and cash flows to be derived therefrom are highly dependent on the Company's successfully acquiring or discovering new reserves. Without the continual addition of new reserves, any existing reserves the Company may have at any particular time and the production therefrom will decline over time as such existing reserves are exploited. A future increase in the Company's reserves will depend not only on the Company's ability to develop any properties it may have from time to time, but also on its ability to select and acquire suitable producing properties or prospects. There can be no assurance that the Company's future exploration and development efforts will result in the discovery and development of additional commercial accumulations of oil and natural gas. Should the Company not discover additional reserves, current operations may not be sustainable.
The Company is continued in Ontario, Canada, but carries on all of its material operations in the United Kingdom. Accordingly, the Company is subject to the legal systems and regulatory requirements of a number of jurisdictions with a variety of requirements and implications for shareholders of the Company. Exploration and development activities outside Canada may require protracted negotiations with host governments, regulatory bodies and other third parties. If a dispute arises with foreign operations, the Company may be subject to the exclusive jurisdiction of foreign courts or may not be successful in subjecting foreign persons, especially foreign oil ministries, to the jurisdiction of Canada.
Furthermore, some or all of the directors and officers of the Company and some or all of the experts reside outside of Canada. Some or all of the assets of those persons may be located outside of Canada. It may not be possible for investors to collect from the Company or enforce judgments obtained in courts in Canada predicated on the civil liability provisions of Canadian securities legislation against the Company, the directors, the officers of the Company and certain of the experts named in its public disclosure record. Moreover, it may not be possible for investors to effect service of process within Canada upon the directors, officers of the Company and experts referred to above.
Foreign exchange risk
The Company operates primarily in Canada and the United Kingdom. The functional and reporting currency of the parent company is Canadian dollars. The functional currency of the UK subsidiaries is the US dollar. Foreign exchange risk arises because the amount of the local currency receivable or payable for transactions denominated in foreign currencies may vary due to changes in exchange rates (“transaction exposures”) and because the non-Canadian dollar denominated financial statements of the Company's subsidiaries may vary on revaluation into the Canadian dollar reporting currency (“translation exposures”).
The Company’s operations are exposed to exchange rate changes in the U.S. dollar and British Pound to the Canadian dollar. The Company has not entered into arrangements to hedge its foreign currency risk.
Interest rate risk
The Company’s exposure to interest rate risk is related to the Gemini's settlement payable, whereby if LIBOR increases the ultimate amount payable may increase as well. The Company's cash balances earn nominal interest and convertible debentures are fixed (effective) rate instruments and are not subject to fluctuations in interest risk. The Company has no other loans subject to interest rate.
The Company’s financial assets that are exposed to credit risk consist primarily of cash and trade and other receivables. The Company mitigates this credit risk by dealing with counterparties who are major financial institutions and monitoring credit exposure on its cash balances.
Symbol: TSX-V: NUK
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