The maritime boundaries of São Tomé e Príncipe encompass an area of approximately 160,000 square kilometres. The close proximity of São Tomé e Príncipe’s offshore waters to the proven hydrocarbon systems in the adjacent waters of Nigeria, Cameroon, Equatorial Guinea and Gabon suggests the potential for hydrocarbons, which is further supported by regional seismic data and petroleum seeps seen on the islands.

In a joint venture with Petroleum Geo-Services ASA (‘PGS’), Equator funded the acquisition in 2001 and 2005 of ten thousand kilometres of 2D seismic data and interpreted more than twenty thousand kilometres within the Exclusive Economic Zone of São Tomé e Príncipe (‘EEZ’). It was agreed with the government that licences for the seismic data will be sold to oil companies to promote an oil exploration licensing round. In return, Equator gained the right to acquire a 100% interest in two blocks of its choice. In addition, the Company was granted an option to take up to a 15% share in any eventual back-in participation that the government may secure in other blocks.

Prior to the current EEZ Licensing Round, the government invited the Company to make its first choice of two blocks according to the Exploration and Production Option Agreement which Equator has with the government. Following Equator exercising its option, the Company received from the government a letter of allocation of the rights to Block 5 and Block 12 in the EEZ. The government has informed Equator that it will begin negotiation of the Production Sharing Contracts during 2Q 2010. Signature of the PSC’s will commit the Company to the payment of signature bonuses and to the execution of work programmes. Equator intends to enhance the value and manage the risks of its opportunity in the EEZ by seeking farm-outs to an acknowledged deep water operators.

Now that the EEZ Licensing Round has commenced, Equator can expect to receive a return on its investment in the acquisition of 2D seismic data that will be licensed to exploration companies looking to participate in the EEZ Licensing Round.

History

Equator holds a 9% participating interest in JDZ Block 2.

The Joint Development Zone (‘JDZ’) lies between the Republic of Nigeria and the Republic of São Tomé e Príncipe. Under a treaty signed in 2001, the rights to resources extracted from the JDZ are shared between the two countries in the ratio 60:40 respectively. The JDZ is administered by the Joint Development Authority (‘JDA’) which is staffed by officials from both countries. Following the bidding round in 2005, Equator and one of its bidding partners, ONGC Videsh Limited, were jointly awarded a 15% interest in Block 2, of which Equator received a 6% interest.

Equator subsequently purchased an additional 3% interest from one of the other participants in the block, A & Hatman Limited, increasing its total participating interest to 9%. From this, the Company granted a bidding partner an economic interest equivalent to a 0.25% carried interest in the block. The result is that Equator acquired a net economic interest of 8.75% in Block 2 for a total entry cost of US$9.05 million, with an obligation to carry a combined interest of 1.25% during the initial exploration phase. Deferred consideration payments, to a maximum of US$6 million depending on the level of oil reserves, may become payable upon approval of a field development.

The PSC was signed with the JDA on 17 March 2006. The JOA was also signed among the participants at the same time. The other participants and their participating interests are Sinopec (28.67%), ERHC (22.00%), Addax (14.33%), ONGC Videsh (13.5%), Amber Petroleum (5%), Foby Engineering (5%) and A & Hatman (2.5%). EHRC is carried by Sinopec and Addax while A & Hatman is carried by Equator and ONGC Videsh.

Operational status

Sinopec, the operator, has a well established team in its office in Lagos. Sino Geophysical Co. Limited was engaged to reprocess the 3D seismic survey using state-of-art algorithms for Pre-Stack Time Migration and Common Reflection Surface stack processing. The operator then proceeded to interpret the reprocessed data, evaluate the prospects and rank them for drilling. In a cooperative effort, using all of their technical skills, from the top 10 prospects identified by the operator, the participants selected the ‘Bomu’ prospect as the prime candidate for the one commitment well required under the PSC.

The Bomu 1 exploration well was spudded on 29 August 2009 and completed on 3 October. The well, drilled in 1655 metres of water, reached a total depth of 3543 metres below sea level, achieving all of its geological objectives. It was completed under budget by approximately US$10 million, a benefit of the low contract rates for services inherited from Shell. Analysis of the wireline logs and of fluid samples collected by wireline tester indicates the presence of gas in a number of sand intervals. Subject to acknowledgement by the JDA, the well fulfils the work obligation of Phase I of the Exploration Period in the PSC.

Prospectivity

JDZ Block 2 lies at the end of the toe thrust of the deep water Niger basin. It is adjacent to Nigerian Block OML 130, which hosts the Akpo Field, with reserves of 600 million barrels of oil and 1 TCF of gas (Total 2007) and series of significant discoveries. The Obo-1 well discovery in the adjoining Block 1 proved the existence of a hydrocarbon source and the presence of excellent reservoir sands in the region of Block 2.

Based on the 3D seismic survey, acquired in 2003 by PGS and partially funded by Equator, NSAI made a Best Estimate of Gross Unrisked Prospective Resources of 1.3 billion barrels of oil and 1.9 trillion standard cubic feet of gas in total in the 10 identified prospects.

The subsequent evaluation by the operator differs in detail with regard to the definition, size and ranking of the prospects from the NSAI evaluation. For example, the operator identified 18 structures. Their estimate of total unrisked prospective oil-in-place is 3.9 billion barrels and of unrisked prospective gas-in-place is 8 trillion cu ft, both at the P50 level. These figures compare with NSAI’s Best Estimates of unrisked prospective in-place volumes of 4.7 billion barrels for oil and 3 trillion cu ft for gas.

While the discovery in the Bomu 1 well of gas rather than oil was disappointing, the reservoir sands and traps were, by and large, encountered as expected. Further technical and commercial evaluation of the discovery and the other prospects on Block 2 is underway. The JDA has granted a six month extension to 14 September 2010 to allow Sinopec to complete these studies and to allow the participants to make a properly informed judgment on whether to enter the next Exploration Phase with its commitment of one well. Four other wells were drilled in the JDZ, three in Block 4 and one in Block 3, simultaneously with Bomu 1. We believe that the JDA may also grant extensions for these blocks allowing the common operator, Sinopec, to integrate the studies on a regional basis to the benefit of the JDA and participants.