UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 8-K

CURRENT REPORT

Pursuant to Section 13 or 15(d) of the

Securities Exchange Act of 1934

Date of Report (Date of earliest event reported): August 21, 2008

GRAN TIERRA ENERGY INC.

(Exact name of Registrant as specified in its charter)
Nevada
98-0479924
(State or other jurisdiction of incorporation)
(I.R.S. Employer Identification No.)

Commission file number: 000-52594

300, 611 - 10th Avenue S.W.
Calgary, Alberta, Canada T2R 0B2
(Address of principal executive offices and zip code)

Registrant's telephone number, including area code: (403) 265-3221

Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions (see General Instruction A.2. below):

o Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)

o Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)

o Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))

o Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))

 
 


Item 8.01. Other Events.

In June 2006, Gran Tierra Energy Inc. acquired Argosy Energy International, L.P. The financial statements of Argosy have been included in previous registration statements filed by Gran Tierra, and Gran Tierra is now filing the financial statements of Argosy in this Current Report on Form 8-K in order to enable Gran Tierra to incorporate these financial statements by reference in future filings. These financial statements are not incorporated by reference into Gran Tierra’s current Registration Statement on Form S-8 (File No. 333-146815). These financial statements are set forth below.
 
 
ARGOSY ENERGY INTERNATIONAL, LP

INDEX TO FINANCIAL STATEMENTS

     
Page Number
 
Financial Statements for Argosy Energy International, LP as of March 31, 2006 and the period ended March 31, 2006 (Unaudited)
 
 
3
 
 
 
 
 
 
Statements of Income
 
 
3
 
Balance Sheets
 
 
4
 
Statements of Cash Flows
 
 
5
 
Statements of Partners’ Equity
 
 
6
 
Notes to Financial Statements
 
 
7
 
 
 
 
 
 
Financial Statements for Argosy Energy International, LP as of December 31, 2005 and 2004
 
 
21
 
 
 
 
 
 
Independent Auditors’ Report
 
 
21
 
Statements of Income
 
 
22
 
Balance Sheets
 
 
23
 
Statements of Cash Flows
 
 
24
 
Statements of Partners’ Equity
 
 
25
 
Notes to Financial Statements
 
 
26
 
 
 
 
 
 
Supplemental Oil and Gas Information (unaudited)
 
 
42
 
 
2

 
ARGOSY ENERGY INTERNATIONAL, LP
Financial Statements
March 31, 2006 and the period ended March 31, 2006 (Unaudited)
ARGOSY ENERGY INTERNATIONAL, LP
Statements of Income (Unaudited)
For the Three Months Ended March 31, 2006 and 2005
(Expressed in thousands of US dollars)
 
   
2006 
 
2005 
 
Oil sales to Ecopetrol
 
$
3,575
   
1,521
 
 
         
Operating cost (note 8)
   
367
   
364
 
Depreciation, depletion and amortization
   
190
   
80
 
General and administrative expenses
   
282
   
148
 
 
   
839
   
592
 
Operating profit
   
2,736
   
929
 
 
         
Other income, net
   
79
   
116
 
Income before income and remittance taxes
   
2,815
   
1,045
 
 
         
Current income tax (note 9)
   
1,017
   
370
 
Deferred remittance tax
   
109
   
42
 
Total income and remittance taxes
   
1,126
   
412
 
Net income
 
$
1,689
   
633
 
See accompanying notes to unaudited financial statements.
 
3

 
ARGOSY ENERGY INTERNATIONAL, LP
Balance Sheets (Unaudited)
March 31, 2006 and December 31, 2005
(Expressed in thousands of US dollars)
 
   
March 31,
 
December 31,
 
Assets
 
2006
 
2005
 
 
 
 
 
 
 
Current assets:
 
 
 
 
 
Cash and cash equivalents (note 3)
 
$
2,670
   
7,124
 
Accounts receivable, net (note 4)
   
3,898
   
951
 
Accounts receivable reimbursement Ecopetrol
   
1,186
   
1,186
 
Inventories:
         
Crude oil
   
211
   
218
 
Materials and supplies
   
626
   
557
 
 
   
837
   
775
 
Total current assets
   
8,591
   
10,036
 
 
         
Other long-term assets
   
25
   
16
 
Property, plant and equipment (note 5):
         
Unproved properties
   
3,831
   
3,622
 
Proved properties
   
5,305
   
5,401
 
 
   
9,136
   
9,023
 
Total assets
 
$
17,752
   
19,075
 
 
         
Liabilities and Partners’ Equity
         
 
         
Current liabilities:
         
Accounts payable
   
4,852
   
4,979
 
Tax payable
   
1,721
   
1,326
 
Employee benefits
   
97
   
103
 
Accrued liabilities
   
547
   
522
 
Total current liabilities
   
7,217
   
6,930
 
 
         
Long-term accounts payable (note 10)
   
686
   
686
 
Deferred income tax
   
473
   
475
 
Deferred remittance tax
   
1,210
   
1,104
 
Pension plan
   
   
 
Total liabilities
   
9,586
   
9,195
 
Partners’ equity (note 7)
   
8,166
   
9,880
 
Total liabilities and partners’ equity
 
$
17,752
   
19,075
 
See accompanying notes to unaudited financial statements.
 
4

 
ARGOSY ENERGY INTERNATIONAL, LP
Statements of Cash Flows (Unaudited)
For the Three Months Ended March 31, 2006 and 2005
(Expressed in thousands of US dollars)
 
   
2006
 
2005
 
Cash flows from operating activities:
 
 
 
 
 
Net income
 
$
1,689
   
633
 
Adjustments to reconcile net income to net cash provided by operating activities:
         
Depreciation, depletion and amortization
   
190
   
80
 
Deferred remittance tax
   
109
   
42
 
Changes in assets and liabilities:
         
Accounts receivable
   
(3,147
)
 
(839
)
Inventories
   
(62
)
 
58
 
Accounts payable
   
(127
)
 
202
 
Tax payable
   
395
   
99
 
Employee benefits
   
(6
)
 
48
 
Accrued Liabilities
   
25
   
491
 
Deferred income tax
   
(2
)
 
1
 
Deferred remittance tax
   
(3
)
 
4
 
Pensions
   
   
(5
)
Net cash (used in) provided by operating activities
   
(939
)
 
814
 
 
         
Cash flows from investing activities:
         
Increase in long term investments
   
(9
)
 
(1
)
Payments from Petroleum Equipment International - Talora
   
200
   
 
Additions to property, plant and equipment
   
(303
)
 
(767
)
Net cash used in investing activities
   
(112
)
 
(768
)
 
         
Cash flows from financial activities:
         
Bank overdrafts
   
   
106
 
Distributions to partners
   
(3,250
)
 
 
Aviva redemption shares
   
(153
)
 
 
Net cash (used in) provided by financial activities
   
(3,403
)
 
106
 
 
         
(Decrease) increase in cash and cash equivalents
   
(4,454
)
 
152
 
Cash and cash equivalents at beginning of year
   
7,124
   
6,954
 
Cash and cash equivalents at end of the period
 
$
2,670
   
7,106
 
See accompanying notes to unaudited financial statements.
 
5

 
ARGOSY ENERGY INTERNATIONAL, LP
Statements of Partners’ Equity (Unaudited)
For the Three Months Ended March 31, 2006 and the Year Ended December 31, 2005
(Expressed in thousands of US dollars)
 
   
Limited 
 
General 
 
Total 
 
   
partners’ 
 
partners’ 
 
partners’ 
 
   
capital  
 
capital  
 
equity  
 
Balance as of December 31, 2005
   
9,810
   
70
   
9,880
 
Redemption of partnership payments interest - Aviva Overseas Inc. (note 10)
   
(152
)
 
(1
)
 
(153
)
Distributions to partners
   
(3,227
)
 
(23
)
 
(3,250
)
Net income
   
1,677
   
12
   
1,689
 
Balance as of March 31, 2006
 
$
8,108
   
58
   
8,166
 
See accompanying notes to unaudited financial statements.
 
6

 
ARGOSY ENERGY INTERNATIONAL, LP
Notes to Financial Statements (Unaudited)
March 31, 2006 and 2005
(Expressed in thousands of US dollars)
(1)
 
Business Activities
 
 
 
 
Argosy Energy International, LP is a Utah (USA) Limited Partnership, which established a Colombian Branch in 1983.
 
 
 
 
Argosy Energy International, LP is engaged in the business of exploring for, developing and producing oil and gas. The principal properties and operations are located in Colombia, which are carried out through its Colombian Branch in the Putumayo, Cauca, Tolima and Cundinamarca Provinces. The oil production is sold to Empresa Colombiana de Petróleos, the Colombian National Oil Company, (“Ecopetrol”).
 
 
 
 
There are risks involved in conducting oil and gas activities in remote, rugged and primitive regions of Colombia. The guerrillas have operated within Colombia for many years and expose the Company’s operations to potentially detrimental activities. The guerrillas are present in the Putumayo and Río Magdalena areas where the Company’s properties are located. Since 1998, the Company has only experienced minor attacks on pipelines and equipment.
 
 
 
 
Operations
 
 
 
 
As of March 31, 2006, Argosy was participating in the following Association Contracts signed with Ecopetrol and Exploration and Exploitation Contracts signed with the Hydrocarbons National Agency - ANH.

Contract
 
Participation
 
Operator
 
Phase
Santana
 
 
35
%
 
ARGOSY
 
Exploitation
Guayuyaco
 
 
70
%
 
ARGOSY
 
Exploitation
Aporte Putumayo
 
 
100
%
 
ARGOSY
 
Abandonment
Río Magdalena
 
 
70
%
 
ARGOSY
 
Exploration
Talora
 
 
20
%
 
ARGOSY
 
Exploration
Chaza
 
 
50
%
 
ARGOSY
 
Exploration

 
 
The first four contracts have been signed with ECOPETROL and the last two with ANH.
 
 
 
 
An association contracts are those where the Government participate as partner of the field through the national oil company — ECOPETROL.
 
 
 
 
Exploration and production contracts (E&P) are those signed with the ANH — “Agencia Nacional de Hidrocarburos” (National Agency for Hydrocarbons) in which the Government only receive royalties and taxes for the rights of exploration and production but there is not a participation from the national oil company - ECOPETROL or any other government entity.
(Continued)
 
7

 
ARGOSY ENERGY INTERNATIONAL, LP
Notes to Financial Statements (Unaudited)

 
 
The main terms of the above-mentioned contracts are as follows:
 
 
 
 
Santana Association Contract
 
 
 
 
On May 27, 1987 (effective date July 27, 1987), Argosy Energy International, LP signed this association contract to explore for and produce oil, in the area called Santana. The contract is in its 19th year and the Company reduced the area to a 5 kilometer reserve area around each field. The remaining contract area is approximately 1,100 acres.
 
 
 
 
Under the terms of the contract with Ecopetrol, a minimum of 25% of all revenues from oil sold to Ecopetrol is paid in Colombian pesos, which may only be utilized in Colombia. However, this proportion can be modified through parties agreement.
 
 
 
 
Aporte Putumayo - Association Contract
 
 
 
 
The Aporte Putumayo area has been returned to the Government. Such devolution is subject to the approval of the environmental restoration of the region by the Environmental Ministry and the wells abandonment have to be approved by Ecopetrol and the Ministry of Mines.
 
 
 
 
Río Magdalena Association Contract
 
 
 
 
On December 10, 2001 (effective date February 8, 2002), Argosy Energy International, LP and Ecopetrol signed this Association Contract, to explore and produce oil, in the area called Río Magdalena of approximately 145,000 acres, located in the Middle Magdalena Valley of Colombia in the provinces of Cundinamarca and Tolima.
 
 
 
 
The contract has a maximum duration of 28 years distributed as follows: an exploration period of 6 years and a production period of 22 years starting on the date of termination of the exploration period. The exploratory well, Popa-1 was drilled during June and July, 2006 and is on the completion stage.
 
 
 
 
Upon finalization of each phase, Argosy has the option to relinquish the contract, once completed the obligations for each phase.
 
 
 
 
BT Letter Agreement
 
 
 
 
On February 27, 2001 Argosy Energy International, LP signed a letter agreement with BT Operating Company for the acquisition and management of the Río Magdalena Exploration Area. BT and Argosy mutually agreed to pay their 50% share of costs under the terms of the Ecopetrol Association contract and provide certain services toward management and compliance of the obligations.
 
 
 
 
As of March 31, 2006 BT had not paid their obligations under this agreement and outstanding accounts receivable of $355 related to their share of cost related to the Río Magdalena Association Contract were provisioned as bad debts.
(Continued)
 
8

 
ARGOSY ENERGY INTERNATIONAL, LP
Notes to Financial Statements (Unaudited)

 
 
Guayuyaco Association Contract
 
 
 
 
On August 2, 2002 (effective date September 30, 2002) Argosy Energy International, LP signed this association contract with Ecopetrol, to explore and produce oil, in the area called Guayuyaco. This Association contract gives Argosy the right to explore potential reserves in prospects adjacent to the existing Santana oil field. The block is located in the Putumayo and Cauca provinces and covers approximately 52.000 acres originally held under the Santana Risk Sharing Agreement.
 
 
 
 
The Guayuyaco contract has a maximum duration of 27.5 years with an exploration period of 5.5 years and a production period of 22 years, which starts upon termination of the exploration period.
 
 
 
 
During the second exploration phase, two wells were drilled (Guayuyaco-1 and Guayuyaco-2) which were successful. Therefore, on December 28, 2005 Ecopetrol accepted the Commerciality of the field.
 
 
 
 
Solana Petroleum Exploration Commercial Agreement
 
 
 
 
Argosy and Solana Petroleum Exploration entered into a commercial agreement in 2003 whereby, Solana through fulfillment of certain obligations could earn a participating interest in the Inchiyaco Well Prospect (Santana Association Contract) and have an option to enter the next exploration prospect under the Guayuyaco Association Contract. Inchiyaco-1 was drilled and completed as a producing well in 2003 resulting in Solana’s sharing 26.21% interest in Argosy’s net share of the prospect.
 
 
 
 
The commercial agreement was revised in 2004, giving Solana the right to share a 50% interest in Argosy’s net share of the Guayuyaco association contract by paying 66.7% of two exploratory wells (Guayuyaco-1 and Juanambu-1) and 50% for a new seismic program and additional projects.
 
 
 
 
Talora Exploration and Exploitation Contract
 
 
 
 
On September 16, 2004 (effective date) Argosy and the National Hydrocarbons Agency (ANH) signed the Talora Exploration and Exploitation Contract to explore and produce oil, in an area of approximately 108,000 acres located in Tolima and Cundinamarca Provinces.
 
 
 
 
The contract has a maximum duration of 30 years with an exploration period of 6 years and a production period of 24 years, which starts upon the date in which Argosy receives the oil field commerciality declaration from ANH.
 
 
 
 
The contract may be relinquished at the end of each phase after fulfillment of the agreed obligations.
(Continued)
 
9

 
ARGOSY ENERGY INTERNATIONAL, LP
Notes to Financial Statements (Unaudited)

 
 
Argosy and Petroleum Equipment International (PEI) signed a commercial agreement on March 9, 2006. Through fulfillment of certain obligations PEI could earn an 80% of Argosy’s interest under the ANH contract on the Talora Block. In conjunction with such assignment, Argosy shall designate PEI as the operator previous approval of the ANH.
 
 
 
 
Contractual Commitments:

Phase
 
Starting date
 
Obligations
3
 
December 16, 2006
 
One exploratory well.
4
 
December 16, 2007
 
One exploratory well.
5
 
December 16, 2008
 
One exploratory well.
6
 
December 16, 2009
 
One exploratory well.

 
 
The contract may be relinquished at the end of each phase after fulfillment of the agreed obligations.
 
 
 
 
Chaza Exploration and Exploitation Contract
 
 
 
 
On June 27, 2005 (effective date) Argosy and the National Hydrocarbons Agency (ANH) signed the Chaza Exploration and Exploitation Contract to explore and produce oil, in an area of approximately 80,000 acres located in Putumayo and Cauca Provinces.
 
 
 
 
The contract has a maximum duration of 30 years with an exploration period of 6 years and a production period of 24 years, which starts upon the date in which Argosy receives the oil field commerciality declaration from ANH.
 
 
 
 
The ANH’s Resolution 0217, dated September 13, 2005, approved the 2005 assignment of 50% interest of the contract to Solana Petroleum Exploration.
 
 
 
 
Contractual Commitments:

 
 
 
 
 
Phase
 
Starting date
 
Obligations
2
 
June 27, 2006
 
One exploratory well.
3
 
June 27, 2007
 
One exploratory well.
4
 
December 27, 2008
 
One exploratory well.
5
 
December 27, 2009
 
One exploratory well.
6
 
December 27, 2010
 
One exploratory well.

 
 
The contract may be relinquished at the end of each phase after fulfillment of the agreed obligations.
(Continued)
 
10

 
ARGOSY ENERGY INTERNATIONAL, LP
Notes to Financial Statements (Unaudited)

(2)
 Summary of Significant Accounting Policies and Practices
 
    (a) Foreign Currency Translation
 
 
The transactions and accounts of the Company’s operations denominated in currencies other than US dollars are re-measured into United States dollars in accordance with Statement of Financial Accounting Standards FAS 52. The United States dollar is used as the functional currency. Exchange adjustments resulting from foreign currency balances are recognized in expense or income in the current period.
    (b) Cash Equivalents
 
 
Cash equivalents are highly liquid investments purchased with an original maturity of three months or less.
    (c) Inventories
 
 
Inventories consist of crude oil and materials and supplies and are stated at the lower of cost or market.
    (d) Property, Plant and Equipment
 
 
The Company follows the full cost method to account for exploration and development of oil and gas reserves whereby all productive and nonproductive costs are capitalized. The only cost center is Colombia. All capitalized costs plus the undiscounted future development costs of proved reserves are depleted using the unit of production method based on total proved reserves applicable to the country.
 
 
 
 
Proved oil and gas reserves are the estimated quantities of crude oil that geological and engineering data demonstrate with reasonable certainty can be recovered in future years from known reservoirs under existing economic and operating conditions considering future production and development costs.
 
 
 
 
Costs related to initial exploration activities with no proved reserves are initially capitalized and periodically evaluated for impairment. The Company capitalizes internal costs directly identified with exploration and development activities. The net capitalized costs of oil properties are subject to a ceiling test, which limits such pooled costs to the aggregate of the present value of future net revenues attributable to proved oil and gas reserves discounted at 10% plus the lower of cost or market value of unproved properties. If capitalized costs exceed this limit, the excess is charged to expense and reflected as additional accumulated depreciation, depletion and amortization.
 
 
 
 
While the quantities of proved reserves require substantial judgment, the associated prices of oil reserves that are included in the discounted present value of the reserves are objectively determined. The ceiling test calculation requires use of prices and costs in effect as of the last day of the accounting period, which are generally held constant for the life of the properties. As a result, the present value is not necessarily an indication of the fair value of the reserves. Oil and gas prices have historically been volatile and the prevailing prices at any given time may not reflect our Partnership’s or the industry’s forecast of future prices.
(Continued)
 
11

 
ARGOSY ENERGY INTERNATIONAL, LP
Notes to Financial Statements (Unaudited)

 
 
Gain or loss on the sale or other disposition of oil and gas properties is not recognized, unless the gain or loss would significantly alter the relationship between capitalized costs and proved reserves of oil and gas attributable to a country.
 
 
 
 
Support equipment and facilities are depreciated using the unit of production method based on total reserves of the field related to the support equipment and facilities.
 
 
 
 
(e)Environmental Liabilities and Expenditures
 
 
Argosy accrues for losses associated with environmental remediation obligations when such losses are probable and can be reasonably estimated. These accruals are adjusted as further information develops or circumstances change. Costs of future expenditures for environmental remediation obligations are not discounted to their present value.
    (f) Asset Retirement Obligations
 
 
Liability for asset retirement obligation is considered to be negligible at this time, based on projected production profiles, expiry dates and terms of the Association Contracts for current operations. However, the Company has accrued the costs related to environmental remediation and abandonment of the wells belonging to Aporte Putumayo Contract.
    (g) Concentration of Credit Risks
 
 
All of the Company’s production is sold to Ecopetrol; the sale price is agreed between both parts, according to local regulations in Colombia.
    (h) Income Taxes
 
 
Deferred income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis and operating loss. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.
(Continued)
 
12

 
ARGOSY ENERGY INTERNATIONAL, LP
Notes to Financial Statements (Unaudited)
 
    (i) Financial Instruments Fair Value
 
 
The carrying amounts of cash and cash equivalents approximate fair value because of the short maturity of those instruments. The carrying value of other on-balance-sheet financial instruments approximates fair value, and the cost, if any, to terminate off-balance-sheet financial instruments is not significant.
    (j) Employee Benefits
 
 
The Company recognizes the obligations with its employees in accordance with the current Colombian labor law. These obligations include the severance indemnity and the legal service bonus each one equivalent to a monthly salary per year and interest on severance at the rate of 12% on the balance of severance indemnities paid. The relevant liability for these two concepts is shown under the “Employee benefits” account as current liabilities at the closing of the period.
    (k) Defined Benefit Pension Plan
 
 
The Company has a defined benefit pension plan covering one employee. The benefits are based on years of service, age and the employee’s compensation. Currently, the cost of this program is not being funded. The actuarial study is performed at the end of each year in accordance with the guidelines established by FAS 87.
    (l) Use of Estimates
 
 
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements and reported amounts of revenues and expenses during the reporting period.
    (m) Revenue Recognition
 
 
The Company recognizes revenue when the crude oil is delivered to Ecopetrol.
 
 
 
 
Ecopetrol pays the oil sales invoicing 25% in local currency and the 75% in US Dollars, according to the terms of the Oil Sales Contract executed between Ecopetrol and Argosy, through which the oil sale price is fixed, with expiration dated November 1, 2006.
    (n) Management Fee
 
 
The Company accounts for the management fees received from its partners as operator of the contracts as a less value of the operating costs.
(Continued)
 
13

 
ARGOSY ENERGY INTERNATIONAL, LP
Notes to Financial Statements (Unaudited)

   
  (o) Comprehensive Income
 
For each period presented in the accompanying statements of income, comprehensive income and net income are the same amount.
 
 
(3)
Cash and Cash Equivalents
 
 
 
The following is a summary of cash and cash equivalents as of March 31, 2006 and December 31, 2005:
 
   
March 31, 
 
December 31, 
 
   
2006 
 
2005 
 
Held in United States dollars
 
$
2,040
   
6,329
 
Held in Colombian pesos
   
157
   
394
 
Short-term investments
   
473
   
401
 
   
$
2,670
   
7,124
 

(4)
Accounts Receivable
 
 
 
The following is a summary of accounts receivable as of March 31, 2006 and December 31, 2005:
 
           
   
March 31, 
 
December 31, 
 
   
2006 
 
2005 
 
Trade
 
$
3,248
   
675
 
B.T.O. Río Magdalena Agreement
   
355
   
355
 
Vendor Advances
   
177
   
172
 
Petroleum Equipment Investments - Talora
   
300
   
 
Other
   
173
   
104
 
 
   
4,253
   
1,306
 
Less allowance for bad debts
   
(355
)
 
(355
)
   
$
3,898
   
951
 

(5)
Property, Plant and Equipment
 
 
 
The following is a summary of property, plant and equipment as of March 31, 2006 and December 31, 2005:
 
   
March 31,
 
December 31,
 
   
2006
 
2005
 
Oil properties:
 
 
 
 
 
Unproved
 
$
3,831
   
3,622
 
Proved
   
59,190
   
59,096
 
 
   
63,021
   
62,718
 
Less accumulated depreciation, depletion, and amortization
   
53,885
   
53,695
 
   
$
9,136
   
9,023
 
 
14

 
ARGOSY ENERGY INTERNATIONAL, LP
Notes to Financial Statements (Unaudited)
Capitalized Cost Unproved
Excluded From the Capitalized Cost Being Amortized
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Month
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Anticipated
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
to be
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
included
 
 
 
 
 
 
Exploration Cost
 
Cost Incurred
 
in
AFE
 
Contract
 
Detail
 
Dec-04
 
Dec-05
 
Mar-06
 
2004
 
2005
 
2006
 
Amortization
MARY WELLWEST
PROSPECT
 
Santana
 
Geological &
Geophysical Data
 
 
287
 
 
 
287
 
 
 
287
 
 
 
287
 
 
 
 
 
 
 
 
 
 
Dec-06
MARY WEST WELL
TESTING
 
Santana
 
Geological &
Geophysical Data
 
 
93
 
 
 
93
 
 
 
93
 
 
 
93
 
 
 
 
 
 
 
 
 
 
Dec-06
Expl. 100% NEW PROJECTS
 
New Projects
 
Geological &
Geophysical Data
 
 
253
 
 
 
363
 
 
 
375
 
 
 
253
 
 
 
110
 
 
 
12
 
 
Dec-06
Expl. 100% SANTANA
 
Guayuyaco
 
Geological &
Geophysical Data
 
 
1,044
 
 
 
1,044
 
 
 
1,044
 
 
 
1,044
 
 
 
 
 
 
 
 
 
 
Dec-06
Expl. 100% RIO MAGDALENA
 
Rio Magdalena
 
Seismic Program
 
 
634
 
 
 
808
 
 
 
889
 
 
 
634
 
 
 
174
 
 
 
81
 
 
Mar-07
TALORA PROJECT
 
Talora
 
Seismic Program
 
 
1
 
 
 
89
 
 
 
134
 
 
 
1
 
 
 
88
 
 
 
44
 
 
Sep-07
SEISMIC GUAYUYACO
 
Guayuyaco
 
Seismic Program
 
 
0
 
 
 
431
 
 
 
431
 
 
 
 
 
 
 
431
 
 
 
 
 
 
Dec-06
SEISMIC CHAZA
 
Chaza
 
Seismic Program
 
 
0
 
 
 
505
 
 
 
538
 
 
 
 
 
 
 
505
 
 
 
33
 
 
Sep-07
POPA-1 WELL
EXPLORATORY
 
Rio Magdalena
 
Road and Location Well
 
 
0
 
 
 
0
 
 
 
32
 
 
 
 
 
 
 
 
 
 
 
32
 
 
Mar-07
JUANAMBU-1 WELL
EXPLORATORY
 
Guayuyaco
 
Road and Location Well
 
 
0
 
 
 
2
 
 
 
8
 
 
 
 
 
 
 
2
 
 
 
6
 
 
Jun-07
 
 
 
 
 
 
 
 
 
 
 
0
 
 
 
0
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total Unproved
Exploration Costs
 
 
 
 
 
 
2,312
 
 
 
3,622
 
 
 
3,831
 
 
 
2,312
 
 
 
1,310
 
 
 
208
 
 
 

 
 
All capital excluded from capital costs being amortized relates to exploration cost. No acquisition costs, development costs or capitalized interest costs are identified.
(Continued)
 
15


 
ARGOSY ENERGY INTERNATIONAL, LP
Notes to Financial Statements (Unaudited)

(6)
 
Pension Plan
 
 
 
 
The following is a detail of the components of pension cost as of March 31, 2006 and 2005:
 
   
March 31, 
 
March 31, 
 
   
2006 
 
2005 
 
Interest cost
 
$
8
   
8
 
Expected return of assets
   
(13
)
 
(6
)
Amortization of unrecognized net transition obligation (asset)
   
1
   
1
 
Net periodic pension cost
 
$
(4
)
 
3
 

(7)
 
Equity
 
 
 
 
Stockholders’ Capital
 
 
 
 
The following is a detail of the stockholders’ participation in the capital as of March 31, 2006 and December 31, 2005:
 
   
March 31, 
 
December 31, 
 
Stockholder
 
2006 
 
2005 
 
Crosby Capital L.L.C.
 
$
98.75
   
98.75
 
Argosy Energy Corp. **
   
0.71
   
0.71
 
Dale E. Armstrong
   
0.41
   
0.41
 
Richard S. McKnight
   
0.13
   
0.13
 
   
$
100.0
   
100.00
 
 
 
 
 
**
 
Argosy Energy Corp. is a general partner interest. All others are limited partnership interests. Net income is allocated according to the participation of each stockholder in the Company’s capital.

 
 
Foreign Exchange Restrictions
 
 
 
 
In accordance with current legislation in Colombia, the branches of foreign companies in the oil industry are not under the obligation to refund to the Colombian exchange market the proceeds from their foreign currency sales either inside or outside the country. The net proceeds from oil exports may be used by the branches of oil companies to reimburse abroad the capital and profits from the operation in Colombia. As a result of this foreign exchange liberation, the branch cannot purchase foreign currency in the Colombian exchange market to remit profits, repatriate capital, repay external debt or pay foreign currency expenses.
 
 
 
 
Distributions to Partners
 
 
 
 
On March 30, 2006 the partners of Argosy Energy International resolved, with the majority vote of its partners, distribute the amount of $2,500 on March 1, 2006 and $750 on March 30, 2006, ratably to each of its partners.
(Continued)
 
16

 
ARGOSY ENERGY INTERNATIONAL, LP
Notes to Financial Statements (Unaudited)

(8)
 
Operating Cost
 
 
 
 
The following is a summary of operating cost incurred for the period ended March 31, 2006 and 2005:
 
   
March 31, 
 
March 31, 
 
   
2006 
 
2005 
 
Direct labor
 
$
111
   
86
 
Maintenance, materials and lubricants
   
86
   
49
 
Repairs - third party
   
123
   
196
 
General expenses - other
   
47
   
33
 
   
$
367
   
364
 

(9)
 
Income Taxes
 
 
 
 
All of the income and income tax was derived from activities of the Branch in Colombia.
    Deferred Remittance Tax
 
 
Deferred remittance tax is calculated based upon commercial net income. Commercial net income of Colombian branches of foreign companies derived from exploration, development or production of hydrocarbons is levied an additional remittance tax of 7%.
 
 
 
 
The law establishes that when this income is reinvested in the country for five years, the payment of the remittance tax will be deferred, after which time the payment of this tax will be exonerated.
 
 
 
 
Under the law, reinvestment occurs when the net income remains five years within the equity of the entity.
 
 
 
 
Tax Reconciliation
 
 
 
 
Income tax expense attributable to income from continuing operations was $1,126 and $412 for the periods ended March 31, 2006 and 2005, and differed from the amounts computed by applying the Colombian income tax rate of 35% (the statutory tax rate of the partnership’s Branch) to pretax income from continuing operations as a result of the following:
 
   
March 31, 2006 
 
March 31, 2005 
 
   
Amount 
 
%  
 
Amount  
 
%  
 
Income before taxes
 
$
2,815
   
100.00
   
1,045
   
100.00
 
Computed “Expected” tax expense
   
985
   
35.00
   
366
   
35.00
 
Tax expense
   
1,126
   
40.00
   
412
   
39.43
 
Difference
 
$
141
   
5.00
   
46
   
4.43
 
(Continued)
 
17

 
ARGOSY ENERGY INTERNATIONAL, LP
Notes to Financial Statements (Unaudited)
 
       
March 31, 2006
     
March 31, 2005
 
   
Basis
 
Amount
 
%
 
Basis
 
Amount
 
%
 
Explanation:
 
 
 
 
 
 
 
 
 
 
 
 
 
Difference in principles and translation
 
$
(312
)
 
(109
)
 
(3.88
)
 
(86
)
 
(30
)
 
(2.87
)
Surcharge tax (10%)
       
92
   
3.28
       
34
   
3.25
 
Remitance tax expense (7%)
       
146
   
5.19
       
42
   
4.02
 
Inflation adjustment
   
(23
)
 
(8
)
 
(0.28
)
     
   
 
No deductible expenses
   
9
   
3
   
0.11
       
   
 
No deductible taxes (Industry and commerce, stamp tax)
   
41
   
14
   
0.51
       
   
 
Assessments to financial movements
   
6
   
2
   
0.07
       
   
 
Income not taxable
   
4
   
1
   
0.00
       
   
 
 
   
$
   
 
141
   
5.00
       
46
   
4.43
 

 
 
The deferred tax is originated in the following temporary differences as of March 31, 2006 and December 31, 2005:
 
   
March 31, 
 
December 31, 
 
   
2006 
 
2005 
 
Accrued liabilities
 
$
201
   
201
 
Property, plant and equipment
   
(674
)
 
(676
)
Net deferred tax liability
 
$
(473
)
 
(475
)
 
         
Roll forward of deferred taxes:
         
Beginning balance
   
475
   
223
 
Increase in year
   
   
352
 
Translation
   
(2
)
 
(100
)
   
$
473
   
475
 
 
In assessing the realizability of deferred tax assets, management considers whether it is more likely than not some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible and tax carryforwards utilizable. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment. Based upon the level of historical taxable income and projections for future taxable income over the periods in which the deferred tax assets are deductible, management believes it is more likely than not that the branch will realize the benefits of these deductible differences, net of the existing valuation allowances at March 31, 2006. The amount of the deferred tax asset considered realizable, however, could be reduced in the near term if estimates of future taxable income during the carryforward period are reduced.
(Continued)
 
18

 
ARGOSY ENERGY INTERNATIONAL, LP
Notes to Financial Statements (Unaudited)

Major Changes Introduced by Law 863 (December 29, 2003)

 
1)
 
An equity tax was created for fiscal years 2004, 2005 and 2006. Such tax must be liquidated applying at 0.3 % over the net equity at January 1 st of each year. This applies to equities of 3.000 million pesos in 2004, 3.183 million pesos in 2005 and 3.344 million pesos in 2006.
 
 
 
2)
 
The financial transaction tax increased from 3 per thousand to 4 per thousand and it is applicable through the year 2007.
 
 
 
3)
 
Paid taxes are not deductible except for 80% of industrial and commercial and Property Taxes.
 
 
 
4)
 
The 10% income tax surcharge (3.5%) is applicable for years 2003 through 2006. This payment is not deductible for tax purposes.

(10)
 
Settlement Agreement with Aviva Overseas Inc.
 
 
 
 
Effective August 19, 2005 Argosy Energy International, LP, Argosy Energy Corp., Crosby Capital, LLC, and Aviva Overseas, Inc. entered into a settlement agreement which principal terms are as follows:

 
1.
 
The parties agreed that the agreement is a negotiated resolution of various disputes between the parties.
 
 
 
2.
 
Aviva Overseas, Inc. assigned and transferred all interests in the partnership, corresponding to 29.6196%, to Argosy Energy International, LP as a redemption of such interests.
 
 
 
3.
 
Argosy Energy International, LP is required to make the following payments to Aviva Overseas, Inc.: an initial cash payment of $300 as reimbursement to Aviva Overseas, Inc. for a portion of its cost incurred in connection with the disputes, a 90 day promissory note amounted to $3,050, a two year promissory note in the amount of $1,125 (the “Note”, represented for 8 quarterly payments of $153 beginning in November 2005, including interest at 8%), and an additional payment (described below) accrued in the amount of $329 as of the agreement date. As of March 31, 2006, amounts outstanding under the agreement include $990 due on the Note and $310 accrued for the additional payment. The outstanding amount is payable as follows: $614 in 2006 and $686 in 2007.

The additional payment is calculated as follows: after the earlier of i) The date Argosy Energy makes final payment of the “Note”, or (ii) after the occurrence of an event of default, Argosy shall make a payment in cash in an amount equal to (i) $56,250 multiplied by the numeric amount by which the average daily closing price of the New York Mercantile Exchange nearby month contract for West Texas Intermediate crude oil over the note term exceeds $55 per barrel, reduced by (ii) all interest paid by Argosy on the principal of the Note. The additional payment was recorded at the date of the settlement agreement based on a calculation of the required payment at that date.
(Continued)
 
19

 
ARGOSY ENERGY INTERNATIONAL, LP
Notes to Financial Statements (Unaudited)

     Crosby Capital, LLC has guaranteed the payments required by Argosy Energy International, LP.
     The new ownership percentages in Argosy Energy International L.P., after the redemption of the partnership interest held by Aviva Overseas Inc. are as follows:
 
 
 
 
 
 
Type of
Partner
 
Interest
 
interest
Crosby Capital L.L.C.
 
 
98.7491
%
 
Limited Partner
Argosy Energy Corporation
 
 
0.7104
%
 
General Partner
Dale E. Armstrong
 
 
0.4122
%
 
Limited Partner
Richard S. McKnight
 
 
0.1283
%
 
Limited Partner
Total
 
 
100.0000
%
 
 

(11)
 
Disagreement Between Argosy Energy International and Ecopetrol
 
 
 
 
As of March 31, 2006 the contracting parties of Guayuyaco Association Contract, Ecopetrol and Argosy Energy International, consulted with their legal advisors to clarify the procedure for allocation of oil produced and sold during the long term test of the Guayuyaco-1 and Guayuyaco-2 wells. Ecopetrol has advised Argosy of a material difference in the interpretation of the procedure established in the Clause 3.5 of Attachment-B of the Guayuyaco association Contract. Ecopetrol interprets the contract to provide that the extend test production up to a value equal to 30% of the direct exploration costs of the wells is for Ecopetrol’s account only and serves as reimbursement of its 30% back in to the Guayuyaco discovery. Argosy’s contention is that this amount is merely the recovery of 30% of the direct exploration costs of the wells and not exclusively for benefit of Ecopetrol. While Argosy believes its interpretation of the Guayuyaco Association Contract is correct, the resolution of this issue is still pending of agreement between the parties or determination through legal proceedings.
 
 
 
 
The estimated value of disputed production is $2,361,188 which possible loss is shared 50% ($1,180,594) with Solana Petroleum Exploration (Colombia) S.A. partner in the contract and 50% Argosy.
 
 
 
 
At this time no amount has been accrued in the financial statements.
 
 
(12)
 
Subsequent Events

 
 
The Company signed in May and June, 2006 two new exploration and production contracts with the National Hydrocarbons Agency (ANH) called Primavera and Mecaya, to explore and produce oil, respectively.

 
 
These contracts have a maximum duration of 30 years with an exploration period of 6 years and a production period of 24 years, which starts upon the date in which Argosy receives the oil field commerciality declaration from ANH.
 
 
 
 
The contracts may be relinquished at the end of each phase after fulfillment of the agreed obligations.

 
 
On April 1, 2006 the partners of the partnership entered into a redemption agreement pursuant to which all of Dale E. Armstrong interest and Richard S. McKnight interest.
 
 
 
 
On June 21, 2006 Gran Tierra Energy Inc. acquired all of the outstanding partnership interest in the Company.
(Continued)
 
20

 
ARGOSY ENERGY INTERNATIONAL, LP
Financial Statements
December 31, 2005 and 2004
With Independent Auditors’ Report Thereon

INDEPENDENT AUDITORS’ REPORT
Partners of
Argosy Energy International, LP:

We have audited the accompanying balance sheets of Argosy Energy International, LP as of December 31, 2005 and 2004, and the related statements of income, partner’s equity and cash flows for the years then ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Argosy Energy International, LP as of December 31, 2005 and 2004, and the results of its operations and its cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America.

/s/ KPMG Ltda
 
Bogotá, Colombia
July 28, 2006
(Continued)
 
21

 
ARGOSY ENERGY INTERNATIONAL, LP
Statements of Income
Years ended December 31, 2005 and 2004
(Expressed in thousands of US dollars)
 
   
2005 
 
2004 
 
Oil sales to Ecopetrol
 
$
11,891
   
6,393
 
Operating cost (note 9)
   
2,452
   
2,060
 
Depreciation, depletion and amortization
   
697
   
357
 
General and administrative expenses
   
1,082
   
859
 
 
         
 
   
4,231
   
3,276
 
 
         
Operating profit
   
7,660
   
3,117
 
 
         
Other income, net (note 10)
   
449
   
225
 
 
         
Income before income and remittance taxes
   
8,109
   
3,342
 
 
         
Current income tax (note 11)
   
2,187
   
1,026
 
Deferred income tax
   
352
   
245
 
Deferred remittance tax
   
353
   
146
 
Total income and remittance taxes
   
2,892
   
1,417
 
Net Income
 
$
5,217
   
1,925
 
See accompanying notes to financial statements.
(Continued)
 
22

 
ARGOSY ENERGY INTERNATIONAL, LP
Balance Sheets
December 31, 2005 and 2004
(Expressed in thousands of US dollars)
 
   
2005
 
2004
 
Assets
 
 
 
 
 
Current assets:
 
 
 
 
 
Cash and cash equivalents (note 3)
 
$
7,124
   
6,954
 
Accounts receivable, net (note 4)
   
951
   
584
 
Accounts receivable reimbursement Ecopetrol
   
1,186
   
 
Inventories:
         
Crude oil
   
218
   
154
 
Materials
   
557
   
248
 
 
   
775
   
402
 
Total current assets
   
10,036
   
7,940
 
 
         
Other long-term assets
   
16
   
10
 
Property, plant and equipment (note 5):
         
Unproved properties
   
3,622
   
2,312
 
Proved properties, net
   
5,401
   
3,211
 
 
   
9,023
   
5,523
 
Total assets
 
$
19,075
   
13,473
 
 
         
Liabilities and Partners’ Equity
         
 
         
Current liabilities:
         
Accounts payable
   
4,979
   
1,745
 
Tax payable
   
1,326
   
826
 
Employee benefits
   
103
   
88
 
Accrued liabilities
   
522
   
375
 
Total current liabilities
   
6,930
   
3,034
 
 
         
Long-term accounts payable (note 6)
   
686
   
 
Deferred income tax
   
475
   
223
 
Deferred remmittance tax
   
1,104
   
714
 
Pension plan (note 7)
   
   
35
 
Total liabilities
   
9,195
   
4,006
 
Partners’ equity (note 8)
   
9,880
   
9,467
 
Total liabilities and Partners’ equity
 
$
19,075
   
13,473
 
See accompanying notes to financial statements.
(Continued)


23


ARGOSY ENERGY INTERNATIONAL, LP
Statements of Cash Flows
Years ended December 31, 2005 and 2004
(Expressed in thousands of US dollars)
 
 
 
2005
 
2004
 
Cash flows from operating activities:
         
Net income
 
$
5,217
   
1,925
 
Adjustments to reconcile net income to net cash provided by operating activities:
         
Depreciation, depletion and amortization
   
697
   
357
 
Bad debt allowance
   
116
   
239
 
Deferred income tax
   
352
   
245
 
Deferred remittance tax
   
353
   
146
 
Pensions
   
24
   
59
 
Changes in assets and liabilities:
         
Accounts receivable
   
(1,669
)
 
(191
)
Inventories
   
(373
)
 
339
 
Accounts payable
   
2,620
   
1,245
 
Tax payable
   
500
   
716
 
Employee benefits
   
15
   
28
 
Accrued liabilities
   
147
   
102
 
Deferred income tax
   
(100
)
 
(4
)
Deferred remmittance tax
   
37
   
58
 
 
         
Net cash provided by operating activities
   
7,936
   
5,264
 
 
         
Cash flows from investing activities:
         
Increase in long term investments
   
(65
)
 
(70
)
Additions to property, plant and equipment
   
(4,197
)
 
(748
)
 
         
Net cash used in investing activities
   
(4,262
)
 
(818
)
 
         
Cash flows used in financial activities - Redemption of partnership interest - Aviva Overseas Inc.
   
(3,504
)
 
 
 
         
Net increase in cash and cash equivalents
   
170
   
4,446
 
Cash and cash equivalents at beginning of year
   
6,954
   
2,508
 
 
         
Cash and cash equivalents at end of year
 
$
7,124
   
6,954
 
See accompanying notes to financial statements.
(Continued)
 
24

 
ARGOSY ENERGY INTERNATIONAL, LP
Statements of Partners’ Equity
Years ended December 31, 2005 and 2004
(Expressed in thousands of US dollars)
 
   
Limited 
 
General 
 
Total 
 
   
partners’ 
 
partners’ 
 
partners’ 
 
   
capital 
 
capital 
 
equity 
 
Balance as of December 31, 2003
 
$
7,504
   
38
   
7,542
 
 
             
Net income
   
1,915
   
10
   
1,925
 
 
             
Balance as of December 31, 2004
   
9,419
   
48
   
9,467
 
 
             
Net income
   
5,180
   
37
   
5,217
 
 
             
Redemption of partnership interest -
             
Aviva Overseas Inc. (note 6)
   
(4,789
)
 
(15
)
 
(4,804
)
Balance as of December 31, 2005
 
$
9,810
   
70
   
9,880
 
See accompanying notes to financial statements.
(Continued)
 
25

 
ARGOSY ENERGY INTERNATIONAL, LP
Notes to Financial Statements
December 31, 2005 and 2004
(Expressed in thousands of US dollars)

(1) Business Activities
 
Argosy Energy International, LP is a Utah (USA) Limited Partnership, which established a Colombian Branch in 1983.
 
Argosy Energy International, LP is engaged in the business of exploring for, developing and producing oil and gas. The principal properties and operations are located in Colombia, which are carried out through its Colombian Branch in the Putumayo, Cauca, Tolima and Cundinamarca Provinces. The oil production is sold to Empresa Colombiana de Petróleos, the Colombian National Oil Company, (“Ecopetrol”).
 
There are risks involved in conducting oil and gas activities in remote, rugged and primitive regions of Colombia. The guerrillas have operated within Colombia for many years and expose the Company’s operations to potentially detrimental activities. The guerrillas are present in the Putumayo and Río Magdalena areas where the Company’s properties are located. Since 1998, the Company has only experienced minor attacks on pipelines and equipment.
 
Operations
 
As of December 31, 2005, Argosy was participating in the following Association Contracts signed with Ecopetrol and Exploration and Exploitation Contracts signed with the Hydrocarbons National Agency - ANH.
 
Contract
 
Participation
 
 
Operator
 
Phase
Santana
 
 
35
%
 
ARGOSY
 
Exploitation
Guayuyaco
 
 
70
%
 
ARGOSY
 
Exploitation
Aporte Putumayo
 
 
100
%
 
ARGOSY
 
Abandonment
Río Magdalena
 
 
70
%
 
ARGOSY
 
Exploration
Talora
 
 
20
%
 
ARGOSY
 
Exploration
Chaza
 
 
50
%
 
ARGOSY
 
Exploration
 
The first four contracts have been signed with ECOPETROL and the last two with ANH.
 
An association contracts are those where the Government participate as partner of the field through the national oil company — ECOPETROL.
 
Exploration and production contracts (E&P) are those signed with the ANH — “Agencia Nacional de Hidrocarburos” (National Agency for Hydrocarbons) in which the Government only receive royalties and taxes for the rights of exploration and production but there is not a participation from the national oil company - ECOPETROL or any other government entity.
 
(Continued)
 
26

 
ARGOSY ENERGY INTERNATIONAL, LP
Notes to Financial Statements

The main terms of the above-mentioned contracts are as follows:
 
Santana Association Contract
 
On May 27, 1987 (effective date July 27, 1987), Argosy Energy International, LP signed this association contract to explore for and produce oil, in the area called Santana. The contract is in its 19th year and the Company reduced the area to a 5 kilometer reserve area around each field. The remaining contract area is approximately 1,100 acres.
 
Under the terms of the contract with Ecopetrol, a minimum of 25% of all revenues from oil sold to Ecopetrol is paid in Colombian pesos, which may only be utilized in Colombia. However, this proportion can be modified through parties agreement.
 
Aporte Putumayo - Association Contract
 
The Aporte Putumayo area has been returned to the Government. Such devolution is subject to the approval of the environmental restoration of the region by the Ministry of Environment and the treatment of the abandonment of the wells agreed with Ecopetrol and the Ministry of Mines.
 
Río Magdalena Association Contract
 
On December 10, 2001 (effective date February 8, 2002), Argosy Energy International, LP and Ecopetrol signed this Association Contract, to explore and produce oil, in the area called Río Magdalena of approximately 145,000 acres, located in the Middle Magdalena region of Colombia in the provinces of Cundinamarca and Tolima.
 
The contract has a maximum duration of 28 years distributed as follows: an exploration period of 6 years and a production period of 22 years starting on the date of termination of the exploration period. The exploratory well, Popa-1 was drilled during June and July and is on the completion stage.
 
Upon finalization of each phase, Argosy has the option to cancel the contract having previously completed the obligations agreed for each phase.
 
BT Letter Agreement
 
On February 27, 2001 Argosy Energy International, LP signed a letter agreement with BT Operating Company for the acquisition and management of the Río Magdalena Exploration Area. BT and Argosy mutually agreed to pay their 50% share of costs under the terms of the Ecopetrol Association contract and provide certain services toward management and compliance of the obligations. As of December 31, 2005 BT had not met their obligations under this agreement and outstanding accounts receivable of $355 related to their share of costs related to the Río Magdalena Association Contract were provisioned as bad debts.
 
(Continued)
 
27

 
ARGOSY ENERGY INTERNATIONAL, LP
Notes to Financial Statements
 
Guayuyaco Association Contract
 
On August 2, 2002 (effective date September 30, 2002) Argosy Energy International, LP signed this association contract with Ecopetrol, to explore and produce oil, in the area named Guayuyaco. This Association contract gives Argosy the right to explore potential reserves in prospects adjacent to the existing Santana oil field. The block is located in the Putumayo and Cauca provinces and covers approximately 52.000 acres originally held under the Santana Risk Sharing Agreement.
 
The Guayuyaco contract has a maximum duration of 27.5 years with an exploration period of 5.5 years and a production period of 22 years, which starts upon termination of the exploration period.
 
Argosy has the obligation of carry out the exploration work in two phases, which were completed. In the first phase, the Branch drilled the Inchiyaco -1 exploration well which was successful. During the second exploration phase, two wells were drilled, Guayuyaco-1 and Guayuyaco-2, which were successful. Therefore, on December 28, 2005, Ecopetrol accepted the Commerciality of the field.
 
Solana Petroleum Exploration Commercial Agreement
 
Argosy and Solana Petroleum Exploration entered into a commercial agreement in 2003 whereby, Solana through fulfillment of certain obligations could earn a participating interest in the Inchiyaco Prospect and have an option to enter the next exploration prospect under the Guayuyaco Association Contract. Inchiyaco-1 was drilled and completed as a producing well in 2003 resulting in Solana’s sharing 26.21% interest in Argosy’s net share of the prospect.
 
The commercial agreement was revised in 2004, giving Solana the right to share a 50% interest in Argosy’s net share of the Guayuyaco association contract by paying 66.7% of two exploratory wells (Guayuyaco-1 and Juanambu-1) and 50% for a new seismic program and additional projects.
 
Talora Exploration and Exploitation Contract
 
On September 16, 2004, (effective date), Argosy and the National Hydrocarbons Agency (ANH) signed the Talora exploration and exploitation contract to explore and produce oil, in an area of approximately 108,000 acres located in Tolima and Cundinamarca Provinces.
 
The contract has a maximum duration of 30 years with an exploration period of 6 years and a production period of 24 years, which starts upon the date in which Argosy receives the oil field commerciality declaration from ANH.
 
(Continued)
 
28

 
ARGOSY ENERGY INTERNATIONAL, LP
Notes to Financial Statements
Contractual Commitments:
 
 
Starting
 
 
Phase
 
date
 
Obligations
3
 
December 16, 2006
 
One exploratory well.
4
 
December 16, 2007
 
One exploratory well.
5
 
December 16, 2008
 
One exploratory well.
6
 
December 16, 2009
 
One exploratory well.

The contract may be relinquished at the end of each phase after fulfillment of the agreed obligations.
 
Chaza Exploration and Exploitation Contract
 
On June 27, 2005 (effective date) Argosy and the National Hydrocarbons Agency (ANH) signed the Chaza exploration and exploitation contract to explore and produce oil, in an area of approximately 80,000 acres located in Putumayo and Cauca Provinces.
 
The contract has a maximum duration of 30 years with an exploration period of 6 years and a production period of 24 years, which starts upon the date in which Argosy receives the oil field commerciality declaration from ANH.
 
The ANH Resolution 0217, dated September 13, 2005, approved the 2005 assignment of 50% interest of the contract to Solana Petroleum Exploration.
 
Contractual Commitments:
 
 
 
 
 
 
 
Starting
 
 
Phase
 
date
 
Obligations
2
 
June 27, 2006
 
One exploratory well.
3
 
June 27, 2007
 
One exploratory well.
4
 
December 16, 2008
 
One exploratory well.
5
 
December 16, 2009
 
One exploratory well.
6
 
December 16, 2010
 
One exploratory well.
The contract may be relinquished at the end of each phase after fulfillment of the agreed obligations.
(Continued)
 
29

 
ARGOSY ENERGY INTERNATIONAL, LP
Notes to Financial Statements

(2) Summary of Significant Accounting Policies and Practices
 
  (a) Foreign Currency Translation
 
The transactions and accounts of the Company’s operations denominated in currencies other than US dollars are re-measured into United States dollars in accordance with Statement of Financial Accounting Standards FAS 52. The United States dollar is used as the functional currency. Exchange adjustments resulting from foreign currency balances are recognized in expense or income in the current period.
 
  (b) Cash Equivalents
 
Cash equivalents are highly liquid investments purchased with an original maturity of three months or less.
 
  (c) Inventories
 
Inventories consist of crude oil and materials and supplies and are stated at the lower of cost or market.
 
  (d) Property, Plant and Equipment
 
The Company follows the full cost method to account for exploration and development of oil and gas reserves whereby all productive and nonproductive costs are capitalized. The only cost center is Colombia. All capitalized costs plus the undiscounted future development costs of proved reserves are depleted using the unit of production method based on total proved reserves applicable to the country.
 
Proved oil and gas reserves are the estimated quantities of crude oil that geological and engineering data demonstrate with reasonable certainty can be recovered in future years from known reservoirs under existing economic and operating conditions considering future production and development costs.
 
Costs related to initial exploration activities with no proved reserves are initially capitalized and periodically evaluated for impairment. The Company capitalizes internal costs directly identified with exploration and development activities. The net capitalized costs of oil properties are subject to a ceiling test, which limits such pooled costs to the aggregate of the present value of future net revenues attributable to proved oil and gas reserves discounted at 10% plus the lower of cost or market value of unproved properties. If capitalized costs exceed this limit, the excess is charged to expense and reflected as additional accumulated depreciation, depletion and amortization.
 
30

 
ARGOSY ENERGY INTERNATIONAL, LP
Notes to Financial Statements

While the quantities of proved reserves require substantial judgment, the associated prices of oil reserves that are included in the discounted present value of our reserves are objectively determined. The ceiling test calculation requires use of prices and costs in effect as of the last day of the accounting period, which are generally held constant for the life of the properties. As a result, the present value is not necessarily an indication of the fair value of the reserves. Oil and gas prices have historically been volatile and the prevailing prices at any given time may not reflect our Partnership’s or the industry’s forecast of future prices.
 
Gain or loss on the sale or other disposition of oil and gas properties is not recognized, unless the gain or loss would significantly alter the relationship between capitalized costs and proved reserves of oil and gas attributable to a country.
 
Support equipment and facilities are depreciated using the unit of production method based on total reserves of the field related to the support equipment and facilities.
 
  (e) Environmental Liabilities and Expenditures
 
Argosy accrues for losses associated with environmental remediation obligations when such losses are probable and can be reasonably estimated. These accruals are adjusted as further information develops or circumstances change. Costs of future expenditures for environmental remediation obligations are not discounted to their present value.
 
  (f) Asset Retirement Obligations
 
Liability for asset retirement obligation is considered to be negligible at this time, based on projected production profiles, expiry dates and terms of the Association Contracts for current operations. However, the Company has accrued the costs related to environmental remediation and abandonment of the wells belonging to Aporte Putumayo Contract.
 
  (g) Concentration of Credit Risks
 
All of the company’s production is sold to Ecopetrol in which the sale price is agreed between both parts, according to local regulations in Colombia.
 
  (h) Income Taxes
 
Deferred Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis and operating loss.
 
31

 
ARGOSY ENERGY INTERNATIONAL, LP
Notes to Financial Statements
 
Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.
 
  (i) Financial Instruments Fair Value
 
The carrying amounts of cash and cash equivalents approximate fair value because of the short maturity of those instruments. The carrying value of other on-balance-sheet financial instruments, approximates fair value, and the cost, if any, to terminate off-balance-sheet financial instruments is not significant.
 
  (j) Employee Benefits
 
The Company recognizes the obligations with its employees in accordance with the current Colombian labor law. These obligations include the severance indemnity and the legal service bonus each one equivalent to a monthly salary per year and interest on severance at the rate of 12% on the balance of severance indemnities paid. The relevant liability for these two concepts is shown under the “Employee benefits” account as current liabilities at the closing of the period.
 
  (k) Defined Benefit Pension Plan
 
The Company has a defined benefit pension plan covering one employee. The benefits are based on years of service, age and the employee’s compensation. Currently, the cost of this program is not being funded. The actuarial study is performed at the end of each year in accordance with the guidelines established by FAS 87.
 
  (l) Use of Estimates
 
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements and reported amounts of revenues and expenses during the reporting period.
 
  (m) Revenue Recognition
 
The Company recognizes revenue when the crude oil is delivered to Ecopetrol.
 
Ecopetrol pays the oil sales invoicing 25% in local currency and the 75% in US Dollars, according to the terms of the Oil Sales Contract executed between Ecopetrol and Argosy, through which the oil sale price is fixed, with expiration dated November 1, 2006.
 
32


ARGOSY ENERGY INTERNATIONAL, LP
 
Notes to Financial Statements
 
(n) Management Fee
 
The Company accounts for the management fees received from its partners as operator of the contracts as a less value of the operating costs.
 
(o) Comprehensive Income
 
For each period presented in the accompanying statements of income, comprehensive income and net income are the same amount.
 
(3) Cash and Cash Equivalents
 
The following is a summary of cash and cash equivalents as of December 31:
 
   
2005 
 
2004 
 
Held in United States dollars
 
$
6,329
   
6,454
 
Held in Colombian pesos
   
394
   
185
 
Short-term investments
   
401
   
315
 
   
$
7,124
   
6,954
 
(4) Accounts Receivable
The following is a summary of accounts receivable as of December 31:
 
   
2005 
 
2004 
 
Trade
 
$
675
   
81
 
B.T. Río Magdalena Agreement
   
355
   
239
 
Vendor advances
   
172
   
60
 
Solana joint account
   
   
324
 
Other
   
104
   
119
 
 
   
1,306
   
823
 
Less allowance for bad debts
   
(355
)
 
(239
)
   
$
951
   
584
 
(5) Property, Plant and Equipment
 
The following is a summary of property, plant and equipment as of December 31:
 
 
 
2005
 
2004
 
Oil properties:
         
Unproved
 
$
3,622
   
2,312
 
Proved
   
59,096
   
56,218
 
 
   
62,718
   
58,530
 
Less accumulated depreciation, depletion, and amortization
   
53,695
   
53,007
 
   
$
9,023
   
5,523
 
 
33

 
ARGOSY ENERGY INTERNATIONAL, LP
Notes to Financial Statements

Capitalized Cost Unproved
Excluded From the Capitalized Cost Being Amortized
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Month
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Anticipated
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
to be
 
 
 
 
 
 
Exploration