Petro Andina Resources Inc.

Petro Andina Resources Inc.

December 11, 2008 09:37 ET

Petro Andina Analyzes Impact of Petroleo Plus Program

CALGARY, ALBERTA--(Marketwire - Dec. 11, 2008) - Petro Andina Resources Inc. (TSX:PAR) -

On Thursday, December 4, 2008, the Government of Argentina published Resolution 1312/2008 putting into effect the Petroleo Plus Program (the Program) previously established by way of Decree No. 2014/2008.

The stated intent of this Program is to increase oil reserves, grow oil production and resume exports of petroleum from the country. This is consistent with other recent Argentine government policy changes aimed at increasing energy security and export revenues. Oil and gas production in Argentina has been subject to export taxes since May 2002 and capped prices (controlled pricing) since November 2007. Petro Andina refers you to the third quarter 2008 Management, Discussion and Analysis (MD&A) for a description of the Argentine oil pricing regime. The export tax has detached the local oil and natural gas markets from world prices, and is widely viewed as the primary cause for reduced investment in oil and gas projects and the resultant steep decline in oil and natural gas production since then. The government of Argentina's stated intent of the Program is to reverse that decline in oil production. If this is achieved, it is anticipated that domestic pricing will move more in-line with world market reference prices and quality differentials.

The policy implements a system of fiscal credits to be calculated on two, mutually exclusive, performance-based criteria: 1) production growth and 2) replacement of total proved reserves, both over an established baseline calculation of production additions and reserve replacement detailed in the resolution. The fiscal credits are intended to be applied against export taxes. In the government's presentation of the program, it was specified that qualifying companies could use the credits directly against export taxes or trade them to third party exporters, such as refiners, for their nominal face value.

The Program is effective October 1, 2008 and fiscal credits will be awarded quarterly to companies meeting the criteria on a "look back" basis. Petro Andina Resources Inc. (TSX:PAR) (Petro Andina or the Company) will qualify for the production growth component of the Program for 2008, based on performance to date in 2008 and continuing to year-end. The Company appears likely to qualify for the production component of the Program at current or higher production levels for 2009, and should the Company achieve its 2009 production guidance it also expects to qualify for 2010. In respect of the total proved reserves growth component, the Company anticipates that it will qualify for 2008 and for 2009 subject to total proved reserves targets being achieved.

In the table below, Petro Andina has estimated the impact of each of the components of the Program on a US$ per barrel basis before income tax and has provided the forecast 2009 funds flow from operations under three price sensitivities. The estimates of funds flow from operations under the Program are compared to the Company's 2009 funds flow from operations guidance as presented in the third quarter 2008 MD&A. These cases assume that the Company qualifies under both components of the Program and will realize incremental value from both increasing reserves and increasing production over the 2008 established baselines. Further, in all three price scenarios, a key assumption is that the Company achieves its Argentine oil production guidance for 2009 as the Program allocates more credits to achieving incremental production than to maintaining baseline production.

The benefit of the Program to the Company for 2008 is estimated to be in excess of US$5 million dollars before tax for the production growth component. The reserves growth component impact will be determined upon the government communicating how it intends to apply the October 1, 2008 effective date vis-a-vis the calculation of the reserves replacement component.

Material assumptions used in the calculation of the 2009 funds flow from operations estimates under the Program are unchanged from those used in the Company's guidance previously provided in the third quarter 2008 MD&A. However, the Company has reflected in the three WTI price sensitivity cases that post implementation of the Program there is a possibility that realized oil quality differentials in Argentina may trend toward world oil quality differentials.

Estimated 2009 Funds Flow Impact
US$ thousands, except for per
barrel amounts Original
WTI = 60.90
Mid point of
WTI = 60.9 WTI = 45 WTI = 75 guidance

Petroleo Plus Production Impact,
US$ per barrel $ 6.67 $ 4.97 $ 9.18 -
Petroleo Plus Reserves Impact,
US$ per barrel $ 2.95 $ 2.24 $ 4.64 -
Funds flow from Operations 175,000 122,000 195,000 140,000

Petro Andina notes that historically when WTI exceeded US$60.90 per barrel the export tax was applied on all additional price increases. This price point is an apparent hinge in the calculation of the production component impact under the Program. At world prices below US$60.90 per barrel the fiscal credits are calculated at 70 percent of the export tax that would be payable. At world prices greater than US$60.91 per barrel the fiscal credit calculation is reduced to 55 percent of the export tax that would be payable. Thus, under Petro Andina's understanding of the Program as presented, at world prices between US$60.91 per barrel and approximately US$65.50 per barrel, the formula calculation for the production component results in a lower incremental impact than if prices had remained at between $US58 and US$ 60.90 per barrel.

The impact of the fiscal credits realized under the application of the program will be fully taxable; however royalties or turn-over taxes will not be applied to the incremental benefit realized under the Program.

Due to the timing of receiving the credits and then selling them, the Company estimates that there may be a lag in recognizing the full effect of the program in excess of normal Argentine industry trade receivable terms.

If oil remains at or near the US$45 level for an extended period of time, Petro Andina has determined that it has the flexibility to reduce development expenditures by approximately 10 percent in 2009 if necessary without impacting 2009 production guidance. In doing so, the Company anticipates that it will remain cash flow positive and will not require access to incremental sources of capital.

The information provided herein represents the Company's understanding of the program as officially published. The official resolution in Spanish can be accessed on the Argentine Ministry of Economy and Public Finances website located at:

The Petroleo Plus Resolution explicitly states that the Federal Minister of Planning and Public Investment retains complete discretion regarding the qualification under and the application of the program. Petro Andina gives no assurance nor makes any representations or warranty that the expectations conveyed by the Company's interpretation of this Program will prove to be correct and actual results may differ materially from those anticipated in the calculations provided in this press release. Petro Andina undertakes no obligation to publicly update or revise any the information communicated herein.

About Petro Andina Resources Inc.

Petro Andina is engaged in the exploration for and development and production of oil and natural gas in South America and the Caribbean. The Corporation is continuing to develop its existing reserves and to conduct appraisal and exploration drilling on its 628,000 acre (346,000 acre net) land position in the Neuquen basin of Argentina. Petro Andina is headquartered in Calgary, Canada.

This news release does not constitute an offer to sell securities, nor is it a solicitation of an offer to buy securities, in any jurisdiction. All sales will be made through registered securities dealers in jurisdictions where the offering has been qualified for distribution. The securities offered are not, and will not be, registered under the securities laws of the United States of America, nor any state thereof and may not be sold in the United States of America absent registration in the United States or the availability of an exemption from such registration.

Forward-Looking Statements

Certain statements regarding Petro Andina Resources Inc., including management's assessment of future plans and operations, may constitute forward-looking statements under applicable securities laws and necessarily involve known and unknown risks and uncertainties, most of which are beyond Petro Andina's control. These risks may cause actual financial and operating results, performance, levels of activity and achievements to differ materially from those expressed in, or implied by, such forward-looking statements.

Such risks and uncertainties include, but are not limited to: the impact of general economic conditions in Canada, Argentina and Trinidad and Tobago, industry conditions including changes in laws and regulations including adoption of new environmental laws and regulations, and changes in how they are interpreted and enforced, in Canada, Argentina and Trinidad and Tobago, competition, the lack of availability of qualified personnel, fluctuations in commodity prices, the results of exploration and development drilling and related activities, imprecision in reserve estimates, the production and growth potential of Petro Andina's assets, fluctuations in foreign exchange or interest rates, the ability to access sufficient capital from internal and external sources, and obtaining required approvals of regulatory authorities, in Canada, Argentina and Trinidad and Tobago. Many of these risk factors are discussed in further detail in the Corporation's Annual Information Form dated March 28, 2008 on file with Canadian securities commissions. Readers are also referred to the risk factors described in other documents that Petro Andina files from time to time with securities regulatory authorities.

Accordingly, Petro Andina gives no assurance nor makes any representations or warranty that the expectations conveyed by the forward-looking statements will prove to be correct and actual results may differ materially from those anticipated in the forward-looking statements. Petro Andina undertakes no obligation to publicly update or revise any forward-looking statements.

Non-GAAP Terms

Funds flow from operations and operating netback per barrel are used in this document, but do not have any standardized meaning under generally accepted accounting principles (GAAP) and may not be comparable to similarly defined measures presented by other companies. Funds flow from operations includes all cash generated from operating activities and is calculated before changes in non-cash working capital. Funds flow from operations is reconciled with net earnings in the Consolidated Statements of Cash Flows. Funds flow per share is calculated by dividing funds flow from operations by the weighted average number of shares outstanding. Operating netback per barrel equals sales revenue, less royalties, production expenses, and transportation expenses, divided by total equivalent sales volumes. Management uses these non-GAAP measures for its own performance measurement and to provide its shareholders and investors with additional measurement of the Company's efficiency and its ability to fund a portion of its future growth expenditures.

The Toronto Stock Exchange has not received and does not accept responsibility for the adequacy or accuracy of this news release.

Contact Information

  • Petro Andina Resources Inc.
    Melesia Kasha
    Investor Relations
    (403) 237-1700
    (403) 265-8216 (FAX)
    Petro Andina Resources Inc.
    Kenneth G. Pinsky
    Vice President, Finance and Chief Financial Officer
    (403) 517-1729
    (403) 265-8216 (FAX)