Petro One Energy Corp CUDBF

One little detail... (Fixed for the formatting foul up).

[GreatSwami]

...that has always bothered me about the deal POP signed with the Koreans. It was a niggly little detail that has knawed away for some time now - and this morning I finally twigged what it was. A Eureka moment if you like.

To explain it I must tell a little story and this story comes from the game of chess. There is often a point in some locked appearing positions where there is no evident weakness on one side or the other and one of the players makes what is termed a "quiet move." These quiet moves seemingly waste a whole game "tempo" and perhaps give an advantage in time to the opponent - and so you do not expect the when they happen and you think it was a mistake.

Typically the so called "quiet move" involves a very subtle repositioning of the King - but it could be some other seemingly irrelevent or "odd" move involving a very slight repositioning of one of the other major pieces - the queen or a rook perhaps?

However this quiet move occurring right in a seemingly locked and equitable struggle for dominance is often the key winning move. The person making the move has looked very deeply into the future likely unfolding of the power struggle and has identified a weakness that must first be corrected before the decisive attacking sequence can begin. First take care of that vulnerability and then go for the jugular...

What has this story to do with POP and the Koreans? I shall now try to explain. The "quiet move" in all of this is this whole bit about the offloading of any well abandonment liabilities to the Koreans. When I saw this bit of boilerplate in the original agreement it disturbed me but I did not quite understand why it did? After all if all the wells that are planned to be drilled on these properties are going to be long term and hugely economic success stories - why even bother trying to shed these abandonment liabilities in the first place? The present value of these very distant events is negligable and any decent well can have funds put aside from production to cover off against those liabilities.

The logical way to have written up the JV or Farm In agreement would have been to have the abandonment liabilities apportioned to each party according to the ownership position of that well at any given time. For POP this would be a 35% liability BPO (before payout) and a 50% liability APO (after payout). But truly for either party involved these liabilities would be a "non-event" since neither company would likely still be around as operator at the time of such abandonment.

I noticed the way this part of the agreement was written and how POP had basically disowned any abandonment liability whatsoever (to all intents and purposes). The Koreans had (very foolishly) agreed to pay for these 100% in almost all cases. It irritated me at the time and it took a while to understand just why it irritated me. I play chess and I have felt the sting of some of these so called "quiet moves" - seemingly innocuous things that you don't think mean anything too significant at the time but which (often too late) you come to realise were the single most important move of the whole game.

This is extremely important as to any person with any brains once you have seen it (like that winning quiet move in a heated chess battle) you suddenly realise its significance! What is that significance here you ask? Its significance is simply this:

The only reason that this clause is in the agreement at all is because the folks who drew this up on behalf of POP understand precisely that none of their wells will ever be long lived nor hugely economic - none of them will likely reach payout!!! (Triple exclamation mark meaning the same as it means in standard chess notation).

Let me repeat that as it stunned me when I (belatedly) understood exactly what it signified. The management of Petro One know without a shadow of any doubt that their planned wells cannot have a snowballs chance in hell of paying out... That lack of confidence (in their own wells) is the key reason why they included that clause shedding the abandonment liabilities on to the Korean KMDC's shoulders! There is no other reason for it being in there and no sane Western Canadian partner would dream of signing such a deal!

That is what has been niggling me for a few weeks here now. It comes form having played chess and seen this pattern before - but failing to understand its meaning at first blush.

Why did the Koreans accept this clause if it is so bad? Two reasons I suppose - they have little history of doing these kinds of deals in a country like Canada that actually has rules about these kinds of environmental things. Most places in the World you just leave the wells for others to pay for the clean ups - you simply socialise the costs while privitising the profits - just like our good friends down south would like to see more of.

The second reason - if they (The Koreans with KDMC) skimmed over the rigours of proper due diligence they would have come to the simple conclusion that again - if these wells are going to be so wildly productive they can afford these costs, and if they are very long life producing wells - then they do not have to worry about them as by then the ownership will most likely have changed hands and these things are (or will become) someone elses problem.

Eureka - when the mists finally clear - you can see for effing miles...

Now I understand! Now it all makes sense. I realise that for most reading this it will seem just a little arcane and oblique and that perhaps the Great One has completely lost it? But for those that truly have the eyes to see here and the ears to hear - this little story speaks eloquently and these words do not shout they positively scream...

What do I say about the Koreans for having signed off on all this? Again I will defer to standard chess notation. Their failure to understand fully the impact and implications of this "quiet phrase" in the negotiation statement and their having not excised it from the final document deserves a simple???

Three question marks in a row in standard chess notation signifies a serious and fatal blunder - it means that the Grandmaster in question was asleep at the time the move was made and quite simply did not see it coming! The three exclamation marks? That of course is used to highlight an absolutely brilliant and unexpected move - the game crusher if you like.

As I have said before - the deal as written is brilliant for POP. It simply sucks for the Koreans who of all people really wish to look smart and save face after the past debacle. And yet here they are being taken to the cleaners by one of the slickest teams on the Planet!!!

I hope that this short story has been useful and instructive to those who are paying attention here? Myself I remain absolutely stunned that this did not become clear to me far sooner. I am slipping in me old age...

As they say when a group has gathered somewhere to discuss some business and you do not know who the "Mark" is within the first few seconds - you are that Mark!

GS