Overview

Harvest Natural Resources, Inc. (NYSE-HNR) is primarily focused on the acquisition and development of previously discovered oil and gas fields with low geologic risk in countries where the broad perception of political risk constrains competition.



We have operated in Venezuela since 1992 through Harvest Vinccler, S.C.A. (Harvest Vinccler), our 80 percent owned Venezuelan subsidiary. Harvest Vinccler operates the South Monagas Unit (SMU) in Venezuela under the terms of an operating service agreement (OSA) with Petroleos de Venezuela S.A. (PDVSA). SMU includes the Uracoa, Bombal and Tucupita fields. In 2005, the government of Venezuela pronounced that all OSAs must be converted to mixed companies in which the Venezuelan government would own a controlling interest. On March 31, 2006, Harvest Vinccler signed a Memorandum of Understanding (MOU) with PDVSA Petroleo, S.A. (PPSA) and Corporacion Venezolana del Petroleo S.A. (CVP), both affiliates of PDVSA, to convert our contractual arrangement governed by the OSA into a mixed company. The MOU contemplated several steps to be completed to finalize the conversion including:


- Finalization of additional consideration in exchange for Harvest contributing all of its tangible assets, contracts, permits and rights to the SMU fields to Petrodelta

- Approval of the conversion contract by our Board of Directors

- Approval of the conversion by the Harvest stockholders

- Receipt of Venezuelan government approvals


The MOU included a draft form of the conversion contract which defined the terms and conditions of the migration to the mixed company, the mixed company charter and the mixed company by-laws. These documents provide that upon completion of the conversion:


- Harvest and CVP will form a company called Petrodelta S.A. (Petrodelta) in which an 80 percent owned affiliate of Harvest will own 40 percent and CVP will own the remaining 60 percent. Consequently after the conversion, Harvest will own a net 32 percent of Petrodelta. An affiliate of our Venezuelan partner will indirectly own a net 8 percent of Petrodelta;

- There will be an adjustment between the parties to obtain the same economic result as if the conversion had been completed on April 1, 2006;

- Petrodelta will operate the properties under a 20-year grant from the Venezuelan government;

- Oil and gas produced will be sold to PPSA under a long-term contract;

- Petrodelta's production will incur a one-third royalty;

- The income tax rate applicable to Petrodelta will be 50 percent.


On August 16, 2006, the parties amended the MOU to provide for the addition of the Isleño, Temblador and El Salto fields to Petrodelta as additional consideration for our conversion to the OSA to Petrodelta. The Isleño, Temblador and El Salto fields are close in proximity to and geologically similar to the SMU fields. We previously completed field development studies for each field. Upon execution of the conversion contract, Petrodelta will engage in the exploration, production, gathering, transportation and storage of oil and gas from the SMU fields as well as the Isleño, Temblador and El Salto fields.


In 2005, the SENIAT, the Venezuelan tax authority, asserted substantial tax claims against Harvest Vinccler. In 2006, Harvest Vinccler resolved and substantially paid all of the tax claims made by the SENIAT. Harvest Vinccler paid $73.8 million, $59 million net to our 80 percent interest, additional taxes and related interest for the periods of 2001 through the first quarter of 2006. The additional taxes were primarily due to a retroactive tax rate increase imposed by the SENIAT.


On December 18, 2006, the stockholders of Harvest Natural Resources, Inc. approved the conversion of our Venezuelan operating service agreement to Petrodelta.


In connection with the preparation of the proxy statement to obtain the approval of our stockholders to enter into the conversion contract, Harvest Vinccler retained an independent engineering firm to estimate its share of Petrodelta's reserves as of April 1, 2006. Based on their estimates, Petrodelta will have proved reserves of 210 million barrels of oil equivalent, or 45 million barrels equivalent net to our 32 percent interest after the one-third royalty.


Harvest Vinccler and CVP have agreed upon a business plan to develop and operate the six fields. It envisions rapid development of the proved reserve base as well as the appraisal and development of the numerous opportunities associated with the new fields. The intent is to build production quickly with an early focus on the SMU fields. The business plan calls for two drilling rigs and one workover rig to begin drilling in the SMU fields and a third drilling rig and a second workover rig for the three new fields. In addition, the business plan calls for the shooting of three-dimensional seismic over the Isleño and a portion of the El Salto fields. The 3D seismic currently available over the Temblador field and a portion of the El Salto field will be reprocessed.


The Venezuelan National Assembly approved the formation of Petrodelta and the direct award of the Isleņo, Temblador and El Salto fields to Petrodelta on June 5, 2007. Harvest and CVP signed the conversion contract on September 11, 2007. Pursuant to the conversion contract, HVSCA will transfer all of its rights under its operating service agreement and its operating assets to Petrodelta upon formation of Petrodelta and the receipt of a transfer decree. The transfer decree will establish the rights to develop the Urocoa, Tucupita and Bombal fields, operated by HVSA since 1992 and the Isleno, Temblador and El Salto fields recently assigned to Petrodelta by the Venezuelan Government. Upon receipt of a transfer decree from the Venezuelan government, the conversion process will be complete. After conversion, our business in Venezuela will be more substantial and should play to our technical and operational strengths.