10-K
1
form10-k.htm
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-K
(Mark
One)
For
the Fiscal Year Ended December 31, 2020
For
the transition period from to
Commission
File No. 1-32955
HOUSTON
AMERICAN ENERGY CORP.
(Exact
name of registrant specified in its charter)
801
Travis Street, Suite 1425, Houston, Texas 77002
(Address
of principal executive offices)(Zip code)
Issuer’s
telephone number, including area code: (713) 222-6966
Securities
registered pursuant to Section 12(b) of the Act:
Title of each class Trading Symbol Name of each exchange on which registered
Common Stock, $0.001 par value HUSA NYSE American
Securities
registered pursuant to Section 12(g) of the Act:
None
(Title
of Class)
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes [ ]
No [X]
Indicate
by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Exchange Act. Yes [ ]
No [X]
Indicate
by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such
reports); and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ]
Indicate
by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant
to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that
the registrant was required to submit such files). Yes [X] No [ ]
Indicate
by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting
company or an emerging growth company. See definition of “accelerated filer,” “large accelerated filer,”
“smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer [ ] Accelerated filer [ ] Non-accelerated filer [X]
Smaller reporting company [X] Emerging growth company [ ]
If
an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for
complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. [ ]
Indicate
by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness
of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered
public accounting firm that prepared or issued its audit report. [ ]
Indicate
by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [ ]
No [X]
The
aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant on June 30, 2020, based
on the closing sales price of the registrant’s common stock on that date, was approximately $10.7 million. Shares of common
stock held by each current executive officer and director and by each person known by the registrant to own 10% or more of the
outstanding common stock have been excluded from this computation in that such persons may be deemed to be affiliates.
The
number of shares of the registrant’s common stock, $0.001 par value, outstanding as of March 29, 2021 was 9,923,338.
DOCUMENTS
INCORPORATED BY REFERENCE
Portions
of the Company’s Proxy Statement for its 2021 Annual Meeting are incorporated by reference into Part III of this Report.
TABLE
OF CONTENTS
Page
PART I
Item 1. Business 3
Item 1A. Risk Factors 14
Item 1B. Unresolved Staff Comments 25
Item 2. Properties 25
Item 3. Legal Proceedings 25
Item 4. Mine Safety Disclosures 25
PART II
Item 6. Selected Financial Data 26
Item 7A. Quantitative and Qualitative Disclosures About Market Risk 35
Item 8. Financial Statements and Supplementary Data 35
Item 9A. Controls and Procedures 35
Item 9B. Other Information 35
PART III
Item 10. Directors, Executive Officers, and Corporate Governance 36
Item 11. Executive Compensation 36
Item 14. Principal Accountant Fees and Services 36
PART IV
Item 15. Exhibits and Financial Statement Schedules 37
SIGNATURES 38
FORWARD-LOOKING
STATEMENTS
This
annual report on Form 10-K contains forward-looking statements within the meaning of the federal securities laws. These forwarding-looking
statements include without limitation statements regarding our expectations and beliefs about the market and industry, our goals,
plans, and expectations regarding our properties and drilling activities and results, our intentions and strategies regarding
future acquisitions and sales of properties, our intentions and strategies regarding the formation of strategic relationships,
our beliefs regarding the future success of our properties, our expectations and beliefs regarding competition, competitors, the
basis of competition and our ability to compete, our beliefs and expectations regarding our ability to hire and retain personnel,
our beliefs regarding period to period results of operations, our expectations regarding revenues, our expectations regarding
future growth and financial performance, our beliefs and expectations regarding the adequacy of our facilities, and our beliefs
and expectations regarding our financial position, ability to finance operations and growth and the amount of financing necessary
to support operations. These statements are subject to risks and uncertainties that could cause actual results and events to differ
materially. See “Item 1A. Risk Factors” for a discussion of certain risk factors. We undertake no obligation to update
forward-looking statements to reflect events or circumstances occurring after the date of this annual report on Form 10-K.
As
used in this annual report on Form 10-K, unless the context otherwise requires, the terms “we,” “us,”
“the Company,” and “Houston American” refer to Houston American Energy Corp., a Delaware corporation.
PART
I
Item 1. Business
General
Houston
American Energy Corp is an independent oil and gas company focused on the development, exploration, exploitation, acquisition,
and production of natural gas and crude oil properties. Our principal properties, and operations, are in the U.S. Permian Basin.
Additionally, we have properties in the U.S. Gulf Coast region, particularly Texas and Louisiana, and in the South American country
of Colombia.
We
focus on early identification of, and opportunistic entrance into, existing and emerging resource plays. We do not operate properties
but typically seek to partner with, or invest along-side, larger operators in the development of resources or retain interests,
with or without contribution on our part, in prospects identified, packaged and promoted to larger operators. By entering these
plays earlier, identifying stranded blocks and partnering with, investing along-side or promoting to, larger operators, we believe
we can capture larger resource potential at lower cost and minimize our exposure to drilling risks and costs and ongoing operating
costs.
We,
along with our partners, actively manage our resources through opportunistic acquisitions and divestitures where reserves can
be identified, developed, monetized and financial resources redeployed with the objective of growing reserves, production and
shareholder value.
Properties
Our
exploration and development projects are focused on existing property interests, and future acquisition of additional property
interests, in the Texas Permian Basin, the onshore Texas and Louisiana Gulf Coast region and in the South American country of
Colombia.
Each
of our property interests differ in scope and character and consists of one or more types of assets, such as 3-D seismic data,
owned mineral interests, leasehold positions, lease options, working interests in leases, partnership or limited liability company
interests, corporate equity interests or other mineral rights. Our percentage interest in each property represents the portion
of the interest in the property we share with other partners in the property. Because each property consists of a bundle of assets
that may or may not include a working interest in the project, our stated interest in a property simply represents our proportional
ownership in the bundle of assets that constitute the property. Therefore, our interest in a property should not be confused with
the working interest that we will own when a given well is drilled. Each of our exploration and development projects represents
a negotiated transaction between the project partners relating to one or more properties. Our working interest may be higher or
lower than our stated interest.
The
following table sets forth information relating to our principal properties as of December 31, 2020:
Average Gross Net proved 2020 Net Production
In
2020, (1) we acquired a 20% working interest in two lease blocks covering an aggregate 820 gross acres within the 20,367-acre
(gross) area of mutual interest (the “Hockley County AMI”) associated with our existing Northern Shelf of the Permian
Basin acreage in Hockley County, Texas; (2) we acquired a 100% working interest in 46.1 gross acres in Yoakum County, Texas; (3)
our acreage position in Hockley County, Texas was reduced by 1,564 gross acres as a result of lease expirations; (4) we sold our
interest in two marginal wells and associated acreage in Louisiana; and (5) our acreage position in Reeves County, Texas was reduced
by 160 gross (40 net) acres as a result of a lease expiration.
-
United States Properties:
In
the United States, our properties and operations are principally located in the on-shore Permian Basin and Gulf Coast regions
of Louisiana and Texas.
Texas
Properties – Permian Basin
Reeves
County. We hold a 20.4% average working interest in 480 gross acres in Reeves County, Texas, consisting of (1) the 320 gross
acre Johnson Lease, in which we hold a 25% working interest, subject to a proportionate 5% back-in after payout, and (2) the 160
gross acre O’Brien Lease, in which we hold an average 11.2% working interest. Our Reeves County acreage lies within the
Delaware sub-basin of the Permian Basin, with resource potential in the Wolfcamp, Bone Spring and Avalon formations. During 2017,
we drilled and completed our initial wells on both lease blocks, the Johnson State #1H well and the O’Brien #3H well, both
horizontally drilled and hydraulically fractured wells in the Wolfcamp A formation. The Johnson #1H well continued on production
at December 31, 2020. The O’Brien #3H well was shut-in for repairs at December 31, 2020.
In
June 2018, a new operator took control of operations of our Reeves County acreage, following the acquisition of the interests
of the former operator. No wells have been drilled on our Reeves County acreage since the change of operatorship. As of December
31, 2020, no additional development or drilling operations are planned with respect to our Reeves County acreage.
Yoakum
County. We hold a 12.5% working interest, subject to a proportionate 10% back-in after payout, in an approximately 650 gross
acre block in Yoakum County, Texas and hold a 100% working interest in 46.1 gross acres subject to our obligation to offer participation
in that acreage to our partners in the area of mutual interest associates with our Yoakum County acreage. Our Yoakum County acreage
lies within the Midland sub-basin of the Permian Basin.
During
2019, we drilled the Frost #1H well, the first well on our Yoakum County acreage. The well was horizontally drilled, hydraulically
fractured in the San Andres Formation and completed and commenced production in mid-2019. A second well on our Yoakum County acreage,
the Frost #2H well, was horizontally drilled, hydraulically fractured in the San Andres Formation and completed and commenced
production during the third quarter of 2020. Subject to the operator’s evaluation of the performance of the initial wells,
additional wells may be drilled on our Yoakum County acreage in the future.
Northern
Shelf of Permian Basin – Hockley County. We hold a 20% working interest, subject to an obligation to pay 26.667% of
drilling and related costs on the initial well, in an approximately 5,080-acre lease block (including 820 gross acres acquired
during 2020 within the Hockley County AMI) in the Northern Shelf of the Permian Basin in Texas. We also hold the right to participate,
at cost and for a period of five years, in a 20,367-acre area (gross) of mutual interest that includes the existing lease block.
During
2020, we drilled the Lou Brock #1-H well, the first well on our Hockley County acreage. The well has horizontally drilled and
hydraulically fractured. As a result of issues incurred during the fracking process, the well is shut-in pending evaluation of
options to remedy the fracking issues. Pending evaluation of the performance of the initial well, no additional drilling operations
are presently planned on the Hockley County acreage.
Louisiana
Properties
Our
principal producing and exploration properties in Louisiana consist of the following:
There
are no known present plans to conduct additional drilling operations on our Louisiana acreage.
-
Colombian Properties:
At
December 31, 2020, we held interests in multiple prospects, all operated by Hupecol Operating and affiliates, in Colombia covering
1,031,610 gross acres. We identify our Colombian prospects by the concessions operated.
The
following table sets forth information relating to our interests in prospects in Colombia at December 31, 2020:
CPO-11 – Venus Exploration Area Hupecol 2.0 % 69,128 — —
At
December 31, 2020, we held interests in four concessions operated by Hupecol Operating Co. in Colombia. The CPO-11 concession,
including the Venus Exploration Area, is located in the Llanos Basin. The Loc Picachos, Macaya and Serrania concessions are located
in the Caguan Putumayo Basin of Colombia. The concessions cover an aggregate area of 1,031,610 gross acres.
CPO-11
During
2019, we acquired a two percent ownership interest in Hupecol Meta, LLC (“Hupecol Meta”). Hupecol Meta owns
the 639,405 gross acre CPO-11 block in the Llanos Basin in Colombia. The CPO-11 block is comprised of the 69,128 acre Venus Exploration
area and 570,277 acres which was 50% farmed out by Hupecol to Parex Resources. In 2021, Hupecol Meta increased its ownership interest
in the CPO-11 block and we agreed to contribute $99,716 of additional capital to increase our ownership interest
in Hupecol Meta to 7.85%. Through our ownership interest in Hupecol Meta, after the agreed 2021 increase in ownership,
we will hold a 6.99% interest in the Venus Exploration area and a 3.495% interest in the remainder of the CPO-11
block.
The
CPO-11 block covers almost 1,000 square miles with multiple identified leads and prospects. The Venus Exploration area includes
an existing productive vertical well that is presently shut-in. Pursuant to the farm-out agreement covering the balance of the
CPO-11 block, the Daisy-1 well, a vertical well, began drilling in December 2019 and was determined to be a dry hole in early
2020. The Matuno-1 well, a vertical well drilled at no cost to Houston American, was drilled during 2020 and was a dry hole. Hupecol
will evaluate industry conditions and drilling results from the initial planned wells before formalizing drilling plans for additional
wells on the CPO-11 block. Future wells in the Venus Exploration area, if any, are expected to be horizontal wells.
Serrania
Block
Our
interest in the Serrania concession was acquired through a Farmout Agreement with the original operator of the block pursuant
to which we paid 25% of designated Phase 1 geological and seismic costs in return for a 12.5% interest in the Contract for Exploration
and Production covering the concession.
Seismic
work on the Serrania Block was completed in 2010. Drilling preparation and seismic processing work was performed in 2011 and 2012
in connection with the planned drilling of initial test wells on the concession. The National Hydrocarbon Agency of Colombia (the
“ANH”) granted extensions of required development commitments, including drilling of a first test well on the Serrania
concession, until conditions in the area allow operations.
The
Serrania concession is subject to longstanding local opposition to the granting of necessary permits to commence drilling operations.
Hupecol is presently engaged in litigation and negotiations with the National Hydrocarbon Agency of Colombia (the “ANH”)
to either secure the necessary permits to drill and develop the concession or receive compensation for the concession and the
funds expended.
Given
the ongoing opposition, Hupecol has determined to stop all activity on the block for the foreseeable future pending a final definitive
settlement either permitting drilling or compensating Hupecol for the block. COVID-19 has caused all actions in Colombia to be
delayed.
Los
Picachos and Macaya Prospects
Our
Los Picachos and Macaya prospects adjoin our Serrania concession. Hupecol has advised us that they have put on hold plans to begin
seismic and other work on the Los Picachos and Macaya concessions until a satisfactory resolution of the ongoing permitting disputes.
The ANH has granted extensions of required development commitments, including seismic acquisition, until conditions in the area
allow operations.
As
operator of our various prospects, Hupecol has substantial control over the timing of drilling and selection of prospects to be
drilled and we have limited ability to influence the selection of prospects to be drilled or the timing of such drilling operations
and have no effective means of controlling the costs of such drilling operations. Accordingly, our drilling budget is subject
to fluctuation based on the prospects selected to be drilled by Hupecol, the decisions of Hupecol regarding timing of such drilling
operations and the ability of Hupecol to drill and operate wells within estimated budgets.
Drilling
Activity
During
2020, we drilled three wells. The following table summarizes the number of wells drilled during 2020, 2019 and 2018, excluding
any wells drilled under farmout agreements, royalty interest ownership, or any other wells in which we do not have a working interest.
Year Ended December 31,
Gross Net Gross Net Gross Net
Development wells, completed as:
Productive — — — — — —
Non-productive — — — — — —
Total development wells — — — — — —
Exploratory wells, completed as:
Non-productive 2 0.02 — — — —
Productive
wells are wells that are found to be capable of producing hydrocarbons in sufficient quantities such that proceeds from the sale
of the production exceed production expenses and taxes.
As
of December 31, 2020, we had testing operations ongoing on one well, the Lou Brock #1-H well in Hockley County, Texas.
Productive
Wells
Productive
wells consist of producing wells and wells capable of production, including shut-in wells. A well bore with multiple completions
is counted as only one well. As of December 31, 2020, we owned interests in four gross wells (excluding wells in which we hold
only royalty interests). As of December 31, 2020, we had ownership interests in productive wells, categorized by geographic area,
as follows:
Oil Wells Gas Wells
United States
Gross 4 —
Colombia
Gross — —
Net — —
Total
Gross 4 —
Volume,
Prices and Production Costs
The
following table sets forth certain information regarding the production volumes, average prices received and average production
costs associated with our sales of gas and oil, categorized by geographic area, for each of the three years ended December 31,
2020, 2019, and 2018:
Year Ended December 31,
Net Production:
Gas (Mcf):
Colombia — — —
Oil (Bbls):
Colombia — — —
Average sales price:
Gas ($ per Mcf)
Colombia — — —
Oil ($ per Bbl)
Colombia — — —
Average production costs ($ per BOE):
Colombia — — —
Natural
Gas and Oil Reserves
Reserve
Estimates
The
following tables sets forth, by country and as of December 31, 2020, our estimated net proved oil and natural gas reserves, and
the estimated present value (discounted at an annual rate of 10%) of estimated future net revenues before future income taxes
(“PV-10”) and after future income taxes (“Standardized Measure”) of our proved reserves, each prepared
in accordance with assumptions prescribed by the Securities and Exchange Commission (“SEC”).
The
PV-10 value is a widely used measure of value of oil and natural gas assets and represents a pre-tax present value of estimated
cash flows discounted at ten percent. PV-10 is considered a non-GAAP financial measure as defined by the SEC. We believe that
our PV-10 presentation is relevant and useful to our investors because it presents the discounted future net cash flows attributable
to our proved reserves before taking into account the related future income taxes, as such taxes may differ among various companies
because of differences in the amounts and timing of deductible basis, net operating loss carry forwards and other factors. We
believe investors and creditors use our PV-10 as a basis for comparison of the relative size and value of our proved reserves
to the reserve estimates of other companies. PV-10 is not a measure of financial or operating performance under GAAP and is not
intended to represent the current market value of our estimated oil and natural gas reserves. PV-10 should not be considered in
isolation or as a substitute for the standardized measure of discounted future net cash flows as defined under GAAP.
These
calculations were prepared using standard geological and engineering methods generally accepted by the petroleum industry and
in accordance with SEC financial accounting and reporting standards.
Reserves (1)
Oil Natural Gas Total (2)
(bbls) (mcf) (boe)
Reserve category
Proved Developed Producing
Colombia — — —
Proved Undeveloped
United States — — —
Colombia — — —
Total Proved Undeveloped Reserves — — —
Proved Developed Proved Undeveloped Total Proved
Due
to the inherent uncertainties and the limited nature of reservoir data, proved reserves are subject to change as additional information
becomes available. The estimates of reserves, future cash flows and present value are based on various assumptions, including
those prescribed by the SEC, and are inherently imprecise. Although we believe these estimates are reasonable, actual future production,
cash flows, taxes, development expenditures, operating expenses and quantities of recoverable oil and natural gas reserves may
vary substantially from these estimates.
Reserve
Estimation Process, Controls and Technologies
The
reserve estimates, including PV-10 and Standard Measure estimates, set forth above were prepared by Russell K. Hall & Associates,
Inc. for our Permian Basin, Texas reserves.
These
calculations were prepared using standard geological and engineering methods generally accepted by the petroleum industry and
in accordance with SEC financial accounting and reporting standards.
Our
year-end reserve reports are prepared by reserve engineering firms based upon a review of property interests being appraised,
production from such properties, current costs of operation and development, current prices for production, agreements relating
to current and future operations and sale of production, geosciences and engineering data, and other information provided to them
by our management team. Upon analysis and evaluation of data provided, the reserve engineering firms issue a preliminary appraisal
report of our reserves. The preliminary appraisal report and changes in our reserves are reviewed by our President and board for
reasonableness of the results obtained. Once any questions have been addressed, the reserve engineering firms issue final appraisal
reports, reflecting their conclusions.
Russell
K. Hall & Associates is an independent Midland, Texas based professional engineering firm providing reserve evaluation services
to the oil and gas industry. Their report was prepared under the direction of Russell K. Hall, founder and President of Russell
K. Hall & Associates. Mr. Hall holds a BS in Mechanical Engineering from the University of Oklahoma, is a registered professional
engineer and a member of the Society of Petroleum Engineers, the Society of Independent Professional Earth Scientists and the
West Texas Geological Society. Mr. Hall has more than 30 years of experience in reserve evaluation for the oil and gas industry
and the oil and gas finance industry. Russell K. Hall & Associates, and its employees, have no interest in our company or
our properties and were objective in determining our reserves.
The
SEC’s rules with respect to technologies that a company can use to establish reserves allows use of techniques that have
been proved effective by actual production from projects in the same reservoir or an analogous reservoir or by other evidence
using reliable technology that establishes reasonable certainty. Reliable technology is a grouping of one or more technologies
(including computational methods) that have been field tested and have been demonstrated to provide reasonably certain results
with consistency and repeatability in the formation being evaluated or in an analogous formation.
Our
reserve engineering firm used a combination of production and pressure performance, simulation studies, offset analogies, seismic
data and interpretation, geophysical logs and core data to calculate our reserves estimates.
Proved
Undeveloped Reserves
The
following table summarizes activity within our proved undeveloped reserve category for the year ended December 31, 2020:
For the Year Ended December 31, 2020
Proved undeveloped reserves (Boe):
Decrease due to evaluation reassessments (282,123 )
End of year —
The
decrease in proved undeveloped reserves during the year ended December 31, 2020 was attributable to evaluation reassessments relating
to our Reeves County, Texas acreage.
Developed
and Undeveloped Acreage
The
following table sets forth the gross and net developed and undeveloped acreage (including both leases and concessions, but excluding
acreage in which we hold a royalty interest but no working interest), categorized by geographical area, which we held as of December
31, 2020:
Developed Undeveloped
Gross Net Gross Net
Developed
acreage is comprised of leased acres that are within an area spaced by or assignable to a productive well and acreage in which
we hold a mineral interest with no potential development related lease expirations. Undeveloped acreage is comprised of leased
acres with defined remaining terms and not within an area spaced by or assignable to a productive well.
As
is customary in the oil and natural gas industry, we can generally retain our interest in undeveloped acreage by drilling activity
that establishes commercial production sufficient to maintain the leases or by paying delay rentals during the remaining primary
term of leases. The oil and natural gas leases in which we have an interest are for varying primary terms and, if production under
a lease continues from our developed lease acreage beyond the primary term, we are entitled to hold the lease for as long as oil
or natural gas is produced.
The
leases and concessions comprising the U.S. undeveloped acreage set forth in the table above relate primarily to our Northern Shelf
acreage which is comprised of a large number of leases most having primary terms of three years and will expire at the end of
their respective primary terms unless production from the acreage has been established prior to such date, in which event the
lease or concession will remain in effect until the cessation of production.
Title
to Properties
Title
to properties is subject to royalty, overriding royalty, carried working, net profits, working and other similar interests and
contractual arrangements customary in the gas and oil industry, liens for current taxes not yet due and other encumbrances. As
is customary in the industry in the case of undeveloped properties, little investigation of record title is made at the time of
acquisition (other than preliminary review of local records).
Investigation,
including a title opinion of local counsel, generally is made before commencement of drilling operations.
Marketing
At
December 31, 2020, we had no contractual agreements to sell our gas and oil production and all production was sold on spot markets.
Employees
As
of December 31, 2020, we had 2 full-time employees and no part time employees. The employees are not covered by a collective bargaining
agreement, and we do not anticipate that any of our future employees will be covered by such agreements.
Competition
We
encounter intense competition from other oil and gas companies in all areas of our operations, including the acquisition of producing
properties and undeveloped acreage. Our competitors include major integrated oil and gas companies, numerous independent oil and
gas companies and individuals. Many of our competitors are large, well-established companies with substantially larger operating
staffs and greater capital resources and have been engaged in the oil and gas business for a much longer time than our Company.
These companies may be able to pay more for productive oil and gas properties, exploratory prospects and to define, evaluate,
bid for and purchase a greater number of properties and prospects than our financial or human resources permit. Our ability to
acquire additional properties and to discover reserves in the future will be dependent upon our ability to evaluate and select
suitable properties and to consummate transactions in this highly competitive environment.
Regulatory
Matters
Regulation
of Oil and Gas Production, Sales and Transportation
The
oil and gas industry is subject to regulation by numerous national, state and local governmental agencies and departments. Compliance
with these regulations is often difficult and costly and noncompliance could result in substantial penalties and risks. Most jurisdictions
in which we operate also have statutes, rules, regulations or guidelines governing the conservation of natural resources, including
the unitization or pooling of oil and gas properties, minimum well spacing, plugging and abandonment of wells and the establishment
of maximum rates of production from oil and gas wells. Some jurisdictions also require the filing of drilling and operating permits,
bonds and reports. The failure to comply with these statutes, rules and regulations could result in the imposition of fines and
penalties and the suspension or cessation of operations in affected areas.
Environmental
Regulation
Various
federal, state and local laws and regulations relating to the protection of the environment, including the discharge of materials
into the environment, may affect our exploration, development and production operations and the costs of those operations. These
laws and regulations, among other things, govern the amounts and types of substances that may be released into the environment,
the issuance of permits to conduct exploration, drilling and production operations, the discharge and disposition of generated
waste materials and waste management, the reclamation and abandonment of wells, sites and facilities, financial assurance and
the remediation of contaminated sites. These laws and regulations may impose substantial liabilities for noncompliance and for
any contamination resulting from our operations and may require the suspension or cessation of operations in affected areas.
The
environmental laws and regulations applicable to our U.S. operations include, among others, the following United States federal
laws and regulations:
● Clean Air Act, and its amendments, which govern air emissions;
● Clean Water Act, which governs discharges into waters of the United States;
Colombia
has similar laws and regulations designed to protect the environment.
We
routinely obtain permits for our facilities and operations in accordance with these applicable laws and regulations on an ongoing
basis. There are no known issues that have a significant adverse effect on the permitting process or permit compliance status
of any of our facilities or operations.
The
ultimate financial impact of these environmental laws and regulations is neither clearly known nor easily determined as new standards
are enacted and new interpretations of existing standards are rendered. Environmental laws and regulations are expected to have
an increasing impact on our operations. In addition, any non-compliance with such laws could subject us to material administrative,
civil or criminal penalties, or other liabilities. Potential permitting costs are variable and directly associated with the type
of facility and its geographic location. Costs, for example, may be incurred for air emission permits, spill contingency requirements,
and discharge or injection permits. These costs are considered a normal, recurring cost of our ongoing operations and not an extraordinary
cost of compliance with government regulations.
Although
we do not operate the properties in which we hold interests, noncompliance with applicable environmental laws and regulations
by the operators of our oil and gas properties could expose us, and our properties, to potential costs and liabilities associated
with such environmental laws. While we exercise no oversight with respect to any of our operators, we believe that each of our
operators is committed to environmental protection and compliance. However, since environmental costs and liabilities are inherent
in our operations and in the operations of companies engaged in similar businesses and since regulatory requirements frequently
change and may become more stringent, there can be no assurance that material costs and liabilities will not be incurred in the
future. Such costs may result in increased costs of operations and acquisitions and decreased production.
Hydraulic
Fracturing Regulation
Hydraulic
fracturing, or “fracking”, is a common practice used to stimulate production of oil and natural gas from tight
formations, including shales. Fracking involves the injection of fluids—usually consisting mostly of water but typically
including small amounts of chemical additives—as well as sand into a well under high pressure in order to create fractures
in the rock that allow oil or gas to flow more freely to the wellbore.
Except
as applies to federal lands, fracking generally is exempt from regulation under many federal environmental rules and is generally
regulated at the state level.
For
example, in Texas, the Texas Railroad Commission administers regulations related to oil and gas operations, including regulations
pertaining to protection of water resources in connection with those operations. The Texas Legislature adopted new legislation
requiring oil and gas operators to publicly disclose the chemicals used in the hydraulic fracturing process, effective as of September
1, 2011. The Texas Railroad Commission has adopted rules and regulations implementing this legislation that apply to all wells
for which the Railroad Commission issues an initial drilling permit after February 1, 2012. This law requires that the well operator
disclose the list of chemical ingredients subject to the requirements of the federal Occupational Safety and Health Act (OSHA)
for disclosure on an internet website and also file the list of chemicals with the Texas Railroad Commission with the well completion
report. The total volume of water used to hydraulically fracture a well must also be disclosed to the public and filed with the
Texas Railroad Commission.
There
is public controversy regarding fracking with regard to the use of fracking fluids, impacts on drinking water supplies, use of
water and the potential for impacts to surface water, groundwater and the environment generally. Lawsuits and enforcement actions
have been initiated across the country implicating hydraulic fracturing practices. If new laws or regulations restricting hydraulic
fracturing are adopted, such laws could make it more difficult or costly to perform fracturing to stimulate production from tight
formations as well as make it easier to initiate legal proceedings based on allegations that specific chemicals used in the fracturing
process could adversely affect groundwater. In addition, if hydraulic fracturing is further regulated at the federal or state
level, fracturing activities could become subject to additional permitting and financial assurance requirements, more stringent
construction specifications, increased monitoring, reporting and recordkeeping obligations, plugging and abandonment requirements
and also to attendant permitting delays and potential increases in costs. Such legislative changes could cause operators to incur
substantial compliance costs, and compliance or the consequences of any failure to comply could have a material adverse effect
on well operations and economics.
We
do not operate wells but contract well operations to third party operators. Operators of our wells may perform fracking operations,
or contract third parties to perform such operations, on wells in which we participate. Many newer wells would not be economical
without the use of fracking to stimulate production from the well. At this time, it is not possible to estimate the impact on
our business of newly enacted or potential federal or state legislation governing hydraulic fracturing.
Climate
Change Legislation and Greenhouse Gas Regulation
Federal,
state and local laws and regulations are increasingly being enacted to address concerns about the effects the emission of “greenhouse
gases” may have on the environment and climate. These effects are widely referred to as “climate change.” Since
its December 2009 endangerment finding regarding the emission of greenhouse gases, the Environmental Protection Agency (the “EPA”)
has begun regulating sources of greenhouse gas emissions under the federal Clean Air Act. Among several regulations requiring
reporting or permitting for greenhouse gas sources, the EPA finalized its “tailoring rule” in May 2010 that determines
which stationary sources of greenhouse gases are required to obtain permits to construct, modify or operate on account of, and
to implement the best available control technology for, their greenhouse gases. The EPA’s final greenhouse gas reporting
requirements pertain to certain oil and gas production facilities.
Moreover,
the U.S. Congress has considered establishing a cap-and-trade program to reduce U.S. emissions of greenhouse gases. Under past
proposals, the EPA would issue or sell a capped and steadily declining number of tradable emissions allowances to certain major
sources of greenhouse gas emissions so that such sources could continue to emit greenhouse gases into the atmosphere. These allowances
would be expected to escalate significantly in cost over time. The net effect of such legislation, if ever adopted, would be to
impose increasing costs on the combustion of carbon-based fuels such as crude oil, refined petroleum products, and natural gas.
In addition, while the prospect for such cap-and-trade legislation by the U.S. Congress remains uncertain, several states have
adopted, or are in the process of adopting, similar cap-and-trade programs.
As
a crude oil and natural gas company, the debate on climate change is relevant to our operations because the equipment we use to
explore for, develop and produce crude oil and natural gas emits greenhouse gases. Additionally, the combustion of carbon-based
fuels, such as the crude oil and natural gas we sell, emits greenhouse gases. Thus, any current or future federal, state or local
climate change initiatives could adversely affect demand for the crude oil and natural gas we produce by stimulating demand for
alternative forms of energy that do not rely on the combustion of fossil fuels, and therefore could have a material adverse effect
on our business. Although our compliance with any greenhouse gas regulations may result in increased compliance and operating
costs, we do not expect the compliance costs for currently applicable regulations to be material. Moreover, while it is not possible
at this time to estimate the compliance costs or operational impacts for any new legislative or regulatory developments in this
area, we do not anticipate being impacted to any greater degree than other similarly situated competitors.
Web
Site Access to Reports
Our
Web site address is www.houstonamerican.com. We make available, free of charge on our Web site, our annual report on Form
10-K, quarterly reports on Form 10-Q and current reports on Form 8-K, and all amendments to these reports as soon as reasonably
practicable after such material is electronically filed with, or furnished to, the United States Securities and Exchange Commission.
Information contained on our website is not incorporated by reference into this report and you should not consider information
contained on our website as part of this report.
Item 1A. Risk Factors
Our
business activities and the value of our securities are subject to significant hazards and risks, including those described below.
If any of such events should occur, our business, financial condition, liquidity and/or results of operations could be materially
harmed, and holders and purchasers of our securities could lose part or all of their investments.
Company
and Organization Risks
We
have experienced recurring operating losses and may not attain profitability; attainment of profitability will require successful
drilling and development operations to support substantial increases in production and revenues.
We
have incurred losses from operations in each year since 2011 and, at December 31, 2020, had an accumulated deficit of $72,021,911.
While we have implemented cost control initiatives that have brought down our cash overhead in recent years, our ability to attain
profitability is substantially dependent upon increasing our production and production revenues while continuing to control costs.
In order to increase production and revenues, we will need to successfully drill new wells on our existing, or future acquired,
acreage at a pace, and with results, significantly greater than in recent years. If, for any reason, we are unable to substantially
increase our production and revenues, while controlling drilling costs and overhead, we may never attain, or sustain, profitability.
Our ability to so increase production and revenues and attain profitability is subject to all of the other risks of oil and gas
operations as well as our ability to fund our share of drilling and development operations.
Our
ability to operate profitably and our financial condition are highly dependent on energy prices. A substantial or extended decline