SEVEN SEAS PETROLEUM INC, 10-K/A, 1998-05-06

SEVEN SEAS PETROLEUM INC
10-K/A, 1998-05-06
OIL & GAS FIELD EXPLORATION SERVICES

Previous: AMBASSADORS INTERNATIONAL INC, 10-K/A, 1998-05-06

Next: DEUTSCHE BANK AG, SC 13G, 1998-05-06

<PAGE> 1

================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K/A

AMENDMENT NO. 2

[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934

FOR FISCAL YEAR ENDED DECEMBER 31, 1997

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES ACT OF
1934

COMMISSION FILE NO. 0-22483

SEVEN SEAS PETROLEUM INC.
(Exact name of registrant as specified in its charter)

<TABLE>
<S> <C>
YUKON TERRITORY 73-1468669
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)

SUITE 960, THREE POST OAK CENTRAL
1990 POST OAK BOULEVARD
HOUSTON, TEXAS 77056
(Address of principal executive offices) (Zip Code)
</TABLE>

Registrant's telephone number, including area code: (713) 622-8218

The aggregate market value of the common stock held by non-affiliates of
the registrant (treating all executive officers and directors of the registrant
and their respective affiliates, for this purpose, as if they may be affiliates
of the registrant) was approximately $638,089,326 on March 26, 1998 based upon
the closing sale price of the Common Stock on such date of $27.00 per share on
the American Stock Exchange as reported by The Wall Street Journal.

AS OF MARCH 27, 1998 THERE WERE 35,216,606 SHARES OF THE REGISTRANT'S
COMMON SHARES, NO PAR VALUE PER SHARE, OUTSTANDING.

Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 of 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 checkmark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, to the best of registrant's
knowledge, in definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ]
================================================================================
<PAGE> 2

TABLE OF CONTENTS TO FORM 10-K

<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
PART I
Item 1. Business.................................................... 1
Risk Factors................................................ 6
Item 2. Properties.................................................. 12
Item 3. Legal Proceedings........................................... 21
Item 4. Submission of Matters to a Vote of Security Holders......... 21
PART II
Item 5. Market for Registrant's Common Equity and Related........... 22
Item 6. Selected Financial Data..................................... 22
Item 7. Management's Discussion and Analysis of Financial........... 23
Item 8. Financial Statements and Supplementary Data................. 27
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.................................... 28
PART III
Item 10. Directors and Executive Officers of the Registrant.......... 29
Item 11. Executive Compensation...................................... 33
Item 12. Security Ownership of Certain Beneficial Owners and
Management.................................................. 40
Item 13. Certain Relationships and Related Transactions.............. 42
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form
8-K......................................................... 43
Signatures.................................................. 46
</TABLE>

i
<PAGE> 3

PART I

ITEM 1. BUSINESS

OVERVIEW

Seven Seas is an independent international energy company engaged in the
exploration, development and production of oil and natural gas in Colombia. The
Company is the operator of an oil discovery ("Emerald Mountain") held by two
adjoining association contracts covering a total of approximately 109,000
contiguous acres in central Colombia. The Company has focused its efforts on
delineating the oil and gas potential of Emerald Mountain. The five exploratory
wells completed to date on Emerald Mountain have achieved maximum tested actual
production rates ranging from 3,415 to 13,123 barrels per day. The Company's
57.7% working interest in Emerald Mountain (before Colombian government
participation) was acquired through a series of transactions from 1995 through
1997. The Company has interests in three additional association contracts in
Colombia which, together with the Emerald Mountain association contracts, cover
over one million gross acres. As of December 31, 1997, the Company's estimated
net proved reserves attributable to the delineation of 14,459 acres of Emerald
Mountain were 32.2 million barrels of oil with an SEC PV-10 of $144.9 million.

Certain members of the Company's management have been involved in the
Emerald Mountain project since its inception in 1992. The Company's executive
officers average approximately 29 years of experience in the oil and gas
industry and predecessors of the Company have operated throughout the U.S. and
Canada since 1959. As of March 31, 1998, the Company's officers and directors
beneficially owned approximately 30% of the Company's outstanding shares.

The Company believes that it will be able to fund its operations and
investments through the first phase of its Emerald Mountain development program
("Phase I") with existing cash balances, the issuance of public or private debt
securities, as well as by obtaining a secured line of credit from one or more
commercial banking institutions. Phase I, scheduled for completion in 1999,
includes development and delineation drilling and the construction of production
facilities and a 36-mile pipeline which will allow Emerald Mountain production
to reach an existing pipeline with approximately 50,000 barrels per day of
currently available transportation capacity. To date, the Company has financed
the operation, exploration and continued delineation of Emerald Mountain
primarily with private offerings of equity and convertible debt, providing the
Company with aggregate net proceeds of $47.0 million. In future periods, the
Company may finance its operations and investments through the issuance of
public and private debt, equity, and convertible securities, as well as through
commercial banking credit facilities. The Company also issued 17.8 million
common shares as consideration for a portion of its interests in Emerald
Mountain. Based on the closing sales price of its common shares on the American
Stock Exchange ("SEV") on April 29, 1998, the Company had an equity market
capitalization, on a diluted basis, of approximately $890 million.

BUSINESS STRATEGY

The Company's strategy is to maximize value, cash flow and profitability
through: (i) continuing to develop and delineate Emerald Mountain; (ii)
maintaining a balance between development activities that generate near-term
cash flow and a longer-term exploration program; (iii) capitalizing on the
relative advantages of Emerald Mountain compared to other areas in Colombia to
achieve commercial production as soon as practicable; and (iv) mitigating the
risks of foreign operations.

Developing the Emerald Mountain Asset. As operator of Emerald Mountain, the
Company's goal is to continue rapidly and efficiently its field development and
delineation drilling program and to build the production facilities and pipeline
infrastructure to allow its production to reach existing transportation lines
for access to export markets.

- Development and Delineation Drilling Activities. The Company's Phase I
drilling program, which is scheduled to be completed in 1999, includes
capital expenditures of $16.2 million for Emerald Mountain field
development and delineation for 1998 and 1999.

1
<PAGE> 4

- Pipeline and Infrastructure Activities. The Company is engaged in
negotiations with leading oil pipeline, construction and engineering
firms to construct its processing, storage and related facilities and a
36-mile pipeline from Emerald Mountain to a connection with the existing
Oleoductos Alto Magdalena ("OAM") pipeline. Upon its scheduled completion
in 1999, the Phase I pipeline is expected to transport production from
Emerald Mountain to the OAM pipeline, which has approximately 50,000
Bbls/d of currently available transportation capacity. The Company's
1998-1999 budgeted expenditures for pipeline and infrastructure
activities are approximately $60.7 million for Phase I. The Company may
utilize joint ventures and other arrangements to reduce its capital
outlays for pipeline infrastructure and production facilities related to
Emerald Mountain.

Balancing Development Activities with Exploration Program. The Company
seeks to balance its development drilling program with an exploration program
focused on delineating and extending the reservoir limits of Emerald Mountain.
The Company utilizes advanced technology, including 2-D and 3-D seismic
techniques as well as other proven exploratory and development analytical tools.

Capitalizing on Favorable Operating Environment. The Company intends to
capitalize on the relative advantages of the location and characteristics of
Emerald Mountain, which it believes represents a more favorable operating
environment than most other discoveries and producing fields in Colombia. These
advantages include:

- The productive Upper Cretaceous Cimarrona formation at Emerald Mountain
is at the relatively shallow vertical depth of between approximately
6,000 and 7,500 feet and does not require the relatively more complicated
and more expensive drilling procedures needed to reach the deeper
formations that are found in many other areas of Colombia.

- Emerald Mountain benefits from accessible terrain at an average of
approximately 3,000 feet above sea level in a generally unforested area,
which is served by a major highway and is located near the existing OAM
pipeline.

- Emerald Mountain is located 60 miles northwest of Bogota in the capital
state of Cundinamarca in central Colombia, which has been characterized
by greater civil and political stability and by a higher population
density and military presence than more remote areas of Colombia.

- Colombia is a relatively stable democracy with a long history of
consistent GDP growth and an announced goal of aggressively expanding its
oil exports. Colombia's sovereign U.S. dollar rating as of April 9, 1998
was Baa3/BBB-.

Mitigating Risks of Foreign Operations. The Company seeks to mitigate
operating and financial risks associated with operating in Colombia by: (i)
building on its relationship with the Colombian government, which, through the
Colombian national oil company ("Ecopetrol"), has the right to back in to an
initial 50% working interest in Emerald Mountain upon its acceptance of a field
as commercial; (ii) continuing the high level of involvement of the Company's
Colombian advisory board consisting of prominent business and political leaders,
all of whom are shareholders of the Company, who provide advice and facilitate
operating in Colombia; (iii) building on existing favorable relationships with
the local community by, among other initiatives, providing local employment as
well as medical and educational assistance; (iv) employing local personnel with
in-country oil and gas industry expertise; and (v) operating primarily in U.S.
dollars with the right to expatriate profits from Colombia.

EMERALD MOUNTAIN

Overview. The Company's Colombian operations are focused on Emerald
Mountain. The Emerald Mountain discovery is located on two adjoining association
contact areas in central Colombia, approximately 60 miles northwest of Bogota.
Emerald Mountain is defined by two association contracts with Ecopetrol (the
"Dindal Association Contract" and the "Rio Seco Association Contract" and,
collectively, the "Association Contracts"). The Company owns a 57.7% working
interest in Emerald Mountain before Colombian government participation. As of
December 31, 1997, the Company's estimated net proved reserves attributable

2
<PAGE> 5

to the delineation of 14,459 acres of Emerald Mountain were 32.2 MMBbls with an
SEC PV-10 of $144.9 million.

The Emerald Mountain geological structure is a large anticline. The primary
oil reservoir is the Upper Cretaceous Cimarrona formation, which comprises both
limestone and sandstone and is relatively under-pressured. The Emerald Mountain
reserves are located at vertical depths of between approximately 6,000 and 7,500
feet and are characterized by low sulfur content (less than 1%), low paraffin
content and a medium gravity (18 degrees to 20 degrees API gravity).

Drilling Activity. The Company has enhanced its knowledge of the Cimarrona
formation and its potential productive capacity through the drilling of eight
wells in this formation. Production tests of these wells have indicated a
uniform and extensive degree of permeability within the area investigated. In
1994, a predecessor to the Company drilled the first exploratory well, which was
non-commercial. The five exploratory wells completed to date on Emerald Mountain
have encountered on average 303 feet of Cimarrona formation at vertical depths
between approximately 6,000 and 7,500 feet. For the five wells where production
testing has been completed, actual per well production rates realized ranged
from 3,415 Bbls/d to 13,123 Bbls/d with an average in excess of 7,000 Bbls/d.
The table below sets forth drilling results to date on Emerald Mountain.

<TABLE>
<CAPTION>
MAXIMUM ACTUAL MAXIMUM ACTUAL
DATE VERTICAL DEPTH OIL TEST RATE GAS TEST RATE
WELL NAME COMPLETED (FEET) (BBLS/D)(1) (MCF/D) DESCRIPTION
<S> <C> <C> <C> <C> <C>
Escuela 1(2) -- -- -- -- Non-commercial
El Segundo 1-E 2/96 5,718 3,415 1,350 Discovery well
El Segundo 1-N 11/96 6,820 8,948 3,500 Drilled from initial pad
El Segundo 1-S 9/97 6,920 4,528 451 Drilled from initial pad
Tres Pasos 1-E 10/97 6,200 13,123 6,000 Drilled 600' downdip to
northwest of ES 1-E
El Segundo 2-E 11/97 6,292 5,381 826 Drilled 3.7 miles north
of ES 1-E; 1,168' below
ES 1-N
El Segundo 3-E (3) 8,021 (3) (3) Drilled 2.8 miles south
of ES 1-E and
temporarily abandoned
Tres Pasos 2-E (4) 6,054 (4) (4) Drilled 5.6 miles to
northwest of ES 1-E
</TABLE>

- ---------------

(1) References are from production testing only and are not necessarily
indicative of flow rates that may be realized during commercial production.
Production tests are conducted to obtain an indication of the flow capacity
of individual wells and to give an indication of reservoir quality and
extent. Actual producing rates from individual wells will depend on the
results of an integrated reservoir study and an engineering production plan,
which will incorporate data from all wells in the field in a development
plan to maximize the economic recovery of oil from the reservoir.

(2) The Escuela 1 well, drilled in 1994, encountered Tertiary and Cretaceous
shales and siltstones from surface to total depth. This predominantly shale
section, emplaced by thrust faulting adjacent to the Cimarrona reservoir
section, is believed to form the eastern critical element of the trap for
the Cimarrona reservoir.

(3) While the anticipated Cimarrona formation was encountered, the Company
experienced significant mechanical problems while attempting to complete the
well for production testing and has temporarily abandoned the well pending a
scheduled return to this location in the third quarter of 1998.

(4) Due to an operational problem that resulted from a failure to properly
cement liner casing through the Cimarrona formation, the Company has decided
to sidetrack and drill a new well bore. This operation is scheduled to be
completed during the second quarter of 1998. Log and core analysis performed
subsequent to the completion of drilling operations provided indications of
a highly fractured and oil bearing formation similar to that found in the
preceding five completed wells.

3
<PAGE> 6

Capital Spending Program. Phase I of the Company's two-stage development
plan includes the completion of production facilities and a 36-mile pipeline
link to the OAM pipeline in La Dorada, which has 50,000 Bbls/d of currently
available transportation capacity. The OAM pipeline transports oil from La
Dorada to Vasconia, a major oil pipeline terminal center, where it joins the
Oleoducto Central S.A. ("OCENSA") and Oleoducto de Colombia ("ODC") pipelines
for transport to Covenas, the major export terminal in Colombia on the
Caribbean. The Company plans to drill seven development and delineation wells in
1998 and the first half of 1999 to develop production capacity for Phase I. The
gross capital expenditures estimated for Phase I include $186.5 million ($60.7
million net) for pipeline and production facilities and $31.2 million ($16.2
million net) for development and delineation drilling.

The Company believes that Phase II of the development plan, scheduled to be
completed in the first quarter of 2000, will result in an increase in Emerald
Mountain production capacity to approximately 250,000 Bbls/d, subject to
drilling and completion of and commercial production from scheduled wells. To
meet these volume requirements, the Company's plans call for construction of a
pipeline with capacity of 250,000 Bbls/d that would extend the Phase I pipeline
45 miles from La Dorada to Vasconia and would be constructed alongside the
existing OAM pipeline. At Vasconia, the Company's oil would be transported
approximately 300 miles on the OCENSA and ODC pipelines to Covenas. The maximum
transportation capacity currently available on the OCENSA and ODC pipelines is
250,000 Bbls/d. The Company plans to drill 52 additional development and
delineation wells from 1998 through 2000 in Phase II to increase productive
capacity from Emerald Mountain. The gross capital expenditures estimated for
Phase II include $308.5 million ($89.0 million net) for construction of pipeline
and production facilities and $209.4 million ($65.2 million net) for development
and delineation drilling. The construction of the Phase I and Phase II pipelines
and production facilities is subject to a number of conditions, including
negotiating construction contracts and obtaining required environmental and
construction permits, easements and rights of way.

The Association Contracts. The Company and the other working interest
owners have secured the right to produce oil and gas from the Dindal and Rio
Seco contract areas through the years 2021 and 2023, respectively. Under the
terms of the Association Contracts, Ecopetrol receives a royalty on behalf of
the Colombian government equal to 20% of production after transportation costs
are deducted and, in the event of commerciality, Ecopetrol has the right to
acquire an initial 50% working interest in the project. Until the working
interest owners have been repaid for 50% of all costs associated with successful
drilling, Ecopetrol's share of production will be applied to the repayment of
such costs. The Company expects that the current working interest owners will
fund all costs prior to the initiation of commercial production. Ecopetrol's
share of production and costs in the Dindal contract area will increase once a
commercial field produces in excess of 60 MMBbls, up to a maximum interest of
70% if the field produces in excess of 150 MMBbls. In addition, Ecopetrol's
share of production and costs in the Rio Seco contract area is subject to
increase once a commercial field produces in excess of 60 MMBbls, up to a
maximum interest of 75% depending upon revenues and associated costs. The
Company will have a 28.9% working interest in Emerald Mountain, assuming
Ecopetrol exercises its initial 50% back-in right.

Additional Exploration Potential. The Company believes that its existing
properties at Emerald Mountain hold additional exploration potential in deeper
horizons beneath the Cimarrona formation including Tertiary formations and
repeated Upper Cretaceous formations. In addition to capital expenditures for
seismic and other technical evaluation, the Company has budgeted approximately
$9.0 million to participate in drilling a deep exploratory well (up to
approximately 18,000 feet) on Emerald Mountain scheduled to be commenced in late
1998.

OTHER COLOMBIAN PROPERTIES

The Company owns a 75% working interest in the contiguous Montecristo and
Rosablanca association contract areas, which cover approximately 692,000 gross
acres in the northern Middle Magdalena Basin. In the Central Llanos Basin, 40
miles east of the Cusiana field, the Company owns an 11.875% initial working
interest in the 233,000 acre Tapir contract area operated by Heritage Minerals
Colombia ("Heritage Minerals"). During 1998, the Company expects to reprocess
and evaluate 2-D seismic on the Montecristo and

4
<PAGE> 7

Rosablanca contract areas and is participating in the drilling of the Mateguafa
Prospect on the Tapir contract area.

COMPANY BACKGROUND

Seven Seas was formed February 3, 1995 to participate in exploration and
development activities outside of North America. In August 1995, the Company
purchased a 15.0% interest in Emerald Mountain from GHK Company Colombia, Inc.
("GHK Colombia"), a subsidiary of The GHK Company, L.L.C. In July 1996, the
Company acquired an additional 36.7% working interest in Emerald Mountain
through its acquisition of 100% of GHK Colombia and Esmeralda Limited Liability
Company ("Esmeralda LLC") and 63% of Cimarrona Limited Liability Company
("Cimarrona LLC"). In March 1997, the Company acquired an additional 6.0%
working interest in Emerald Mountain through its acquisition of Petrolinson,
S.A., resulting in the Company's current ownership of a 57.7% working interest
in Emerald Mountain (before Colombian government participation). In connection
with these acquisitions, the Company issued a total of 17.8 million common
shares.

RECENT DEVELOPMENTS

Drilling Activity. In March 1998, Seven Seas commenced drilling operations
on the El Segundo 6-E well, the southernmost well on Emerald Mountain to date.
This well is located in the Dindal contract area, approximately 5.3 miles south
of the El Segundo 1-E discovery well.

On February 13, 1998, Seven Seas announced that the Tres Pasos 2-E well had
reached a total depth of 6,054 feet. The well is located 5.6 miles northwest of
the El Segundo 1-E discovery well in the Rio Seco contract area. The well
encountered 290 feet of Cimarrona formation with no indication of oil-water
contact. Due to an operational problem that resulted from a failure to properly
cement casing through the Cimarrona formation, the Company has decided to
sidetrack and drill a new wellbore. This operation is scheduled to be completed
during the second quarter of 1998. Log and core analysis performed subsequent to
the completion of drilling operations provided indications of a highly fractured
and oil-bearing formation similar to that found in the preceding five completed
wells.

On January 30, 1998, Seven Seas announced the completion and results from
33 days of reservoir testing for the El Segundo 2-E well located in the Dindal
contract area. The well encountered 314 feet of Cimarrona formation and had a
maximum production rate of 5,381 Bbls/d and 826 Mcf/d and there was no evidence
of oil-water contact. The production rate and interference data confirm a
significant extension of the reservoir approximately 3.7 miles to the north of
the El Segundo 1-E discovery well.

In November 1997, drilling commenced on the El Segundo 3-E well, the eighth
well to be drilled on Emerald Mountain and the sixth to be drilled in the Dindal
contract area. The drilling of the El Segundo 3-E was completed in February
1998, and the well encountered 292 feet of Cimarrona formation. After the
completion of drilling operations on the El Segundo 3-E, the Company experienced
significant mechanical problems while attempting to complete the well for
production testing. Due to a failure to effectively install the lower portion of
the well casing, it was not possible to achieve sufficient communication with
the Cimarrona formation to initiate production testing. The Company has
temporarily abandoned the El Segundo 3-E well pending a scheduled return to this
location in the third quarter of 1998.

Other International Interests. The Company is in the process of eliminating
any mandatory capital commitments outside of Colombia. In Papua New Guinea, the
Company signed a farm-out agreement with ARCO Papua New Guinea Inc., whereby the
Company will retain a 20% carried interest with no required capital
expenditures. In the Perth Basin in Western Australia, the Company has signed a
purchase and sale agreement with Forcenergy International Inc., in which the
Company will exchange its 11.77% working interest for approximately $0.9
million. The Company will retain a small overriding interest and will also be
reimbursed approximately $0.3 million for certain capital expenditures. The
agreement is pending final approval by an aboriginal council in Western
Australia. In the Bass Strait Basin offshore southeastern Australia, the Company
is seeking to farm out its interests. The Company has no required capital
commitments for this prospect.
5
<PAGE> 8

RISK FACTORS

DISCLOSURE REGARDING FORWARD LOOKING STATEMENTS

All statements other than statements of historical fact contained herein,
including, "Management's Discussion and Analysis of Financial Condition and
Results of Operations," "Business" and "Properties," regarding the Company's
financial position, estimated quantities of reserves, business strategy and
plans and objectives for future operations are forward looking statements.
Forward-looking statements in this annual report are generally accompanied by
words such as "anticipate", "believe", "estimate," "project," "potential" or
"expect" or similar statements. Although the company believes that the
expectations reflected in such forward-looking statements are reasonable, no
assurance can be given that such expectations will prove correct. Factors that
could cause the company's results to differ materially from the results
discussed in such forward-looking statements are discussed in "Risk Factors" and
elsewhere in this annual report. All forward-looking statements included herein
are expressly qualified in their entirety by the cautionary statements in this
paragraph.

RISKS RELATED TO THE COMPANY

LACK OF CASH FLOW

The Company has no significant income producing properties and its
principal assets, its interests in the Dindal and Rio Seco Association
Contracts, are in the early stage of exploration and development. Since
inception through December 31, 1997, the Company incurred cumulative losses of
$12.2 million and because of its continued exploration and development
activities, expects that it will continue to incur losses and that its
accumulated deficit will increase until commencement of production from the
Dindal and Rio Seco Association Contracts in quantities sufficient to cover
operating expenses related thereto. The Company had oil and gas sales in 1996
and 1997 of $0.2 million and $0.8 million, respectively, which pertained solely
to production testing of the Company's wells in Colombia. These sales
represented the Company's only sales of production since its inception. Although
the Company intends to continue to sell oil resulting from production tests,
significant production from the wells drilled to date is not expected to
commence until further work is done to evaluate the field through the drilling
of additional wells, and producing facilities and pipelines have been
constructed. The Company has received preliminary plans and engineering
specifications for the construction of pipelines and production facilities. The
construction of the Phase I and Phase II pipelines and the production facilities
is subject to a number of conditions, including obtaining required environmental
and construction permits and necessary easements and rights of way. The Company
does not expect these facilities to be completed before mid-1999, and no
assurances can be given as to when such facilities will be completed. If the
Company is unsuccessful in constructing a pipeline and production facilities or
in increasing its proved reserves or realizing future production from its
properties, the Company may be unable to pay existing or future debt. See
"-- Risks Related to the Oil and Gas Industry" and "-- Risks Related to
Construction of Pipeline and Production Facilities."

RISKS RELATED TO CONSTRUCTION OF PIPELINE AND PRODUCTION FACILITIES

The marketability of the Company's production depends upon the availability
and capacity of gathering systems, pipelines, compression and production
facilities, including storage, separation and reinjection facilities, and the
unavailability or lack of capacity thereof could result in the shut-in of
producing wells or the delay or discontinuance of development plans for
properties. In addition, regulation of oil and natural gas production and
transportation, general economic conditions and changes in supply and demand
could adversely affect the Company's ability to produce and market its oil and
natural gas on a profitable basis.

The Company has received preliminary plans and engineering specifications
for the construction of pipelines and production facilities. The construction of
the pipeline and the production facilities is subject to a number of conditions,
including negotiating construction contracts and obtaining required
environmental and construction permits, easements and rights of way. The Company
does not expect the Phase I facilities to be completed before mid-1999, and no
assurances can be given as to when such facilities will be completed. In

6
<PAGE> 9

addition, the Company has not finalized its negotiations with the operator of
the OAM pipeline for the transportation of 50,000 Bbls/d on the OAM pipeline. If
the Company is unsuccessful in constructing its pipeline and production
facilities or in increasing its proved reserves or realizing future production
from its properties, the Company may be unable to pay principle and interest on
existing debt or debt incurred in the future. See "-- Risks Related to the Oil
and Gas Industry."

NEED FOR SIGNIFICANT CAPITAL

The exploration and development of the Company's current properties and any
properties acquired in the future is expected to require substantial amounts of
additional capital which the Company may be required to raise through debt or
equity financings, encumbering properties or entering into arrangements whereby
certain costs of exploration will be paid by others to earn an interest in the
property. The Company has budgeted capital expenditures of $62.2 million for
1998 and $141.6 million for 1999. The Company believes it is capable of
obtaining sufficient funds to finance its initial capital expenditure
requirements for Phase I, although no assurance can be given as to the actual
amount that will need to be spent. Substantial amounts of capital will be needed
to finance Phase II, and no external sources of capital have yet been
identified. It is expected that additional monies for capital expenditures will
be financed through either debt or equity financings in the future, as the
Company does not expect any significant revenues from operations until the
production facilities are constructed in the third quarter of 1999. There can be
no assurance that the additional debt or equity financing will be available to
the Company on economically acceptable terms. As of December 31, 1997, the
Company has commitments under existing exploration and development contracts of
$3.3 million through 2001. If sufficient funds cannot be raised to meet the
Company's obligations with respect to a property, the Company may elect to
forfeit its interest in such property. The Company does not anticipate that it
will lose any of its Colombian property to forfeiture. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."

RISKS IN COLOMBIA AND OTHER FOREIGN OPERATIONS

Foreign properties, operations or investments may be adversely affected by
local political and economic developments, exchange controls, currency
fluctuations, royalty and tax increases, retroactive tax claims, renegotiation
of contracts with governmental entities, expropriation, import and export
regulations and other foreign laws or policies governing operations of
foreign-based companies, as well as by laws and policies of the United States
affecting foreign trade, taxation and investment. In addition, as the Company's
operations are governed by foreign laws, in the event of a dispute, the Company
may be subject to the exclusive jurisdiction of foreign courts and the
application of foreign laws or may not be successful in subjecting foreign
persons to the jurisdiction of courts in the United States. The Company may also
be hindered or prevented from enforcing its rights with respect to a
governmental instrumentality because of the doctrine of sovereign immunity.

The Company's business is subject to political risks inherent in all
foreign operations. While Colombia has no history of nationalizing its business
nor expropriation of foreign assets, the Company's oil and gas operations are
subject to certain risks, including: (i) loss of revenue, property, and
equipment as a result of unforeseen events such as expropriation,
nationalization, war and insurrection, (ii) risks of increases in taxes and
governmental royalties, (iii) renegotiation of contracts with governmental
entities, and (iv) changes in laws and policies governing operations of
foreign-based companies in Colombia. Guerrilla activity in Colombia has
disrupted the operation of oil and gas projects in certain areas in Colombia but
to date has not affected the Dindal and Rio Seco association contracts areas. No
assurance can be given as to the future level or impact of future guerrilla
activities, including after the construction of pipeline and production
facilities in the Dindal and Rio Seco contract areas, or the steps, if any, that
may be taken by the government may take in response to any such activities. The
Company's other three association contracts are located in more remote areas
that have been subject to guerrilla activity. The government continues its
efforts through negotiation and legislation to reduce the problems and effects
of insurgent groups. These efforts include regulations containing sanctions such
as impairment or loss of contract rights on companies and contractors if found
to be giving aid to such groups.

7
<PAGE> 10

Colombia is among several nations whose progress in stemming the production
and transit of illegal drugs is subject to annual certification by the President
of the United States. In March 1996, the President of the United States
announced that Colombia would neither be certified nor granted a national
interest waiver. The consequences of the failure to receive certification
generally include the following: all bilateral aid, except anti-narcotics and
humanitarian aid, has been or will be suspended; the Export-Import Bank of the
United States and the Overseas Private Investment Corporation will not approve
financing for new projects in Colombia; United States representatives at
multilateral lending institutions will be required to vote against all loan
requests from Colombia, although such votes will not constitute vetoes; and the
President of the United States and Congress retain the right to apply future
trade sanctions. Each of these consequences of the failure to receive such
certification could result in adverse economic consequences in Colombia and
could further heighten the political and economic risks associated with the
Company's operations in Colombia. Colombian national elections are scheduled for
May 1998, and neither the outcome of such elections nor any legal or policy
changes or increases in guerrilla activity that could be associated therewith
can be determined at this time. See "Properties -- Colombia."

SUBSTANTIAL CONCENTRATION OF OPERATIONS

The Company's producing properties are concentrated in Colombia and
specifically in the state of Cundinamarca. As of December 31, 1997, all of the
Company's proved reserves were attributable to Emerald Mountain. There are
significant operating and economic risks associated with conducting business in
Colombia. Due to the Company's concentration in and reliance on such operations
for its future cash flow, if the operations in Colombia were adversely affected,
the Company would experience a material adverse effect. See "-- Risks in
Colombia and Other Foreign Operations" and "-- Risk Related to the Oil and Gas
Industry."

LIMITED OPERATING HISTORY AND HISTORICAL OPERATING LOSSES

The Company commenced its operations in 1995 and has only a limited
operating history. The Company also has had operating losses each year since
inception. Potential investors, therefore, have limited historical financial and
operating information upon which to base an evaluation of the Company's
performance. For example, the only production to date has been test production.
The Company is not expected to have regular production until 1999. Therefore,
estimates of proved reserves and the level of future production attributable to
such reserves are difficult to determine and there can be no assurance as to the
volume of recoverable reserves that will be realized. The Company's prospects
must be considered in light of the risks, expenses and difficulties frequently
encountered by companies in the early stages of their development. The
development of the Company's business will continue to require substantial
expenditures. The Company's future financial results will depend primarily on
its ability to economically locate and produce hydrocarbons in commercial
quantities and on the market prices for oil and natural gas. There can be no
assurance that the Company will achieve or sustain profitability or positive
cash flows from operating activities in the future. See "-- Need for Significant
Capital," "Selected Financial Data," "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and "Properties -- Oil and Gas
Reserves."

RISKS OF JOINT VENTURES

The Company has and expects to continue to acquire only partial interests
in oil and gas properties through joint venture agreements with other oil and
gas corporations that may, by the terms of such joint venture agreements, be the
operators of such programs. Although the Company can take certain steps to
determine if the risk of the program to be conducted by the operator is
appropriately spread over a number of prospects, there can be no assurance that
the risk will be so allocated, that the program will be carried out by the
operator in a manner deemed appropriate by the Company or that the prospects
will be successful. In addition, the Company's ability to continue its
exploration and development programs may be dependent upon the decision of its
joint venture partners to continue exploration and development programs and to
finance their portion of the costs and expenses of the joint venture. If the
Company's partners do not elect to continue and to finance their obligations to
the joint ventures, the Company may be required to accept an assignment of

8
<PAGE> 11

the partners' interests therein and assume their financing obligations or
relinquish its interest in the joint venture.

DEPENDENCE ON KEY PERSONNEL

The Company believes that its success will depend to a significant extent
upon the continued services of certain key executive officers and operating
personnel. The Company has entered into employment agreements with certain of
its key executive officers. See "Management -- Employment Agreements." The
Company also depends on the services of professionals such as engineers,
geologists and geophysicists. The loss of the services of certain key executive
officers and operating personnel or the loss of or shortage of significant
number of professionals could have a material adverse effect on the Company. The
Company does not maintain key employee insurance on any of its personnel.

POTENTIAL CONFLICTS OF INTEREST

Certain of the directors of Seven Seas also serve as officers, directors or
consultants of other companies involved in natural resource development which
activities may be in competition with the Company and may result in conflicts of
interest. In the event a director has an interest in an investment or proposed
investment of the Company or other conflict of interest, it is the Company's
policy that such director not participate in the Company's decision-making with
respect thereto and that any transactions with such director be on terms
consistent with industry standards and sound business practices.

SERVICE AND ENFORCEMENT OF LEGAL PROCESS

The Company is continued under the laws of the Yukon Territory in Canada.
Three of the directors of the Company, and certain experts utilized by the
Company, are not residents of the United States and all or substantially all of
such persons' assets are located outside of the United States. The Company has
been advised by its counsel that there is no assurance that judgments of U.S.
courts for liabilities predicated solely upon U.S. federal securities laws will
be enforceable against the Company or against any of its directors or experts
who are not residents of the United States.

RISKS RELATED TO THE OIL & GAS INDUSTRY

UNCERTAINTY OF ESTIMATES OF OIL AND GAS RESERVES

This document contains estimates of the Company's proved oil and gas
reserves and the estimated future net revenues therefrom based upon the
Company's own estimates or on a reserve report that relies upon various
assumptions, including assumptions required by the Commission as to oil and gas
prices, drilling and operating expenses, capital expenditures, taxes and
availability of funds. The process of estimating oil and gas reserves is
complex, requiring significant decisions and assumptions in the evaluation of
available geological, geophysical, engineering and economic data for each
reservoir. As a result, such estimates are inherently imprecise. Actual future
production, oil and gas prices, revenues, taxes, development expenditures,
operating expenses and quantities of recoverable oil and gas reserves may vary
substantially from those estimated by the Company or contained in the Reserve
Report. Any significant variance in these assumptions could materially affect
the estimated quantity and value of reserves set forth in this document. The
Company's properties may also be susceptible to hydrocarbon drainage from
production by other operators on adjacent properties. In addition, the Company's
proved reserves may be subject to downward or upward revision based upon
production history, results of future exploration and development, prevailing
oil and gas prices, mechanical difficulties, government regulation and other
factors, many of which are beyond the Company's control. Actual production,
revenues, taxes, development expenditures and operating expenses with respect to
the Company's reserves will likely vary from the estimates used, and such
variances may be material.

Approximately 64% of the Company's total proved reserves at December 31,
1997 were undeveloped, which are by their nature less certain of recovery.
Recovery of such reserves will require significant capital expenditures and
successful drilling operations. The Company's reserve data assume that
substantial capital expenditures by the Company will be required to develop such
reserves. Although cost and reserve estimates

9
<PAGE> 12

attributable to the Company's oil and gas reserves have been prepared in
accordance with industry standards, no assurance can be given that the estimated
costs are accurate, that development will occur as scheduled or that the results
will be as estimated. See "Properties -- Oil and Gas Reserves."

The present value of future net revenues (SEC PV-10) referred to herein
should not be construed as the current market value of the estimated oil and gas
reserves attributable to the Company's properties. In accordance with applicable
requirements of the Commission, the estimated discounted future net cash flows
from proved reserves are generally based on prices and costs as of the date of
the estimate, whereas actual future prices and costs may be materially higher or
lower. Actual future net cash flows also will be affected by increases in
consumption by gas and oil purchasers and changes in governmental regulations or
taxation. The timing of actual future net cash flows from proved reserves, and
thus their actual present value, will be affected by the timing of both the
production and the incurrence of expenses in connection with development and
production of oil and gas properties. In addition, the 10% discount factor,
which is required by the Commission to be used in calculating discounted future
net cash flows for reporting purposes, is not necessarily the most appropriate
discount factor based on interest rates in effect from time to time and risks
associated with the Company or the oil and gas industry in general.

DRILLING, EXPLORATION AND DEVELOPMENT RISKS

Oil and gas exploration and development is a speculative business and
involves a high degree of risk. The Company has expended, and plans to continue
to expend, significant amounts of capital on the exploration and development of
its oil and gas interests. Even if the results of such activities are favorable,
subsequent drilling at significant costs must be conducted on a property to
determine if commercial development of the property is feasible. Oil and gas
drilling may involve unprofitable efforts, not only from dry holes but from
wells that are productive but do not produce sufficient net revenues to return a
profit after drilling, operating and other costs. It is difficult to project the
costs of implementing an exploratory drilling program due to the inherent
uncertainties of drilling in unknown formations, the costs associated with
encountering various drilling conditions such as overpressured zones and tools
lost in the hole, and changes in drilling plans and locations as a result of
prior exploratory wells or additional seismic data and interpretations thereof.
The marketability of oil and gas which may be acquired or discovered by the
Company will be affected by the quality and viscosity of the production and by
numerous factors beyond its control, including market fluctuations, the
proximity and capacity of oil and gas pipelines and processing equipment,
government regulations, including regulations relating to prices, taxes,
royalties, land tenure, importing and exporting of oil and gas and environmental
protection. There can be no assurance the Company will be able to discover,
develop and produce sufficient reserves in Colombia or elsewhere to recover the
costs and expenses incurred in connection with the acquisition, exploration and
development thereof and achieve profitability.

VOLATILITY OF OIL AND NATURAL GAS PRICES

The Company's revenues, future rate of growth, results of operations,
financial condition and ability to borrow funds or obtain additional capital, as
well as the carrying value of its properties, are substantially dependent upon
prevailing prices of oil and natural gas. Historically, the markets for oil and
natural gas have been volatile, and such markets are likely to continue to be
volatile in the future. Prices for oil and natural gas are subject to wide
fluctuation in response to relatively minor changes in the supply of and demand
for oil and natural gas, market uncertainty and a variety of additional factors
that are beyond the control of the Company. These factors include the level of
consumer product demand, weather conditions, domestic and foreign governmental
regulations, the price and availability of alternative fuels, political
conditions in the Middle East, the foreign supply of oil and natural gas, the
price of foreign imports and overall economic conditions. It is impossible to
predict future oil and natural gas price movements with certainty. Declines in
oil and natural gas prices may materially adversely affect the Company's
financial condition, liquidity, ability to finance planned capital expenditures
and results of operations. Lower oil and natural gas prices also may reduce the
amount of oil and natural gas that the Company can produce economically. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Marketing."

10
<PAGE> 13

The Company periodically reviews the carrying value of its oil and natural
gas properties under the full cost accounting rules of the Commission. Under
these rules, capitalized costs of proved oil and natural gas properties may not
exceed the present value of estimated future net revenues from proved reserves,
discounted at 10% (SEC PV-10). Application of this "ceiling" test generally
requires pricing future revenue at the unescalated prices in effect as of the
end of each fiscal quarter and requires a write-down for accounting purposes if
the ceiling is exceeded, even if prices were depressed for only a short period
of time. The Company may be required to write down the carrying value of its oil
and natural gas properties when oil and natural gas prices are depressed or
unusually volatile. If a write-down is required, it would result in a charge to
earnings, but would not impact cash flow from operating activities. Once
incurred, a write-down of oil and natural gas properties is not reversible at a
later date.

RESERVE REPLACEMENT RISK

In general, the volume of production from oil and natural gas properties
declines as reserves are depleted, with the rate of decline depending on
reservoir characteristics. Except to the extent the Company conducts successful
exploration and development activities or acquires properties containing proved
reserves, or both, the proved reserves of the Company will decline as reserves
are produced. The Company's future oil and natural gas production is, therefore,
highly dependent upon its level of success in finding or acquiring additional
reserves. The business of exploring for, developing or acquiring reserves is
capital intensive. To the extent cash flow from operations is reduced and
external sources of capital become limited or unavailable, the Company's ability
to make necessary capital investment to maintain or expand its asset base of oil
and natural gas reserves would be impaired. The failure of an operator of the
Company's wells to adequately perform operations, or such operator's breach of
the applicable agreements, could adversely impact the Company. In addition,
there can be no assurance that the Company's future exploration, development and
acquisition activities will result in additional proved reserves or that the
Company will be able to drill productive wells at acceptable costs. Furthermore,
although the Company's revenues could increase if prices for oil and natural gas
increase significantly, the Company's finding and development costs could also
increase. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations."

ENVIRONMENTAL RISKS

Extensive national, provincial and/or local environmental laws and
regulations in Colombia and the other countries in which the Company operates
affect nearly all of the operations of the Company. These laws and regulations
set various standards regulating certain aspects of health and environmental
quality, provide for penalties and other liabilities for the violation of such
standards and establish in certain circumstances obligations to remediate
current and former facilities and off-site locations. In addition, special
provisions may be appropriate or required in environmentally sensitive areas of
operation, such as where the Company's Colombian interests are located and where
other independent producers of oil and gas have faced significant liability
resulting from environmental claims. There can be no assurance that the Company
will not incur substantial financial obligations in connection with
environmental compliance.

It is possible that the administration and enforcement of current
environmental laws and regulations or the passage of new environmental laws or
regulations in Colombia could result in substantial costs and liabilities in the
future or in delays in obtaining the necessary permits to conduct and expand the
Company's operations in such country. The Company has experienced and may
continue to experience delays in obtaining the necessary environmental permits
to expand its operations in Colombia.

Significant liability could be imposed on the Company for damages, clean-up
costs and/or penalties in the event of certain discharges into the environment,
environmental damage caused by previous owners of property purchased by the
Company or non-compliance with environmental laws or regulations. Such liability
could have a material adverse effect on the Company. Moreover, the Company
cannot predict what environmental legislation or regulations will be enacted in
the future or how existing or future laws or regulations will be administered or
enforced. Compliance with more stringent laws or regulations, or more vigorous
enforcement policies of any regulatory agency, could in the future require
material expenditures by

11
<PAGE> 14

the Company for the installation and operation of systems and equipment for
remedial measures, any or all of which could have a material adverse effect on
the Company.

MARKETS

There is substantial uncertainty as to the prices which the Company may
receive for production from its existing oil reserves or from additional oil and
gas reserves, if any, which the Company may discover. The availability of a
ready market and the prices received for oil and gas produced depend upon
numerous factors beyond the control of the Company including, but not limited
to, adequate transportation facilities (such as pipelines), the marketing of
competitive fuels, fluctuating market demand, governmental regulation and world
political and economic developments. Prices for crude oil are subject to wide
fluctuation in response to relatively minor changes in supply and demand, market
uncertainty and a variety of additional factors that are beyond the control of
the Company. It is possible that, under market conditions prevailing in the
future, the production and sale of oil, if any, from certain of the Company's
properties may not be commercially feasible and the production of gas from the
Company's oil and gas interests in Colombia is not currently commercially
feasible. The sale of oil from the production tests on the Company's properties
in Colombia has been sold to Ecopetrol.

COMPETITION

The Company encounters competition from other oil and gas companies in all
areas of its operations, including the acquisition of producing properties. The
Company's competitors in Colombia include major integrated oil and gas companies
and independent oil and gas companies. Many of its competitors are large,
well-established companies with substantially larger operating staffs and
greater capital resources than the Company's and which, in many instances, have
been engaged in the oil and gas business for a longer time than the Company.
Such companies may be able to offer more attractive terms in obtaining
concessions for exploratory prospects and secondary operations and to pay more
for productive properties and exploratory prospects and to define, evaluate, bid
for and purchase a greater number of properties and prospects than the Company's
financial or human resources permit. The Company's ability to acquire additional
properties and to discover reserves in the future will be dependent upon its
ability to evaluate and select suitable properties and to consummate
transactions in this highly competitive environment.

REGULATION

The Company's operations are subject to regulations imposed by the local
regulatory authorities including, without limitation, currency regulation,
import and export regulation, taxation and environmental controls. The
regulations also generally specify, among other things, the extent to which
properties may be acquired or relinquished, permits necessary for drilling of
wells, spacing of wells, measures required for preventing waste of oil and gas
resources and, in some cases, rates of production and sales prices to be charged
to purchasers. Specifically, Colombian operations are governed by a number of
ministries and agencies including Ecopetrol, the Ministry of Mines and Energy,
the Ministry of Public Works and the Ministry of the Environment.

ITEM 2. PROPERTIES

COLOMBIA -- EMERALD MOUNTAIN

Overview. The Company's Colombian operations are focused on Emerald
Mountain. The Emerald Mountain discovery is located on two adjoining concession
areas in central Colombia, approximately 60 miles northwest of Bogota. The
concession areas are defined by the Association Contracts with Ecopetrol. The
area is accessible via the main road between Bogota and Honda. The OAM pipeline
is approximately 12 miles west of Emerald Mountain, at its nearest point, and
provides an opportunity for oil transportation from Emerald Mountain, although
currently available capacity is limited to 50,000 Bbls/d. The village of Guaduas
lies within the block and provides infrastructure for the local economy, which
is primarily agrarian in nature. The Company owns a 57.7% working interest in
Emerald Mountain before Colombian government participation. The remaining
interests are owned by MTV Investments Limited Partnership (9.4%) and Sociedad
Internacional Petrolera, S.A. ("Sipetrol") (32.9%). Sipetrol is the
international exploration and production

12
<PAGE> 15

subsidiary of the Chilean national oil company. As of December 31, 1997, the
Company's estimated net proved reserves attributable to the delineation of
14,459 acres of Emerald Mountain were 32.2 MMBbls with an SEC PV-10 of $144.9
million.

The Emerald Mountain geological structure is a large anticline. The primary
oil reservoir is the Upper Cretaceous Cimarrona formation, which comprises both
limestone and sandstone and is relatively under pressured. The Emerald Mountain
reserves are located at vertical depths of between approximately 6,000 and 7,500
feet and are characterized by low sulfur content (less than 1%), low paraffin
content and a medium gravity (18 degrees to 20 degrees API gravity).

Drilling activity. To date, eight wells have been drilled on the Dindal and
Rio Seco contract areas. The first well, the Escuela 1, which was drilled in
1994 prior to the acquisition of an interest in Emerald Mountain by the Company,
was plugged and abandoned as non-commercial. The discovery well on Emerald
Mountain was the second well drilled on the Dindal block, the El Segundo 1-E.
The El Segundo 1-E discovery well commenced drilling in December 1995 and
reached total depth in mid-January 1996. The well reached the expected Cimarrona
formation at a depth of 5,718 feet, but stopped drilling after penetrating only
88 feet of the Cimarrona formation due to circulation problems encountered while
drilling. The well was then completed for testing in February 1996. Production
testing produced oil at an actual maximum rate of 3,418 Bbls/d. A third well,
the El Segundo 1-N, reached total drilling depth of 6,820 feet in November 1996.
This well was intentionally deviated from the surface location of the El Segundo
1-E well to a bottom hole location approximately 2,000 feet north of the surface
location. The well encountered approximately 450 feet of oil saturated and
highly fractured Upper Cretaceous Cimarrona formation. During production
testing, the El Segundo 1-N produced oil at an actual maximum rate of 8,948
Bbls/d. A fourth well, the El Segundo 1-S, was drilled and completed in
September 1997 to a total depth of 6,920 feet. The bottom hole location of this
well is approximately 2,000 feet south of the surface location of the El Segundo
1-E well. In October 1997, the Company conducted production testing which
resulted in oil production at an actual maximum rate of 4,528 Bbls/d.

In October 1997, the Tres Pasos 1-E well was drilled and completed at a
vertical depth of 6,200 feet without evidence of any oil-water contact. This
well was the first to be drilled on the Rio Seco contract area and was located
approximately 1.6 miles northwest of the surface location of the El Segundo 1-E
well. Production testing of the Tres Pasos 1-E well was completed in December
1997 and resulted in oil being produced at an actual maximum rate of 13,123
Bbls/d. Analysis of reservoir pressure data during production testing indicated
pressure communication with the El Segundo 1 wells located to the southeast.
Such pressure communication over a 1.6 mile distance support drilling results
that indicate a consistently high and intensive degree of a well-connected
fracture system indicating an extensive storage capacity and permeabililty
within the area of the Cimarrona formation investigated during the production
test.

The sixth well to be drilled on Emerald Mountain, the El Segundo 2-E,
completed drilling at a vertical depth of 6,292 feet in November 1997 on the
Dindal contract area approximately 3.7 miles north of the surface location of
the El Segundo 1-E discovery well. Production testing of the El Segundo 2-E was
completed in January 1998 and resulted in a maximum actual production rate of
5,381 Bbls/d. Analysis of pressure data during production testing evidenced
communication with the El Segundo 1-S well approximately 3.7 miles to the south.
This data further confirmed the presence of a uniform and pervasive fracture
system supporting the evidence for extensive storage capacity and permeability
within the Cimarrona formation over the area investigated by the production
testing.

Drilling of the seventh well on Emerald Mountain and the second on the Rio
Seco contract area, the Tres Pasos 2-E, commenced in December 1997 and was
completed in February 1998 at a location approximately 5.6 miles northwest of
the surface location of the El Segundo 1-E. This well was drilled to a vertical
depth of 6,054 feet and encountered 290 feet of the Cimarrona formation with no
evidence of any oil-water contact. Due to an operational problem that resulted
from a failure to properly cement liner casing through the Cimarrona formation,
the Company has decided to sidetrack and drill a new well bore. This operation
is scheduled to be completed during the second quarter of 1998. Log and core
analysis performed subsequent to

13
<PAGE> 16

the completion of drilling operations resulted in indications of a highly
fractured and oil bearing formation similar to that found in the preceding five
completed wells.

In November 1997, drilling commenced on the El Segundo 3-E well located
approximately 2.8 miles south of the surface location of the El Segundo 1-E
well. This well was the eighth well to be drilled on Emerald Mountain and the
sixth to be drilled on the Dindal contract area. The drilling of the El Segundo
3-E was completed at a vertical depth of 8,021 feet in February 1998. The well
encountered 292 feet of Cimarrona formation that exhibited similar
characteristics in terms of lithology and fracturing as that exhibited in the
previous seven wells. After the completion of drilling operations on the El
Segundo 3-E, the Company experienced significant mechanical problems while
attempting to complete the well for production testing. Due to a failure to
effectively install the lower portion of the well casing, it was not possible to
achieve sufficient communication with the Cimarrona formation to initiate
production testing. The Company has temporarily abandoned the El Segundo 3-E
well pending a scheduled return to this location in the third quarter of 1998.
The Company moved the drilling rig to the surface location for the drilling of
the El Segundo 6-E well located approximately 5.3 miles south of the surface
location of the El Segundo 1-E well. Drilling on the El Segundo 6-E commenced in
March 1998.

- ---------------

14
<PAGE> 17

Prospect Geology. The Emerald Mountain structure is formed by a faulted
anticlinal closure in the foot wall of the Bituima thrust fault system on the
eastern side of the Magdalena river valley. The primary oil reservoir tested to
date is the Upper Cretaceous Cimarrona formation which comprises both limestones
and sandstones. These reservoir sequences are charged with oil generated from
the immediately underlying Villeta (also called La Luna) shale which is
considered the principal source rock for the oil accumulations throughout
Colombia and Venezuela.

The Cimarrona formation is seen in surface outcrop to the north and west of
the structure, as well as in the Lasmo Madrigal #1 well, the AIPC Quina #1 well
and the Company's five delineation wells completed as of March 1998. From this
geologic control and completed well information, the Cimarrona is shown to be
depositionally complex, with a high degree of fracturing consistent in
directional orientation. The Cimarrona formation is on average approximately 290
feet in thickness and contains limestones, calcareous sandstones and siltstones.

Evidence for the structural trap is found in both seismic data over the
prospect and in surface geologic mapping. The trapping mechanism is believed to
be formed by structural closure in three directions (north, south and west), and
an imbricate fault within the Bituima thrust fault system to the east, which is
evidenced in the Escuela 1 well which was drilled in 1994, prior to the
acquisition of an interest in Emerald Mountain by the Company, and was plugged
and abandoned as a non-commercial well. The Escuela 1 well is located 2.5 miles
southeast of the El Segundo 1-E discovery well location and encountered Tertiary
and Cretaceous shales and siltstones from surface to total depth. This
predominantly shale section, emplaced by thrust faulting adjacent to the
Cimarrona reservoir section, is believed to form the eastern critical element of
the trap for the prospect.

Terms of Association Contracts and Related Matters. Association contracts
acquired from Ecopetrol, after receipt of the necessary approval by Colombian
governmental authorities as well as the approval of the board of Ecopetrol, are
mutually executed by the parties and subsequently recorded as a public deed in
Colombia. Therefore, ownership of an association contract is protected by
Colombian law.

The Association Contracts were issued by Ecopetrol in March 1993 and August
1995, respectively, and provide generally for a six-year exploration phase
followed by a 22-year production period, with partial relinquishments of
acreage, excluding commercial fields, required commencing at the end of the
sixth year of each contract. Under the terms of the Association Contracts,
Ecopetrol will receive a royalty equal to 20% of production (after
transportation costs are deducted) on behalf of the Colombian government and, in
the event a commercially feasible discovery is made, Ecopetrol will acquire a
50% interest in the remaining production, bear 50% of the development costs, and
reimburse the working interest owners, from Ecopetrol's share of future
production, for 50% of the working interest owners' costs of certain exploration
activities. Upon its acceptance of a field as commercial, Ecopetrol will acquire
a 50% interest therein and the interests of the other parties to the contract,
including the Company, will be reduced by 50%; all decisions regarding the
development of a commercial field will be made by an Executive Committee
consisting of representatives of the parties to the contract who will vote in
proportion to their respective interests in such contract. Decisions of the
Executive Committee will be made by the affirmative vote of the holders of over
50% of the interests in the contract.

Under the terms of the Dindal Association Contract, Ecopetrol's interest in
production and costs would increase after a commercial contract area produces in
excess of 60 MMBbls. Such increases occur in 5% increments from 50% to 70% as
accumulated production from any field increases in 30 million barrel increments
from 60 MMBbls to 150 MMBbls. Under the terms of the Rio Seco Association
Contract, after a commercial contract area produces in excess of 60 MMBbls,
Ecopetrol's interest in production and costs would increase from 50% to 75% as
the ratio of the accumulated income attributable to the parties to the contract
other than Ecopetrol to the accumulated development, exploration and operating
costs of such parties (less any expenses reimbursed by Ecopetrol) increases from
a one-to-one ratio to a two-to-one ratio.

Under the terms of the Association Contracts, in the event a discovery is
made and is not deemed to be commercially feasible by Ecopetrol, the working
interest owners may expend up to $2 million over a one-year period to further
develop the field, 50% of which will be reimbursed if Ecopetrol subsequently
accepts the
15
<PAGE> 18

commercial feasibility thereof. If Ecopetrol does not declare the field
commercial, the working interest owners may continue to develop the field at its
own expense. In such event, Ecopetrol will have the right to acquire a 50%
interest therein upon payment of 200% of the amounts expended by the working
interest owners, which payment may be made out of Ecopetrol's share of future
production.

The Company and the other working interest owners have paid all costs of
the exploration program under the Association Contracts to date. Under the terms
of the Dindal and Rio Seco Association Contracts, the Company and its partners
are required to drill one well on each contract per year through 1999 and 2001,
respectively, and will continue to bear all exploration costs relating to a
field until such field is declared commercial. The Company plans to submit a
commerciality application to Ecopetrol in the second quarter of 1998 with
respect to its discovery. Such application is subject to approval by Ecopetrol,
which has the right to reject or delay acceptance of commerciality or to accept
commerciality and acquire a 50% working interest in the Association Contracts.

GHK Colombia, a wholly owned subsidiary of the Company, serves as the
operator of Emerald Mountain, pursuant to the terms of operating agreements
between the Company, its respective subsidiaries and the other working interest
owners. GHK Colombia has exclusive charge of carrying out the program of
operations within the budgets approved by the Operating Committee and may demand
payment in advance from each party of its respective shares of estimated monthly
expenditures.

Under the terms of a letter agreement dated September 11, 1992, as amended,
between GHK Colombia and Dr. Jay Namson, the holders of interests in the
Association Contracts, as a group, will be required to assign a 2% working
interest in the Dindal Association Contract and the Rio Seco Association
Contract to Dr. Namson after recovery from production of 100% of all costs
incurred in connection with the exploration and development of the Dindal and
Rio Seco contract areas since the completion of the first year work obligations
under the Dindal Association Contract. Accordingly, when such costs have been
recovered, the Company will be required to assign to Dr. Namson 2% of its
interests prior to the acquisition of the 6% Petrolinson interest (or a 0.517%
interest in the Association Contracts after adjusting for the acquisition of a
50% interest by Ecopetrol which is expected to occur prior to the assignment to
Dr. Namson).

COLOMBIA -- MONTECRISTO AND ROSABLANCA ASSOCIATION CONTRACTS

The Company owns a 75% working interest in the contiguous Montecristo and
Rosablanca association contract areas, which cover a total of approximately
692,000 gross acres in the northern Middle Magdalena Basin. During 1998, the
Company expects to reprocess and evaluate 2-D seismic data on the Montecristo
and Rosablanca contract areas.

COLOMBIA -- TAPIR ASSOCIATION CONTRACT

Overview. The Company acquired an 11.875% interest in the Tapir Association
Contract (the "Tapir Association Contract") in April 1996. The Tapir contract
area consists of 233,000 gross acres located in the Llanos Basin of east central
Colombia and is crossed by two oil pipelines carrying production from nearby oil
fields. Other interests in the Tapir Association Contract are held by Ampolex
(56.25%), Mohave Oil & Gas Corp. (10.205%), Doreal Energy (11.67%) and Heritage
Minerals (10%), which serves as the operator.

Exploration Prospects. There are three exploration prospect types on the
Tapir contract area: several conventional Llanos Basin small structural
closures, a deep Paleozoic anomaly and two basal Cretaceous stratigraphic
prospects. The small structural closures are relatively low risk, but are
expected to have low reserve potential. The Paleozoic prospect is of geologic
interest, but relies on unproven source and reservoir rocks and is therefore
high risk until further geologic work can be completed. The geologic risk for
the two Cretaceous stratigraphic prospects depends on the effectiveness of the
lateral seal between the Ubaque sandstone and the adjacent Paleozoic section.

The Mateguafa prospect, one of the small structural closures in the central
portion of the Tapir contract area, has been selected as the first exploration
drill site in the Tapir contract area. The Company is participating in the
Mateguafa well, which commenced drilling in March 1998.

16
<PAGE> 19

Existing Well. In 1993, the Macarenas #1 well, a discovery well, was
drilled on the Tapir contract area and produced 320 Bbls/d in a short-term test,
but was not completed for production. Since the well was drilled and tested,
additional oil pipeline infrastructure has been built in the area. The operator
plans to place the well on long-term production test after the completion of the
exploratory well to determine sustainable production rates and the extent of the
reservoir.

Terms of Tapir Association Contract. The Tapir Association Contract was
effective on February 6, 1995 on terms substantially similar to the Rio Seco
Association Contract. Heritage Minerals has completed a 51.5 square-mile seismic
program in the contract area, which satisfied the work program for the first
year of the Tapir Association Contract and part of the second year. The
commitment for the second year well has been satisfied by the drilling of the
Mateguafa well.

The Company acquired its interest in the Tapir Association Contract in
April 1996 in consideration for the payment of $0.1 million, which represents
reimbursement for past seismic costs and permit administration, and its
agreement to pay its proportionate share of the costs of a seismic program, the
first exploratory well, the production test on the Macarenas #1 well (assuming
the parties elect to proceed therewith) and certain additional costs to earn its
interest in the Tapir Association Contract. The Company estimates that its
proportionate share of these costs, which are required to be paid to retain its
interest in the Tapir Association Contract, is approximately $0.4 million.

AUSTRALIA

The following is a description of the Company's interests in Australia,
which the Company plans to divest or farm out.

Perth Basin Permits. The Company holds an 11.77% working interest in
Exploration Permit 381 ("EP381") and Exploration Permit 408 ("EP408"), both of
which relate to properties that are located in the Perth Basin, Western
Australia. Other interests in these permit areas are held by: Pennzoil
(44.115%), Amity Oil (30.115%) and GeoPetro Company (14%).

The Company has entered into a purchase and sale agreement with Forcenergy
International Inc. with respect to the sale of its interests in EP 381 and EP
408 for approximately $0.9 million and will be reimbursed approximately $0.3
million for certain capital expenditures. The required consents of governmental
authority and most third parties have been received. No absolute assurance can
be given that the Company will complete this sale, which is subject to obtaining
the final approval of an aboriginal council in Western Australia.

Bass Basin, Block T27P. The Company holds a 20% working interest in Block
T27P, a 1,800,000 acre block in approximately 70 meters of water, in the Bass
Basin, the central of three basins offshore southern Australia. The easternmost
basin is the Gippsland Basin where BHP Petroleum and Esso have a series of large
oil and gas fields. The westernmost basin is the Otway Basin, the site of recent
gas discoveries by BHP Petroleum and others which will likely serve the South
Australia and Victoria gas markets. Block T27P lies about halfway between the
Victoria coast to the north and the Tasmania coast to the south (about 56 miles
each way). The Bass Basin has been the site of a series of gas and oil shows and
discoveries, including the Yolla Field, which is adjacent to Block T27P. The
Yolla Field was discovered by Amoco in the mid-1980s and has not yet been
appraised or developed.

Globex Exploration, the operator of the permit with an 80% working
interest, was granted the Offshore Petroleum Exploration Permit effective August
10, 1994 (the "Bass Basin Permit"). Globex completed a 620-mile 2-D seismic
program on the block. The remaining work commitment on the block consists of a
3-D seismic survey and two exploration wells. Globex has selected a drillable
prospect some 6.2 miles north of the Yolla Field and is seeking additional
participants in the block to share the cost of an exploratory well which is
estimated to be approximately $5 million. As suitable drilling rigs are not
available in the near term, Globex has applied for a permit extension in the
block until a suitable rig can be contracted.

In March 1996, the Company acquired a six-month option to purchase its
interest in the block for $0.3 million and exercised that option in September
1996. Pursuant to the terms of the option agreement, the
17
<PAGE> 20

Company may elect to farm out up to 50% of its interest in the Bass Basin
Permit. In addition, if Globex Exploration and the other interest holders seek
to enter into a farm-out, the Company has agreed to participate proportionally
with such parties in such farm-out provided that its interest may not be reduced
below 10%.

PAPUA NEW GUINEA

The Company holds 100% of exploration permit PPL-182 in southern Papua New
Guinea effective June 11, 1996. The permit covers an area of 1,200,000 acres
located both onshore and offshore in the Fly River Delta and the Gulf of Papua.

Past exploration activity within PPL-182 has resulted in the acquisition of
seismic data and the drilling of several exploratory wells. The Company's first
year work program consisted of a geological and geophysical review of existing
data. The Company has entered into an Agreement with ARCO Papua New Guinea Inc.
("ARCO") for a farm out of its interest whereby ARCO will fund the Company's
obligation for the twelve-month period ended July 1998 for an 80% interest in
the subject exploration permit. In future periods, the Company has no obligation
to expend funds but may be subject to a forfeiture of its interest should the
Company decide not to continue to fund its remaining 20% interest.

OIL AND GAS RESERVES

The following table sets forth estimated net proved oil and gas reserves of
the Company, the estimated future net revenues before income taxes, the present
value of estimated future net revenues before income taxes related to proved
reserves and the standardized measure of discounted future net cash flows
related to proved reserves, in each case as of December 31, 1997. All
information in this Offering Memorandum relating to estimated net proved oil and
gas reserves and the estimated future net revenues and cash flows attributable
thereto is based upon a report from Ryder Scott Company Petroleum Engineers. All
calculations of estimated net proved reserves have been made in accordance with
the rules and regulations of the Commission.

<TABLE>
<CAPTION>
AS OF
DECEMBER 31,
1997
<S> <C>
Total net proved reserves:
Oil (MBbls)............................................... 32,160
Gas (MMcf)................................................ --
Total (MBOE).............................................. 32,160
Net proved developed reserves:
Oil (MBbls)............................................... 11,494
Gas (MMcf)................................................ --
Total (MBOE).............................................. 11,494
Estimated future net revenues before income taxes (in
thousands)(1)............................................. $241,700
Present value of estimated future net revenues before income
taxes
(in thousands)(1)(2)...................................... $144,866
Standardized measure of discounted future net cash flows (in
thousands)(1)(3).......................................... $100,617
</TABLE>

- ---------------

(1) Calculated using an oil price of $10.15 per barrel net of gravity
adjustment, transportation costs, and marketing costs.

(2) The present value of estimated future net revenues attributable to the
Company's proved reserves was prepared using constant prices as of the
calculation date, discounted at 10% per annum on a pre-tax basis (SEC
PV-10).

(3) The standardized measure of discounted future net cash flows represents the
present value of estimated future net revenues from proved reserves after
income tax, discounted at 10% per annum.

There are numerous uncertainties inherent in estimating quantities of
proved reserves, future rates of production and the timing of development
expenditures, including many factors beyond the control of the Company. The
reserve data set forth herein represent only estimates. Reserve engineering is a
subjective

18
<PAGE> 21

process of estimating underground accumulations of oil and gas that cannot be
measured in an exact manner, and the accuracy of any reserve estimate is a
function of the quality of available data, engineering and geological
interpretation and judgment and the existence of development plans. As a result,
estimates of reserves made by different engineers for the same property will
often vary. Results of drilling, testing and production subsequent to the date
of an estimate may justify a revision of such estimates. Accordingly, reserve
estimates generally differ from the quantities of oil and gas ultimately
produced. Further, the estimated future net revenues from proved reserves and
the present value thereof are based upon certain assumptions, including
geological success, prices, future production levels and costs that may not
prove to be correct. Predictions about prices and future production levels are
subject to great uncertainty, and the meaningfulness of such estimates depends
on the accuracy of the assumptions upon which they are based.

PRODUCTIVE WELLS

The following table sets forth the productive oil and gas wells owned by
the Company as of December 31, 1997:

<TABLE>
<CAPTION>
WELLS(1)
----------------------------
OIL GAS
------------ ------------
GROSS NET GROSS NET
<S> <C> <C> <C> <C>
Colombia................................................. 3 1.7 0 0.0
-- --- -- ---
Total.......................................... 3 1.7 0 0.0
</TABLE>

- ---------------

(1) One or more completions in the same well bore are counted as one well.

ACREAGE

The following table sets forth estimates of the developed and undeveloped
acreage for which oil and gas leases or concessions were held by the Company as
of December 31, 1997.

<TABLE>
<CAPTION>
DEVELOPED UNDEVELOPED
--------------------------- ---------------------------
GROSS ACRES NET ACRES(1) GROSS ACRES NET ACRES(1)
<S> <C> <C> <C> <C>
Colombia........................... 14,459 8,343 1,019,371 601,329
Papua New Guinea................... -- -- 1,200,000 1,200,000
Australia.......................... -- -- 2,394,546 429,978
------ ----- --------- ---------
Total.................... 14,459 8,343 4,613,917 2,231,307
</TABLE>

- ---------------

(1) New acres are based on the Company's respective working interests and, in
Colombia, are before Colombian government participation. See
"-- Properties."

DRILLING ACTIVITY

The following table sets forth the number of wells drilled by the Company
from inception through December 31, 1997:

<TABLE>
<CAPTION>
EXPLORATORY DEVELOPMENT
-------------------------- -------------------------
PRODUCTIVE DRY PRODUCTIVE DRY
----------- ------------ ----------- -----------
GROSS NET GROSS NET GROSS NET GROSS NET
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Year ended December 31, 1997:
Colombia................................ 3 1.7 0 0.0 0 0.0 0 0.0
Year ended December 31, 1996:
Colombia................................ 2 1.2 0 0.0 0 0.0 0 0.0
Argentina............................... 0 0.0 1 0.3 0 0.0 0 0.0
-- --- -- ---- -- --- -- ---
2 1.2 1 0.3 0 0.0 0 0.0
== === == ==== == === == ===
Year ended December 31, 1995:
Australia............................... 0 0.0 1 0.1 0 0.0 0 0.0
== === == ==== == === == ===
</TABLE>

19
<PAGE> 22

Since December 31, 1997, the Company has drilled no gross productive
exploratory wells, 1 gross nonproductive exploratory well (0.6 net to the
Company), no gross productive development wells and no gross nonproductive
development wells. In addition, the Company is currently drilling 2 gross
exploratory wells (1.2 net to the Company) and no gross development wells.

GATHERING AND PIPELINE SYSTEM

Transportation and marketing of crude oil to be produced from Emerald
Mountain is expected to be achieved through the construction of a 36-mile
pipeline northwest from Emerald Mountain to connect to the existing OAM
pipeline, a regulated common carrier, at the town of La Dorada along the
Magdalena River Valley. This 36-mile pipeline, which is part of the Company's
Phase I development plan, will have the capacity for 250,000 Bbls/d but will be
constrained by the currently available capacity of 50,000 Bbls/d on the OAM
pipeline. The Company is negotiating with the operator of the OAM pipeline for
the transportation of 50,000 Bbls/d on the OAM pipeline; however, a final
contract has not been executed. Through the OAM pipeline, Emerald Mountain's
production will be transported to pipeline terminal and storage facilities at
Vasconia, which is located approximately 45 miles north of La Dorada. At
Vasconia, crude oil from Emerald Mountain may then be shipped through the
existing ODC and OCENSA pipelines, regulated common carriers, to the port city
of Covenas on the Caribbean for loading, export and sale. To avoid the capacity
constraints on the OAM pipeline, the Company intends to build its Phase II
pipeline from the end of its Phase I pipeline in La Dorada to Vasconia, where it
will be able to utilize approximately 250,000 Bbls/d of currently available
capacity on the ODC and OCENSA pipelines, subject to negotiation of
transportation contracts.

Phase I of the transportation plan provides for the construction of
compression, storage, separation, gas gathering and reinjection and other
production facilities and a 24-inch buried pipeline from the center of the
project northwest to connect to the OAM pipeline. The total cost of
infrastructure and pipeline construction of the Phase I transportation plan is
estimated to be $186.6 million, and the Company's share of such costs is
estimated to be $60.7 million. Phase I is scheduled to be completed in 1999.

Phase II of the transportation plan provides for the construction of
additional production facilities and a new 24-inch pipeline parallel to the
existing OAM pipeline along the 45 miles from La Dorada to Vasconia. The
completion of Phase II is scheduled to occur in the first quarter of 2000 and is
designed to provide capacity for approximately 250,000 Bbls/d at a total cost of
about $308.5 million with the Company's share at $89.0 million.

Specifications, planning and engineering studies for the planned pipeline
and associated compression facilities to be constructed from Emerald Mountain to
Vasconia are being conducted by Brown & Root Energy Services and Technivance
Brown & Root S.A., subsidiaries of Halliburton Inc. Construction of additional
pipelines beyond Phase I depends upon the negotiation and consummation of
construction and financing arrangements, availability of excess capacity on
existing pipelines and the completion of satisfactory contractual arrangements
to obtain such capacity.

MARKETING

Oil produced from the Dindal contract area to date under the long-term
production tests has been sold to Ecopetrol. Upon Ecopetrol's declaration of the
commerciality of the Company's discovery, oil produced from the Dindal and Rio
Seco contract areas may be sold to Ecopetrol or to third parties. In the event
the production is required to satisfy internal demand for oil in Colombia, the
Company may be required to sell some or all of its production to Ecopetrol at
prevailing market prices.

REGULATION

The Company's operations are affected by political developments and laws
and regulations in the areas in which it operates. In particular, oil and gas
production operations and economics are affected by price controls, tax and
other laws relating to the petroleum industry, by changes in such laws and by
changing administrative regulations and the interpretations and application of
such rules and regulations. In addition, various
20
<PAGE> 23

international laws and regulations covering the discharge of materials into the
environment, the disposal of oil and gas wastes, or otherwise relating to the
protection of the environment, may affect the Company's operations and costs.
The Company has experienced and may continue to experience delays in obtaining
the necessary environmental permits to expand its operations in Colombia. Oil
and gas industry legislation and agency regulation is periodically changed for a
variety of political, economic, environmental and other reasons. Numerous
governmental departments and agencies issue rules and regulations binding on the
oil and gas industry, some of which carry substantial penalties for the failure
to comply. The regulatory burden on the oil and gas industry increases the
Company's cost of doing business.

COMPETITION

EMPLOYEES

At December 31, 1997 the Company had 33 full time employees, primarily
professionals, including geologists, geophysicists, and engineers.

ITEM 3. LEGAL PROCEEDINGS

Petrolinson S.A. and GHK Colombia (two of the Company's subsidiaries),
along with Norman Rowlinson (the former owner of Petrolinson S.A.) and the heirs
of Howard Thomas Corrigan, are defendants in a lawsuit recently filed in the
civil circuit court of Santa Fe de Bogota, Colombia by the heirs of Nicolas
Beltran Franco alleging that (i) a de facto company existed between Nicolas
Beltran Franco and the defendants with regards to the exploration and production
of the Dindal and Rio Seco contract areas and that (ii) prior to the execution
of the Dindal and Rio Seco Association Contracts the de facto company conducted
exploration works in the Dindal and Rio Seco contract areas, resulting in the
plaintiffs having the right to participate in income derived from the Dindal and
Rio Seco contract areas. Despite the fact that none of the plaintiffs is a party
to the Association Contracts, the plaintiffs are seeking 50% of the income
generated by the alleged de facto company. It is unclear from the statements
made in the lawsuit, however, what percentage of the Dindal and Rio Seco
contract areas might be covered by the plaintiffs' claims made through the
alleged de facto company.

As the Company has just been notified of the lawsuit, the Company's
investigation of the claims made by the plaintiffs is in the early stages;
however, the Company believes that this lawsuit is without merit and intends to
defend the lawsuit vigorously. The Company believes that the outcome of this
lawsuit will not have a material adverse effect on the Company. The Company's
Colombian counsel, Raisbeck, Lara, Rodriguez & Rueda, members of the law firm of
Baker & McKenzie, based on their review of the matter to date, are of the
opinion that if the above-described claim is litigated to its conclusion it is
remote that the plaintiffs in such lawsuit would succeed on the merits of their
claim.

ITEM 4. SUBMISSION OF MATTERS TO VOTE

None

21
<PAGE> 24

PART II

ITEM 5. MARKET FOR REGISTRANTS COMMON EQUITY

The Company's Common Shares have been listed on the American Stock Exchange
under the ticker "SEV" since January 9, 1998 and the Toronto Stock Exchange
("TSE") in Toronto, Ontario, Canada under the ticker "SVS.U" since February 10,
1997. From June 30, 1995 through February 7, 1997, the Company's Common Shares
traded on the Canadian Dealer Network under the symbol "SVS.U". The following
table summarizes the high and low closing prices as reported on the Canadian
Dealer Network for each quarterly period since the commencement of trading on
through February 7, 1997 and the high and low sales prices as reported on the
TSE from February 10, 1997 through December 31, 1997. The prices listed below
are stated in U.S. dollars, which is the currency in which they were quoted:

<TABLE>
<CAPTION>
TOTAL
HIGH LOW VOLUME
----- ----- ---------
<S> <C> <C> <C>
1996
First Quarter............................................ 6.75 0.55 8,402,885
Second Quarter........................................... 10.50 5.25 1,974,615
Third Quarter............................................ 20.00 7.00 6,655,958
Fourth Quarter........................................... 25.75 14.75 8,537,978
1997
First Quarter (through February 7, 1997)................. 19.00 15.00 3,018,441
First Quarter (since February 10, 1997).................. 17.40 9.00 3,718,929
Second Quarter........................................... 13.10 8.25 3,200,200
Third Quarter............................................ 14.10 9.60 3,941,940
Fourth Quarter........................................... 20.05 11.80 7,541,766
</TABLE>

ITEM 6. SELECTED FINANCIAL DATA

The following selected financial data should be read in conjunction with
the Consolidated Financial Statements and Notes thereto included herein:

<TABLE>
<CAPTION>
PERIOD FROM
INCEPTION
YEAR ENDED DECEMBER 31, FEBRUARY 3, 1995
------------------------ TO DECEMBER 31,
1997 1996 1995
---------- ---------- ----------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C>
INCOME STATEMENT DATA:
Revenues............................................. $ 1,567 $ 575 $ 152
Net loss............................................. (7,928) (2,195) (2,120)
Net loss per common share............................ (0.24) (0.17) (0.23)
Weighted average shares outstanding.................. 32,505 12,972 9,247
BALANCE SHEET DATA (END OF PERIOD):
Cash and cash equivalents............................ $ 18,067 $ 10,620 $ 3,366
Total assets......................................... 291,914 235,501 4,170
Current liabilities.................................. 8,205 2,806 120
Minority interest.................................... 4,087 1,060 --
Stockholders' equity................................. 184,163 167,667 4,050
</TABLE>

22
<PAGE> 25

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

OVERVIEW

Seven Seas is an independent international energy company engaged in the
exploration, development and production of oil and natural gas in Colombia. The
Company is the operator of an oil discovery ("Emerald Mountain") defined by two
association contracts covering a total of approximately 109,000 contiguous acres
in central Colombia. The Company has focused its efforts to date on delineating
the oil and gas potential of Emerald Mountain from which there has been no
commercial production pending construction of pipeline and other infrastructure
facilities. The Company also has interests in three additional association
contracts in Colombia, which, together with the Emerald Mountain association
contracts, cover over one million gross acres. The Company also has certain
other interests in Australia and Papua New Guinea. As a result of its focus on
its Colombian properties, the Company is in the process of divesting or farming
out its oil and gas interests in Australia and Papua New Guinea.

TERMS OF ASSOCIATION CONTRACTS AND RELATED MATTERS

The Company has a 57.7% working interest (before Colombian government
participation) in the Association Contracts. The Colombian government receives a
royalty equal to 20% of production (after transportation costs are deducted). In
the event of commerciality, Ecopetrol has the right to acquire an initial 50%
working interest in the project. Ecopetrol's share of production and costs in
the Dindal contract area will increase once a commercial field produces in
excess of 60 MMBbls, up to a maximum interest of 70% if the field produces in
excess of 150 MMBbls. In addition, Ecopetrol's share of production and costs in
the Rio Seco contract area is also subject to increase once a commercial field
produces in excess of 60 MMBbls, up to a maximum interest of 75% depending upon
revenues and associated costs. Until commercial production is initiated, the
Company expects that the working interest owners will fund all costs associated
with the initiation of commercial production and that, upon such initiation,
Ecopetrol's 50% share of such costs will be repaid through proceeds from their
share of production.

To date, all oil produced by the Company has been from production testing
on Emerald Mountain. Upon Ecopetrol's acceptance of commerciality of the
Company's discovery, oil produced from the Dindal and Rio Seco contract areas
may be sold to Ecopetrol or to third parties. In the event the production is
required to satisfy internal demand for oil in Colombia, the Company may be
required to sell some or all of its production to Ecopetrol at prevailing market
prices.

COLOMBIAN TAXES

The Company's net income, as defined under Colombian law, from Colombian
sources is subject to Colombian corporate income tax at a rate of 35%. An
additional remittance tax is imposed upon remittance of profits abroad at a rate
of 7%.

ACCOUNTING POLICIES AND DEVELOPMENT STAGE ACCOUNTING

The Consolidated Financial Statements and Notes thereto included herein
have been prepared in accordance with generally accepted accounting principles
in the United States. As a consequence of being a "reporting issuer" under
Canadian Securities laws Company's listing on the Toronto Stock Exchange, the
Company is required to file an Annual Information Form with the Ontario
Securities Commission with its Consolidated Financial Statements and Notes
thereto, prepared in accordance with Canadian GAAP. The consolidated financial
statements and notes prepared in accordance with Canadian GAAP do not require
certain entries or development stage presentation made in accordance with U.S.
GAAP. The Company recorded deferred income tax liabilities relating to the
acquisitions of GHK Colombia, Esmeralda LLC, and 62.963% of Cimarrona LLC in
1996 and Petrolinson, S.A. on March 5, 1997 pursuant to U.S. GAAP. The credit to
deferred income tax liabilities and the corresponding increase in unevaluated
oil and gas interests amounted to $70.5 million and $64.0 million as of December
31, 1997 and December 31, 1996, respectively. The liability for deferred income
taxes recorded in 1997 and 1996 would not be required by Canadian GAAP. In
addition, 1997 general and administrative expense includes compensation expense
of $2.1 million relating to

23
<PAGE> 26

a change in the exercise period of stock options held by former executives.
Recognition of such expense would not be required by Canadian GAAP.

The Company's exploration and development activities have generated an
insignificant amount of revenue, thus requiring the financial statements to be
presented as a development stage enterprise. Accumulated losses are presented on
the balance sheet as "Deficit accumulated during the development stage." The
income statement presents revenues and expenses for each period presented and
also a cumulative total of both amounts from the Company's inception. The
statement of cash flows shows inflows and outflows for the each period presented
and from the Company's inception. The statement of stockholders' equity presents
the date and number of shares of each class of security issued for cash or other
consideration and the dollar amount assigned. In addition, the notes to
financial statements are required to identify the enterprise as development
stage.

The Company follows the full-cost method of accounting for oil and natural
gas properties. Under this method, all costs incurred in the acquisition,
exploration and development of oil and gas properties, including unproductive
wells, are capitalized in separate cost centers for each country. Such
capitalized costs include contract and concession acquisition, geological,
geophysical and other exploration work, drilling, completing and equipping oil
and gas wells, constructing production facilities and pipelines, and other
related costs. As of December 31, 1996, unevaluated oil and gas interests
included capitalized general and administrative costs of $0.1 million. No
additional general and administrative costs were capitalized during 1997. The
Company capitalized interest of $0.6 million in 1997.

The capitalized costs of oil and gas properties in each cost center are
amortized on the composite units of production method based on future gross
revenues from proved reserves. Sales or other dispositions of oil and gas
properties are normally accounted for as adjustments of capitalized costs. Gain
or loss is not recognized in income unless a significant portion of a cost
center's reserves is involved. Capitalized costs associated with the acquisition
and evaluation of unproved properties are excluded from amortization until it is
determined whether proved reserves can be assigned to such properties or until
the value of the properties is impaired. If the net capitalized costs of oil and
gas properties in a cost center exceed an amount equal to the sum of the present
value of estimated future net revenues from proved oil and gas reserves in the
cost center and the lower of cost or fair value of properties not being
amortized, both adjusted for income tax effects, such excess is charged to
expense.

As of December 31, 1997, the Company's exploration and development
activities have not generated significant revenues. As a result, the Company's
historical results of operations have been presented as a development stage
company; thus, period to period comparisons of such results and certain
financial data may not be meaningful or indicative of future results. In this
regard, future results of the Company will be materially dependent upon the
success of the Company's Emerald Mountain operations.

RESULTS OF DEVELOPMENT STAGE OPERATIONS

Oil revenues and lease operating expenses pertained solely to the Company's
share of crude oil produced during production testing of the Company's five
completed wells on Emerald Mountain, which comprised four wells producing in
1997 and two wells producing in 1996. Revenues from oil sales were $0.8 million,
$0.2 million, and $0.0 in 1997, 1996, and for the period from inception on
February 3, 1995 to December 31, 1995 (the "1995 Period"), respectively. Lease
operating expenses were $0.9 million and $0.3 million in 1997 and 1996,
respectively.

Interest income increased from $0.3 million in 1996 to $0.8 million in
1997. The increase was the consequence of higher cash balances resulting from
the private placements of the Company's securities. The increase from $0.2
million for the 1995 Period to $0.3 million for the year ended December 31, 1996
was also the consequence of higher cash balances resulting from private
placements of the Company's securities.

General and administrative costs were $8.7 million in 1997 as compared to
$2.5 million for 1996. The increase was primarily attributable to severance
costs paid to former executive officers and recognition of compensation expense
related to a change in the exercise period of stock options held by such
executives. In

24
<PAGE> 27

addition, the Company expanded its operating activities and added to its
professional staff in the U.S. and Colombia. General and administrative costs
increased from $1.1 million for the 1995 Period to $2.5 million for the year
ended December 31, 1996 primarily as a result of a full year of expenses
incurred by the Company in 1996 as compared to 1995, and the increase in
activities associated primarily with the acquisition of GHK Colombia, Esmeralda
LLC, and Cimarrona LLC.

Depreciation and amortization remained constant at $0.1 million for the
years ended December 31, 1996 and 1997. Depreciation and amortization increased
from $37,671 for the 1995 Period to $0.1 million for the year ended December 31,
1996 primarily as a result of the acquisitions mentioned above and the inclusion
of a full year of expenses incurred by the Company in 1996 as compared to 1995.

The Company incurred net losses of $7.9 million and $2.2 million for the
years ended December 31, 1997 and 1996, respectively, and $2.1 million for the
1995 Period.

LIQUIDITY AND CAPITAL RESOURCES

The Company's activities have been funded primarily by the proceeds from
private placements of the Company's securities from inception through December
1997, resulting in aggregate cash proceeds of $47.0 million. In 1996, the
Company acquired an additional 36.7% interest in the Association Contracts in
Colombia in exchange for the issuance of the Company's securities valued at
$153.1 million in the aggregate. From inception through December 31, 1997, the
Company had capital expenditures of $22.4 million for the acquisition,
exploration, and development of its oil and gas properties including $20.3
million with respect to its interests in Colombia and approximately $2.1
million, of which $1.1 million has been expensed, with respect to its interests
in other countries. Such expense included $0.5 million for the cost of an option
to acquire a 5% participating interest in three exploration blocks in North
Africa and $0.6 million associated with a dry hole in the San Jorge Basin,
Argentina. The Company's activities in North Africa and Argentina have been
discontinued.

The Company's primary capital commitments include Phases I and II of its
Emerald Mountain development program. The Company's capital expenditures
estimated for Phase I include $16.2 million for field development and
delineation and $60.7 million for pipeline and production facilities. The
Company's capital expenditures estimated for Phase II include $65.2 million for
field development and delineation and $89.0 million for pipeline and production
facilities. The Company had working capital of $13.9 million as of December 31,
1997. The Company may finance its operations and investments through the
issuance of public and private debt, equity, and convertible securities, as well
as through commercial banking credit facilities. However, there can be no
assurance that debt or equity financing will be available to the Company on
economically acceptable terms. If sufficient funds are not available to meet the
Company's obligations with respect to a property, the Company may elect to
forfeit its interest in such property. The Company does not anticipate that it
will forfeit its interest in such property.

Colombia. During 1998, the Company plans to drill a total of seven
additional wells on the Dindal and Rio Seco contract areas, begin construction
of a 36-mile pipeline to provide transportation capacity of 50,000 Bbls/d,
conduct seismic operations, and carry out other development activities for an
aggregate estimated cost of $62.2 million. The pipeline is scheduled for
completion in mid-1999. An exploratory well on the Company's non-operated Tapir
Block in Colombia commenced drilling in March 1998.

For the years ended December 31, 1997 and 1996, the Company had oil sales
of $0.8 million and $0.2 million, respectively, solely from production testing
of the Company's five completed wells on Emerald Mountain, which comprised four
wells producing in 1997 and two wells producing in 1996. Although the Company
intends to continue to sell oil resulting from production tests; significant
production is not expected until further evaluation and development of the field
through the drilling of additional wells and construction of production
facilities and pipelines. The Company has received preliminary plans for the
construction of pipelines and producing facilities, and permitting and final
planning for pipelines and production facilities is now proceeding. Completion
of Phase I of these facilities is scheduled for 1999.

25
<PAGE> 28

Australia and Papua New Guinea. The Company is in the process of
eliminating any mandatory capital commitments outside of Colombia. In Papua New
Guinea, the Company signed a farm-out agreement with ARCO Papua New Guinea Inc.
whereby the Company will retain a 20% carried interest with no required capital
expenditures. In the Western Perth Basin in Australia, the Company has signed a
purchase and sale agreement with Forcenergy International Inc. in which the
Company will exchange its 11.77% working interest for $0.9 million. The Company
will retain a small overriding interest and will also be reimbursed $0.3 million
for certain capital expenditures. The agreement is pending its final approval by
an aboriginal council in West Australia. In the Bass Strait Basin in Australia,
the Company is seeking to farm-out its interests. The Company has no required
capital commitments for this prospect.

Special Notes. In August 1997, the Company issued $25 million of Special
Notes in a private transaction with institutional and accredited investors.
Interest on the Special Notes is payable in arrears commencing on December 31,
1997, at a rate of 6% per annum on December 31 and June 30 in each year until
maturity, on August 7, 2003.

The Special Notes are exchangeable for a like principal amount of
Convertible Debentures on the earlier occurring of (i) the effectiveness of a
registration statement under the Securities' Act covering the issuance of the
common shares and warrants upon conversion of the Convertible Debentures and
compliance with certain Canadian securities requirements or (ii) August 7, 1998.
The Convertible Debentures are convertible into Units totaling 2,173,913 common
shares and warrants exercisable for 1,086,957 common shares. Each warrant is
exercisable for one common share at an exercise price of $15 and expire on
August 7, 1998. Assuming exercise of all of the warrants, the Company will
receive proceeds of $16 million. The Convertible Debentures are convertible into
common shares at the option of the Company if a registration statement of the
common shares and warrants has been declared effective under the Securities Act
and has been effective during the seven day notice period prior to the Company's
exercise its conversion rights, provided that the Company's shares have traded
at or above U.S. $14.00 per share for 20 consecutive trading days on the Toronto
Stock Exchange and certain other conditions are met. The Company filed a
registration statement covering the common shares in April 1998. The Special
Notes are, and the Convertible Debentures will be, secured by a pledge of shares
of certain of the subsidiaries of the Company and are guaranteed by Seven Seas
Petroleum Holdings Inc.

26
<PAGE> 29

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Seven Seas Petroleum Inc. and Subsidiaries

Report of Independent Public Accountants.................. F-1
Consolidated Balance Sheets as of December 31, 1997 and
1996................................................... F-2
Statements of Consolidated Operations for the years ended
December 31, 1997 and 1996 and from Inception (February
3, 1995) to December 31, 1995.......................... F-3
Statements of Consolidated Stockholders' Equity for the
years ended December 31, 1997 and 1996 and from
Inception (February 3, 1995) to December 31, 1995...... F-4
Statements of Cash Flows for the years ended December 31,
1997 and 1996 and from Inception (February 3, 1995) to
December 31, 1995...................................... F-5
Notes to Financial Statements............................. F-6
</TABLE>

27
<PAGE> 30

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To the Stockholders of Seven Seas Petroleum Inc.:

We have audited the accompanying consolidated balance sheets of Seven Seas
Petroleum Inc. (a Yukon Territory, Canada corporation in the development stage)
and subsidiaries as of December 31, 1997 and 1996, and the related consolidated
statements of operations and accumulated deficit, stockholders' equity and cash
flows for the years then ended and for the period from inception (February 3,
1995) to December 31, 1995. 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 generally accepted auditing
standards. 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 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 consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Seven Seas
Petroleum Inc. and subsidiaries as of December 31, 1997 and 1996, and the
results of their operations and their cash flows for the years then ended and
for the period from inception (February 3, 1995) to December 31, 1995 in
conformity with generally accepted accounting principles.

ARTHUR ANDERSEN LLP

Houston, Texas
February 27, 1998

F-1
<PAGE> 31

SEVEN SEAS PETROLEUM INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)

CONSOLIDATED BALANCE SHEETS

ASSETS

<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1997 1996
<S> <C> <C>
CURRENT
Cash and cash equivalents................................. $ 18,067,189 $ 10,620,477
Marketable securities..................................... 43,795 43,795
Accounts receivable....................................... 3,865,180 1,241,430
Prepaids and other........................................ 118,447 --
------------ ------------
22,094,611 11,905,702
Note receivable from related party.......................... 200,000 --
Evaluated oil and gas interests, full-cost method........... 46,116,873 1,611,665
Unevaluated oil and gas interests, full-cost method......... 221,713,473 221,884,126
Fixed assets, net of accumulated depreciation of $42,716 at
December 31, 1997 and $12,194 at December 31, 1996........ 303,623 74,219
Other assets, net of accumulated amortization of $194,166 at
December 31, 1997 and $76,622 at December 31, 1996........ 1,485,544 25,270
------------ ------------
TOTAL ASSETS.............................................. $291,914,124 $235,500,982
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT
Accounts payable.......................................... $ 6,885,573 $ 2,560,665
Accrued compensation...................................... 1,228,000 --
Other accrued liabilities................................. 91,917 245,000
------------ ------------
8,205,490 2,805,665
Long-term debt.............................................. 25,000,000 --
Deferred income taxes....................................... 70,458,512 63,967,775
Minority interest........................................... 4,087,022 1,060,433
COMMITMENTS AND CONTINGENCIES (Note 10)..................... -- --
STOCKHOLDERS' EQUITY
Share capital --
Authorized unlimited common shares without par value and
unlimited Class A preferred shares without par value;
35,071,606 and 13,315,796 issued and outstanding common
shares at December 31, 1997 and December 31, 1996,
respectively........................................... 196,405,889 6,781,616
Preferred share subscriptions -- 5,002,972 shares at
December 31, 1996......................................... -- 45,652,120
Special warrant subscriptions -- 14,274,171 warrants at
December 31, 1996......................................... -- 119,548,227
Deficit accumulated during development stage................ (12,242,557) (4,314,622)
Treasury stock, 29 shares held at December 31, 1997 and
December 31, 1996......................................... (232) (232)
------------ ------------
Total Stockholders' Equity................................ 184,163,100 167,667,109
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY................ $291,914,124 $235,500,982
============ ============
</TABLE>

The accompanying notes are an integral part of these financial statements.

F-2
<PAGE> 32

SEVEN SEAS PETROLEUM INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)

STATEMENTS OF CONSOLIDATED OPERATIONS AND ACCUMULATED DEFICIT

<TABLE>
<CAPTION>
CUMULATIVE
PERIOD FROM TOTAL
INCEPTION FROM INCEPTION
(FEBRUARY 3, (FEBRUARY 3,
YEAR ENDED DECEMBER 31, 1995) TO 1995) TO
--------------------------- DECEMBER 31, DECEMBER 31,
1997 1996 1995 1997
<S> <C> <C> <C> <C>
REVENUE
Crude oil sales................. $ 779,767 $ 233,682 $ -- $ 1,013,449
Interest income................. 787,189 341,599 152,383 1,281,171
------------ ----------- ----------- ------------
1,566,956 575,281 152,383 2,294,620
EXPENSES
General and administrative...... 8,714,333 2,454,884 1,070,765 12,239,982
Lease operating expenses........ 907,218 252,504 -- 1,159,722
Depreciation and amortization... 148,065 111,334 37,671 297,070
Dry hole and abandonment
costs........................ 16,952 4,910 1,122,806 1,144,668
Geological and geophysical...... 27,372 10,521 9,769 47,662
Other (income) expense.......... (25,331) -- -- (25,331)
Loss on sale of resource
properties................... -- -- 31,357 31,357
------------ ----------- ----------- ------------
9,788,609 2,834,153 2,272,368 14,895,130
NET LOSS BEFORE MINORITY
INTEREST........................ (8,221,653) (2,258,872) (2,119,985) (12,600,510)
MINORITY INTEREST................. 293,718 64,235 -- 357,953
------------ ----------- ----------- ------------
NET LOSS.......................... $ (7,927,935) $(2,194,637) $(2,119,985) $(12,242,557)
============ =========== =========== ============
DEFICIT ACCUMULATED DURING THE
DEVELOPMENT STAGE, beginning of
period.......................... (4,314,622) (2,119,985) -- --
DEFICIT ACCUMULATED DURING THE
DEVELOPMENT STAGE, end of
period.......................... $(12,242,557) $(4,314,622) $(2,119,985) $(12,242,557)
============ =========== =========== ============
BASIC AND DILUTED NET LOSS PER
COMMON SHARE.................... $ (0.24) $ (0.17) $ (0.23) $ (0.66)
============ =========== =========== ============
WEIGHTED AVERAGE
COMMON SHARES OUTSTANDING....... 32,504,872 12,971,871 9,247,101 18,515,541
============ =========== =========== ============
</TABLE>

The accompanying notes are an integral part of these financial statements.

F-3
<PAGE> 33

SEVEN SEAS PETROLEUM INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)

STATEMENTS OF CONSOLIDATED STOCKHOLDERS' EQUITY
FOR THE PERIOD FROM INCEPTION (FEBRUARY 3, 1995) THROUGH DECEMBER 31, 1997
<TABLE>
<CAPTION>

COMMON STOCK
-------------------------
DATE NUMBER AMOUNT
<S> <C> <C> <C>
Issuance of common share to founder....................... February 3, 1995 1 $ --
Issuance of common shares to founder for cash............. February 27, 1995 999,999 1
Issuance of common shares in a private placement for cash
($0.25 per share)........................................ March 22, 1995 4,000,000 1,000,000
Issuance of common shares in private placements for cash
($0.75 per share)........................................ May 31, 1995 5,687,666 4,265,750
June 9, 1995 979,000 734,250
Issuance of common shares in settlement of agents' fees
($0.75 per share)........................................ May 31, 1995 284,383 213,287
June 9, 1995 48,950 36,713
Less: Common share issuance cost.......................... May 31 - June 9, 1995 -- (250,000)
Issuance of common shares in connection with the May 5,
1995 amalgamation agreement with Rusty Lake Resources
($0.25 per share)........................................ June 29-30, 1995 680,464 170,116
Net loss.................................................. -- --
---------- ------------
BALANCE AT DECEMBER 31, 1995.............................. 12,680,463 6,170,117
Issuance of special warrants in a brokered private
placement for cash ($2.75 per warrant)................... March 15, 1996 -- --
Issuance of common shares to the Company's 401(k) plan
($7.875 per share)....................................... April 29, 1996 10,000 78,750
Purchase Treasury Stock ($8.00 per share)................. June 26, 1996 -- --
Exercise of stock options for cash ($.75 per share)....... Jan. - June 1996 305,000 228,750
Exercise of stock options for cash ($7.125 per share)..... April 29, 1996 10,000 71,250
Issuance of exchangeable preferred stock in connection
with business combination ($9.125 per share)............. July 26, 1996 -- --
Issuance of special warrants in connection with business
combination ($9.125 per warrant)......................... July 26, 1996 -- --
Issuance of convertible special warrants in a brokered
private placement for cash ($15.00 per warrant).......... October 16, 1996 -- --
Exercise of stock options for cash ($.75 per share)....... July - December 1996 310,333 232,749
Net loss.................................................. -- --
---------- ------------
BALANCE AT DECEMBER 31, 1996.............................. 13,315,796 6,781,616
Conversion of special warrants issued in connection with
the business combination dated July 26, 1996 ($9.125 per
share)................................................... February 7, 1997 11,774,171 107,439,309
Conversion of the preferred shares in connection with the
business combination dated July 26, 1996 ($9.125 per
share)................................................... February 7, 1997 5,002,972 45,652,120
Conversion of privately placed special warrants ($15.00
per warrant)............................................. February 7, 1997 500,000 7,013,370
Conversion of privately placed special warrants ($2.75 per
warrant)................................................. February 7, 1997 2,000,000 5,095,548
Issuance of common shares in connection with the business
combination ($18.55 per share)........................... March 5, 1997 1,000,000 18,550,000
Conversion of privately placed special warrants for cash
($3.50 per warrant)...................................... March 14, 1997 1,000,000 3,500,000
Exercise of stock options ($.75 - 10.90 per share)........ Jan. - December 1997 478,667 2,373,926
Net loss.................................................. -- --
---------- ------------
BALANCE AT DECEMBER 31, 1997.............................. 35,071,606 $196,405,889
========== ============

PREFERRED STOCK SPECIAL WARRANTS
------------------------- ---------------------------
NUMBER AMOUNT NUMBER AMOUNT
<S> <C> <C> <C> <C>
Issuance of common share to founder....................... -- $ -- -- $ --
Issuance of common shares to founder for cash............. -- -- -- --
Issuance of common shares in a private placement for cash
($0.25 per share)........................................ -- -- -- --
Issuance of common shares in private placements for cash
($0.75 per share)........................................ -- -- -- --
-- -- -- --
Issuance of common shares in settlement of agents' fees
($0.75 per share)........................................ -- -- -- --
-- -- -- --
Less: Common share issuance cost.......................... -- -- -- --
Issuance of common shares in connection with the May 5,
1995 amalgamation agreement with Rusty Lake Resources
($0.25 per share)........................................ -- -- -- --
Net loss.................................................. -- -- -- --
---------- ------------ ----------- -------------
BALANCE AT DECEMBER 31, 1995.............................. -- -- -- --
Issuance of special warrants in a brokered private
placement for cash ($2.75 per warrant)................... -- -- 2,000,000 5,095,548
Issuance of common shares to the Company's 401(k) plan
($7.875 per share)....................................... -- -- -- --
Purchase Treasury Stock ($8.00 per share)................. -- -- -- --
Exercise of stock options for cash ($.75 per share)....... -- -- -- --
Exercise of stock options for cash ($7.125 per share)..... -- -- -- --
Issuance of exchangeable preferred stock in connection
with business combination ($9.125 per share)............. 5,002,972 45,652,120 -- --
Issuance of special warrants in connection with business
combination ($9.125 per warrant)......................... -- -- 11,774,171 107,439,309
Issuance of convertible special warrants in a brokered
private placement for cash ($15.00 per warrant).......... -- -- 500,000 7,013,370
Exercise of stock options for cash ($.75 per share)....... -- -- -- --
Net loss.................................................. -- -- -- --
---------- ------------ ----------- -------------
BALANCE AT DECEMBER 31, 1996.............................. 5,002,972 45,652,120 14,274,171 119,548,227
Conversion of special warrants issued in connection with
the business combination dated July 26, 1996 ($9.125 per
share)................................................... -- -- (11,774,171) (107,439,309)
Conversion of the preferred shares in connection with the
business combination dated July 26, 1996 ($9.125 per
share)................................................... (5,002,972) (45,652,120) -- --
Conversion of privately placed special warrants ($15.00
per warrant)............................................. -- -- (500,000) (7,013,370)
Conversion of privately placed special warrants ($2.75 per
warrant)................................................. -- -- (2,000,000) (5,095,548)
Issuance of common shares in connection with the business
combination ($18.55 per share)........................... -- -- -- --
Conversion of privately placed special warrants for cash
($3.50 per warrant)...................................... -- -- -- --
Exercise of stock options ($.75 - 10.90 per share)........ -- -- -- --
Net loss.................................................. -- -- -- --
---------- ------------ ----------- -------------
BALANCE AT DECEMBER 31, 1997.............................. -- $ -- -- $ --
========== ============ =========== =============

<CAPTION>
DEFICIT
ACCUMULATED
TREASURY STOCK DURING
--------------- DEVELOPMENT
NUMBER AMOUNT PHASE TOTAL
<S> <C> <C> <C> <C>
Issuance of common share to founder....................... -- $ -- $ -- $ --
Issuance of common shares to founder for cash............. -- -- -- 1
Issuance of common shares in a private placement for cash
($0.25 per share)........................................ -- -- -- 1,000,000
Issuance of common shares in private placements for cash
($0.75 per share)........................................ -- -- -- 4,265,750
-- -- -- 734,250
Issuance of common shares in settlement of agents' fees
($0.75 per share)........................................ -- -- -- 213,287
-- -- -- 36,713
Less: Common share issuance cost.......................... -- -- -- (250,000)
Issuance of common shares in connection with the May 5,
1995 amalgamation agreement with Rusty Lake Resources
($0.25 per share)........................................ -- -- -- 170,116
Net loss.................................................. -- -- (2,119,985) (2,119,985)
--- ----- ------------ ------------
BALANCE AT DECEMBER 31, 1995.............................. -- -- (2,119,985) 4,050,132
Issuance of special warrants in a brokered private
placement for cash ($2.75 per warrant)................... -- -- -- 5,095,548
Issuance of common shares to the Company's 401(k) plan
($7.875 per share)....................................... -- -- -- 78,750
Purchase Treasury Stock ($8.00 per share)................. 29 (232) -- (232)
Exercise of stock options for cash ($.75 per share)....... -- -- -- 228,750
Exercise of stock options for cash ($7.125 per share)..... -- -- -- 71,250
Issuance of exchangeable preferred stock in connection
with business combination ($9.125 per share)............. -- -- -- 45,652,120
Issuance of special warrants in connection with business
combination ($9.125 per warrant)......................... -- -- -- 107,439,309
Issuance of convertible special warrants in a brokered
private placement for cash ($15.00 per warrant).......... -- -- -- 7,013,370
Exercise of stock options for cash ($.75 per share)....... -- -- -- 232,749
Net loss.................................................. -- -- (2,194,637) (2,194,637)
--- ----- ------------ ------------
BALANCE AT DECEMBER 31, 1996.............................. 29 (232) (4,314,622) 167,667,109
Conversion of special warrants issued in connection with
the business combination dated July 26, 1996 ($9.125 per
share)................................................... -- -- -- --
Conversion of the preferred shares in connection with the
business combination dated July 26, 1996 ($9.125 per
share)................................................... -- -- -- --
Conversion of privately placed special warrants ($15.00
per warrant)............................................. -- -- -- --
Conversion of privately placed special warrants ($2.75 per
warrant)................................................. -- -- -- --
Issuance of common shares in connection with the business
combination ($18.55 per share)........................... -- -- -- 18,550,000
Conversion of privately placed special warrants for cash
($3.50 per warrant)...................................... -- -- -- 3,500,000
Exercise of stock options ($.75 - 10.90 per share)........ -- -- -- 2,373,926
Net loss.................................................. -- -- (7,927,935) (7,927,935)
--- ----- ------------ ------------
BALANCE AT DECEMBER 31, 1997.............................. 29 $(232) $(12,242,557) $184,163,100
=== ===== ============ ============
</TABLE>

The accompanying notes are an integral part of these financial statements.

F-4
<PAGE> 34

SEVEN SEAS PETROLEUM INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)

STATEMENTS OF CONSOLIDATED CASH FLOWS

<TABLE>
<CAPTION>
PERIOD FROM CUMULATIVE TOTAL
INCEPTION FROM INCEPTION
YEAR ENDED DECEMBER 31, (FEBRUARY 3, 1995) (FEBRUARY 3, 1995)
-------------------------- TO DECEMBER 31, TO DECEMBER 31,
1997 1996 1995 1997
<S> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net loss................................... $ (7,927,935) $(2,194,637) $(2,119,985) $(12,242,557)
Add (subtract) items not requiring
(providing) cash:
Compensation Expense....................... 2,140,250 -- -- 2,140,250
Minority interest.......................... (293,718) (64,235) -- (357,953)
Common stock contribution to 401(k)
retirement plan.......................... -- 78,750 -- 78,750
Dry hole and abandonment costs............. 16,952 -- 1,122,806 1,139,758
Loss on sale of resource properties........ -- -- 31,357 31,357
Depreciation and amortization.............. 148,065 111,334 37,671 297,070
Changes in working capital excluding
changes to cash and cash equivalents:
Accounts receivable...................... (2,082,750) (316,431) (43,642) (2,442,823)
Prepaids and other, net.................. (118,447) 482 (482) (118,447)
Accounts payable......................... 1,389,194 (17,472) 120,305 1,492,027
Other accrued liabilities................ (153,083) 245,000 -- 91,917
------------ ----------- ----------- ------------
Cash Flow Used in Operating Activities....... (6,881,472) (2,157,209) (851,970) (9,890,651)
------------ ----------- ----------- ------------
INVESTING ACTIVITIES
Exploration of oil and gas properties...... (16,359,726) (4,309,446) (1,696,943) (22,366,115)
Proceeds from acquisition.................. -- 630,226 -- 630,226
Proceeds from sale of property............. -- -- 84,336 84,336
Note receivable from related party......... (200,000) -- -- (200,000)
Other asset additions...................... (280,194) (64,135) (169,821) (514,150)
------------ ----------- ----------- ------------
Cash Flow Used in Investing Activities....... (16,839,920) (3,743,355) (1,782,428) (22,365,703)
------------ ----------- ----------- ------------
FINANCING ACTIVITIES
Proceeds from special warrants issued...... -- 12,108,917 -- 12,108,917
Proceeds from share capital issued......... 4,961,726 532,750 6,000,001 11,494,477
Proceeds from additional paid-in capital
contributed.............................. -- 999 -- 999
Proceeds from issuance of special notes.... 25,000,000 -- -- 25,000,000
Costs of issuing special notes............. (1,572,929) -- -- (1,572,929)
Contributions by minority interest......... 2,779,307 513,004 -- 3,292,311
Purchase of treasury stock................. -- (232) -- (232)
------------ ----------- ----------- ------------
Cash Flow Provided by Financing Activities... 31,168,104 13,155,438 6,000,001 50,323,543
------------ ----------- ----------- ------------
NET INCREASE (DECREASE) IN
CASH AND CASH EQUIVALENTS.................. 7,446,712 7,254,874 3,365,603 18,067,189
Cash and cash equivalents, beginning
of period.................................. 10,620,477 3,365,603 -- --
------------ ----------- ----------- ------------
CASH AND CASH EQUIVALENTS,
END OF PERIOD.............................. $ 18,067,189 $10,620,477 $ 3,365,603 $ 18,067,189
============ =========== =========== ============
</TABLE>

The accompanying notes are an integral part of these financial statements.

F-5
<PAGE> 35

SEVEN SEAS PETROLEUM INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. DEVELOPMENT STAGE OPERATIONS:

Seven Seas Petroleum Inc. (a Yukon Territory, Canada corporation) was
formed on February 3, 1995. Seven Seas Petroleum Inc. and its subsidiaries
(collectively referred to as "Seven Seas" or the "Company") are collectively a
development stage enterprise engaging in acquisition, exploration, and
development of interests in oil and gas projects worldwide. The Company's
primary business operations to date have been the exploration and development of
its interests in Colombia, South America.

The Company has yet to generate any significant revenue from oil and gas
sales and has no assurance of future revenues. The Company's principal asset is
its 57.7 percent working interest in the Dindal Association Contract and Rio
Seco Association Contract (collectively, the "Association Contracts" or the
"Emerald Mountain Project"). The Association Contracts were issued by Empresa
Colombiana de Petroleos ("Ecopetrol"), the National Oil Company of Colombia, in
March 1993 and August 1995, respectively, and entitle the Company to engage in
exploration, development, and production activities in Colombia. In 1994, a
predecessor to the Company drilled the Escuela #1, which was non-commercial. The
five exploratory wells completed to date on Emerald Mountain have encountered on
average 303 feet of Cimarrona formation at vertical depths between 6,000 and
7,500 feet. For the five wells where production testing has been completed,
actual per well production rates realized ranged from 3,415 to 13,123 barrels
per day with an average in excess of 7,079 barrels per day. The Company plans to
rapidly and efficiently continue its field development and delineation drilling
program and to build the production facilities and pipeline infrastructure to
allow its production to reach existing transportation lines for access to export
markets.

Seven Seas is subject to several categories of risk associated with its
development stage activities. Oil and gas exploration and development is a
speculative business and involves a high degree of risk. The Company has
expended, and plans to expend, significant amounts of capital on the acquisition
and exploration of its properties, and most of such properties have not been
fully evaluated for hydrocarbon potential. The exploration and development of
current properties and any properties acquired in the future are expected to
require substantial amounts of additional capital which the Company may be
required to raise through debt or equity financings, which might involve
encumbering properties or entering into arrangements where certain costs of
exploration will be paid by others to earn an interest in the property. Seven
Seas' success currently depends to a high degree on its activities in Colombia.
However, there are risks that result because the Company has acquired, and
intends to continue to acquire, interests in properties outside of North
America, in some cases in countries that may be considered politically and
economically unstable.

2. BUSINESS COMBINATION:

On June 29, 1995 the Supreme Court of British Columbia approved the May 5,
1995 amalgamation of Seven Seas and Rusty Lake Resources Ltd. Stockholders of
Rusty Lake Resources Ltd. were issued one common share in Seven Seas, the new
company after the amalgamation, for each 35 common shares held in Rusty Lake
Resources Ltd. Additional shares of Seven Seas were issued in settlement of
certain indebtedness of Rusty Lake Resources Ltd. This transaction has been
reflected as an acquisition by Seven Seas using the purchase method of
accounting, whereby the assets acquired and liabilities assumed were fair valued
and Rusty Lake Resources Ltd. has been prospectively reflected in the Company's
financial statements since

F-6
<PAGE> 36
SEVEN SEAS PETROLEUM INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

June 29, 1995. The net assets of Rusty Lake Resources Ltd. were recorded on the
books of Seven Seas as follows:

<TABLE>
<S> <C>
Marketable securities....................................... $ 3,370
Goods and services tax receivable........................... 3,099
Resource properties......................................... 115,693
Other assets (organization costs)........................... 87,481
Accounts payable............................................ (39,527)
Share capital (680,464 shares).............................. (170,116)
</TABLE>

On July 26, 1996 the Company acquired 100 percent of the outstanding stock
which represented 100 percent of the voting shares held in GHK Company Colombia
and Esmeralda LLC. Additionally, on the same date, the Company acquired 62.963
percent of the outstanding shares and voting stock in Cimarrona LLC. This
transaction has been reflected as an acquisition by Seven Seas using the
purchase method of accounting, whereby the assets acquired and liabilities
assumed were fair valued and the operations of the acquired entities have been
reflected in the Company's financial statements since July 26, 1996. As
consideration for the increased interest from these acquisitions, Seven Seas
issued to the stockholders in GHK Company Colombia, Esmeralda LLC and Cimarrona
LLC a combination of preferred shares and special warrants which were
exchangeable into a total of 16,777,143 common shares upon the earlier of the
approval of a prospectus qualifying the exchange, or one year from the closing
of the transaction. Of the 16,777,143 preferred shares and special warrants,
5,002,972 preferred shares were issued for all of the common shares in GHK
Company Colombia, 4,469,028 special warrants were issued for all of the common
shares in Esmeralda LLC, and 7,305,143 special warrants were issued for 62.963
percent of the common shares in Cimarrona LLC. The remaining 37.037 percent
interest in Cimarrona LLC represents a minority interest which is reflected as
such on the balance sheet. The 16,777,143 preferred shares and special warrants
were recorded based on the closing stock price of Seven Seas on July 26, 1996 at
$9.125 totaling $153,091,430. Collectively, the acquisition of these three
companies resulted in the purchase of an additional 36.7 percent participating
interest in the Association Contracts in which the Company previously held a 15
percent participating interest. All three entities were oil and gas exploration
companies whose only material asset was the participating interest they held in
the Association Contracts in Colombia. Net assets acquired include $217,090,298
assigned to oil and gas properties (which are subject to future evaluation based
on further appraisal drilling) and other nominal net working capital, less
amounts attributable to the minority interest in Cimarrona LLC. Because of the
differences in tax basis and the financial statement valuation of such acquired
oil and gas properties, $63,967,775 of deferred Colombian and U.S. income taxes
was also recorded in this acquisition (see Notes 3 and 5) and is included in the
amount assigned to oil and gas properties. Income and expenditures incurred by
these three entities after July 26, 1996 are included in the statements of
operations and accumulated deficit for the years ended December 31, 1997 and
1996.

Of the 16,777,143 preferred shares and special warrants issued, 11,744,000
are held subject to an escrow agreement, whereby one third of the securities are
released each year for three years. The securities may be released earlier based
upon a valuation of the Seven Seas interests in the Association Contracts. On
July 26, 1997, one-third of the 11,744,000 common shares or 3,914,667 was
released from escrow pursuant to the escrow agreement.

On February 7, 1997 approvals were granted by the Ontario Securities
Commission, British Columbia Securities Commission and the Alberta Securities
Commission for the prospectus filed to qualify 11,774,171 special warrants and
5,002,972 preferred shares which were automatically converted to common shares.
These shares were issued in connection with the acquisition of a 36.7 percent
participating interest in the Association Contracts in Colombia by the Company
on July 26, 1996.

F-7
<PAGE> 37
SEVEN SEAS PETROLEUM INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

On March 5, 1997 the Company acquired 100 percent of the outstanding voting
stock held in Petrolinson, S.A. The terms of the transaction were agreed to in a
letter of intent dated November 22, 1996. The principal asset owned by
Petrolinson, S.A. is a six percent participating interest in the Association
Contracts. As consideration for the six percent participating interest in the
Association Contracts, Seven Seas issued to the sole shareholder in Petrolinson,
S.A. 1,000,000 common shares of Seven Seas Petroleum Inc. The common shares
issued to the sole shareholder of Petrolinson, S.A. were subject to an escrow
agreement, the terms of which provided for a 120 day escrow of shares commencing
from March 5, 1997 with an option by the Company to extend the escrow period for
an additional 30 days. The 1,000,000 common shares issued to the sole
shareholder of Petrolinson, S.A. were released from escrow on July 3, 1997, in
accordance with the escrow agreement as described above. This six percent
interest will be carried through exploration by the other 94 percent
participating interest parties. This transaction has been reflected in 1997 as
an acquisition by Seven Seas using the purchase method of accounting, whereby
the assets acquired and liabilities assumed were fair valued and the acquired
operations have been reflected in the Company's financial statements since March
5, 1997. The 1,000,000 common shares were recorded at a price of $18.55, based
on the weighted average closing stock price of Seven Seas for the period
beginning 30 days prior to and ending 30 days subsequent to the date the letter
of intent was signed, November 22, 1996. This represents a transaction cost of
$18,550,000. Net assets acquired include $25,035,701 assigned to oil and gas
properties (most of which is subject to future evaluation based on further
appraisal drilling) and other nominal net working capital. Because of the
differences in tax basis and the financial statement valuation of such acquired
oil and gas properties, $6,490,737 of deferred Colombian income tax was also
recorded in this acquisition (see Notes 3 and 5) and is included in the amount
assigned to oil and gas properties.

3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

The Company follows U.S. generally accepted accounting principles. A
summary of the Company's significant policies is set out below:

USE OF ESTIMATES

The preparation of financial statements in conformity with generally
accepted accounting principles requires the Company to make estimates and
assumptions that affect the reported amounts of assets and liabilities,
revenues, and expenses. Actual results could differ from the estimates and
assumptions used. Significant estimates include depreciation, depletion, and
amortization of proved oil and gas reserves. Oil and natural gas reserve
estimates, which are the basis for depletion and the ceiling test, are
inherently imprecise and expected to change as future information becomes
available.

RECLASSIFICATION OF PRIOR PERIOD STATEMENTS

Consistent with the asset/liability method of accounting for income taxes,
the Company recorded deferred income tax liabilities relating to the
acquisitions of GHK Company Colombia, Esmeralda LLC, and 62.963% of Cimarrona
LLC in 1996 and Petrolinson, S.A. on March 5, 1997. The credit to deferred
income tax liabilities and the corresponding increase in unevaluated oil and gas
interests amounted to $70,458,512 and $63,967,775 at December 31, 1997 and 1996,
respectively. The nature of the amounts recorded is described in Note 5. Certain
adjustments have been made to the 1996 net operating loss carryforward, deferred
tax assets, and the related valuation allowances, none of which affected
reported results of operations, as estimates used in the calculation of the
assets have been revised. Additionally, certain other minor reclassifications
have been made to conform to current reporting practices.

F-8
<PAGE> 38
SEVEN SEAS PETROLEUM INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

CONSOLIDATION

The consolidated financial statements include the accounts of the Company
and its wholly owned and majority owned subsidiaries, after eliminating all
material intercompany accounts and transactions.

STATEMENT OF CASH FLOWS

Cash and cash equivalents include bank deposits and short-term investments,
which upon acquisition have a maturity of three months or less. The Company made
a cash payment for interest of $600,000 in 1997.

FAIR VALUE OF FINANCIAL INSTRUMENTS

The recorded amounts of cash and cash equivalents, accounts receivable and
accounts payable approximate fair value because of the short-term maturity of
those investments. As described in Note 6, the Company issued $25 million of
convertible Special Notes, with a 6% stated interest rate, which mature in 2003.
It is not practical to estimate the fair value of these Special Notes as a
quoted market price has not yet been obtained. The Company intends to file the
required registration statement in order to comply with the conversion option on
these notes.

MARKETABLE SECURITIES

The Company has adopted Statement of Financial Accounting Standards No. 115
("SFAS 115"), "Accounting for Certain Investments in Debt and Equity
Securities." SFAS 115 requires that all investments in debt securities and
certain investments in equity securities be reported at fair value except for
those investments which management has the intent and the ability to hold to
maturity. Investments which are held-for-sale are classified based on the stated
maturity and management's intent to sell the securities. Changes in fair value
are reported as a separate component of stockholders' equity, but were
immaterial for all periods presented herein.

ACCOUNTS RECEIVABLE

Accounts receivable included the following at December 31, 1997 and 1996:

<TABLE>
<CAPTION>
DECEMBER 31, 1997 DECEMBER 31, 1996
<S> <C> <C>
Crude oil sales.................................. $ 291,049 $ 58,845
Joint interest billing........................... 3,013,318 1,117,635
Advances......................................... 541,000 --
Other............................................ 19,813 64,950
---------- ----------
Total Accounts Receivable.............. $3,865,180 $1,241,430
========== ==========
</TABLE>

OIL AND GAS INTERESTS

The Company follows the full-cost method of accounting for oil and natural
gas properties. Under this method, all costs incurred in the acquisition,
exploration and development, including unproductive wells, are capitalized in
separate cost centers for each country. Such capitalized costs include contract
and concession acquisition, geological, geophysical and other exploration work,
drilling, completing and equipping oil and gas wells, constructing production
facilities and pipelines, and other related costs. As of December 31, 1996
unevaluated oil and gas interests include capitalized employee costs related to
exploration and property evaluation of $140,628. No additional general and
administrative costs were capitalized during 1997. The Company capitalized
interest of $600,000 in 1997.

F-9
<PAGE> 39
SEVEN SEAS PETROLEUM INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The capitalized costs of oil and gas properties in each cost center are
amortized on composite units of production method based on future gross revenues
from proved reserves. Sales or other dispositions of oil and gas properties are
normally accounted for as adjustments of capitalized costs. Gain or loss is not
recognized in income unless a significant portion of a cost center's reserves is
involved. Capitalized costs associated with the acquisition and evaluation of
unproved properties are excluded from amortization until it is determined
whether proved reserves can be assigned to such properties or until the value of
the properties is impaired. If the net capitalized costs of oil and gas
properties in a cost center exceed an amount equal to the sum of the present
value of estimated future net revenues from proved oil and gas reserves in the
cost center and the lower of cost or fair value of properties not being
amortized, both adjusted for income tax effects, such excess is charged to
expense.

Since the Company has only produced test quantities of oil, a provision for
depletion has not been made.

Substantially all the Company's exploration and production activities are
conducted jointly with others and the accounts reflect only the Company's
proportionate interest in such activities.

FOREIGN CURRENCY TRANSLATION

The Company's foreign operations are a direct and integral extension of the
parent company's operations and the majority of all costs associated with
foreign operations are paid in U.S. dollars as opposed to the local currency of
the operations; therefore, the reporting and functional currency is the U.S.
dollar. Gains and losses from foreign currency transactions are recognized in
current net income. Monetary items are translated using the exchange rate in
effect at the balance sheet date; non-monetary items are translated at
historical exchange rates. Revenues and expenses are translated at the average
rates in effect on the dates they occur. No material translation gains or losses
were incurred during the periods presented.

INCOME TAXES

The Company follows the asset/liability method of accounting for income
taxes in accordance with Statement of Financial Accounting Standards 109,
"Accounting for Income Taxes." Under this method, deferred tax assets and
liabilities are recognized for the future tax consequences of (i) temporary
differences between the tax bases of assets and liabilities and their reported
amounts in the financial statements and (ii) operating loss and tax credit
carryforwards for tax purposes. Deferred tax assets are reduced by a valuation
allowance when, based upon management's estimates, it is more likely than not
that a portion of the deferred tax assets will not be realized in a future
period.

FIXED ASSETS

Fixed assets are recorded at cost. Depreciation is provided on a
straight-line basis over three to five years.

ORGANIZATION COSTS

Organization costs represent the normal cost of incorporating the Company.
In association with the amalgamation agreement with Rusty Lake Resources Ltd.,
organization costs of $87,481 were recorded to reflect the excess purchase price
of Seven Seas common shares provided to Rusty Lake Resources Ltd. stockholders
over and above the net asset value of Rusty Lake Resources Ltd. as of June 29,
1995. Organization costs were amortized on a straight-line basis over two years.

EARNINGS PER SHARE

The Company has implemented Financial Accounting Standards Board Statement
of Financial Accounting Standards No. 128 ("SFAS 128"), "Earnings per Share."
SFAS 128 establishes standards for computing
F-10
<PAGE> 40
SEVEN SEAS PETROLEUM INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

and presenting earnings per share ("EPS") and applies to entities with publicly
held common stock or potential common stock. This statement simplifies the
standards for computing and presenting EPS previously found in Accounting
Principles Board Opinion No. 15, "Earnings Per Share," and makes them comparable
to international EPS standards. This statement is effective for financial
statements issued for periods ending after December 15, 1997. The statement
requires restatement of all prior-period EPS data presented. Considering the
guidelines as prescribed by SFAS 128, the Company's adoption of this statement
does have a significant effect on EPS since the exercise or conversion of any
potential shares would be antidilutive and result in a lower loss per share.
Options to purchase 3,878,500 common shares at a weighted average option
exercise price of $13.15 per common share were outstanding at December 31, 1997.

All shares issued in connection with the conversion of preferred shares and
special warrants during 1996 were not considered outstanding until registration
with the Canadian Securities Commissions occurred on February 7, 1997, including
the shares held in escrow for the former shareholders of GHK Company Colombia,
Esmeralda LLC and Cimarrona LLC. The common shares held in escrow were
considered in the weighted average shares outstanding since they are considered
outstanding by the transfer agent and have voting rights.

4. CASH AND CASH EQUIVALENTS:

<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1997 1996
<S> <C> <C>
Cash...................................................... $ 2,156,973 $ 170,684
Short-term investments.................................... 15,910,216 10,449,793
----------- -----------
Total cash and cash equivalents........................... $18,067,189 $10,620,477
=========== ===========
</TABLE>

The carrying value of short-term investments approximates fair value.

5. INCOME TAXES:

The geographical sources of loss before minority interest were as follows:

<TABLE>
<CAPTION>
PERIOD ENDED PERIOD ENDED PERIOD ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1997 1996 1995
<S> <C> <C> <C>
United States............................... $(4,515,142) $ (277,456) $ --
Foreign..................................... (3,706,511) (1,981,416) (2,119,985)
----------- ----------- -----------
Loss before minority interest............... $(8,221,653) $(2,258,872) $(2,119,985)
=========== =========== ===========
</TABLE>

No deferred taxes were recorded during the periods presented, as there were
no significant changes in the temporary differences between the book and tax
bases of assets and liabilities. Deferred U.S. and Colombian income taxes have
been provided for the book-tax basis differences related to the Colombian
acquisitions discussed further in Note 2. These foreign subsidiaries' cumulative
undistributed earnings are considered to be

F-11
<PAGE> 41
SEVEN SEAS PETROLEUM INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

indefinitely reinvested outside of Canada and, accordingly, no Canadian deferred
income taxes have been provided thereon. The Company's net deferred income tax
liabilities consist of the following:

<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1997 1996
<S> <C> <C>
Deferred Tax Liabilities.................................. $70,458,512 $63,967,775
Deferred Tax Asset........................................ 3,128,306 2,058,506
Valuation Allowance....................................... (3,128,306) (2,058,506)
----------- -----------
Total Deferred Tax.............................. $70,458,512 $63,967,775
=========== ===========
</TABLE>

The Company did not record any current or deferred income tax provision or
benefit in any of the periods presented. The Company's provision for income
taxes differs from the amount computed by applying statutory rates, which are
45% in Canada and 35% in the United States and Colombia, due principally to the
valuation allowance recorded against its deferred tax asset account relating
primarily to net operating tax loss carryforwards.

Temporary differences included in the deferred tax liabilities relate
primarily to excess of book over tax basis on acquired oil and gas properties.
During 1997, deferred Colombian income tax in the amount of $6,490,737 was
recorded in the acquisition of Petrolinson, S.A., as described in Note 2.
Deferred tax assets principally consist of net operating loss carryforwards.

As of December 31, 1997 and 1996, the Company's subsidiaries had net
operating loss carryforwards in various foreign jurisdictions (primarily Canada)
of approximately $3,700,000 and $2,200,000, respectively. These loss
carryforwards will expire beginning in 2002 if not utilized to reduce Canadian
income taxes. In addition, the Company had during 1997 and 1996 approximately
$1,537,000 and $37,000, respectively, of U.S. tax net operating loss
carryforwards expiring in varying amounts beginning in 2011. A valuation
allowance has been provided for the deferred tax assets resulting primarily from
these loss carryforwards because their future realization is not currently
deemed probable by management.

6. LONG-TERM DEBT:

In August 1997, the Company issued $25 million of Special Notes in a
private transaction to institutional and accredited investors. Interest on the
Special Notes is due and payable in arrears at a rate of 6% per annum on
December 31 and June 30 in each year until maturity, commencing on December 31,
1997. The Special Notes are exchangeable for a like principal amount of
convertible redeemable debentures (the "Debentures") on or before August 7,
1998. At the option of the Company, the Debentures are convertible into common
shares and warrants if a registration statement for resale of the common shares
has been declared effective under the Securities Act of 1933, as amended (the
"Securities Act") and has been effective during the seven-day notice period
required by the Company to the holders of Debentures of its intent to exercise
its conversion rights, provided that the Company's common shares have traded at
or above $14.00 per share for 20 consecutive trading days on the Toronto Stock
Exchange. The Special Notes and Debentures are secured by a pledge of the shares
of the Company's subsidiaries and a guarantee by Seven Seas Petroleum Holdings
Inc.

The Special Notes will be deemed to be exchanged upon the earlier to occur
of (i) the effectiveness of a registration statement under the Securities Act,
covering the issuance of the common shares and warrants upon conversion of the
Debentures and compliance by the Company with certain Canadian securities
requirements and (ii) August 7, 1998. The Debentures are convertible into units
(the "Units") on the basis of one Unit for each $11.50 principal amount of
Debentures outstanding (initially 2,173,913 Units), subject to adjustment. Each
Unit consists of one common share and one-half of a common share purchase
warrant (the

F-12
<PAGE> 42
SEVEN SEAS PETROLEUM INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

"Warrants"). The Debentures mature on August 7, 2003. Each whole Warrant is
exercisable for one common share at an exercise price of $15.00 per share. The
Warrants expire August 7, 1998.

7. EQUITY:

On March 15, 1996, a brokered private placement was carried out in Canada.
The Company issued 2,000,000 special warrants at $2.75 per warrant for a net
offering after commissions and expenses of $5,095,548 to a third party financial
brokerage institution. Each special warrant was convertible into one unit. Each
unit consisted of one share of common stock and a one-half common share purchase
warrant at $3.50 per full share. The warrants were convertible at the earlier of
(a) one year from date of issuance or (b) the date an approval is issued for a
prospectus qualifying the conversion in the appropriate jurisdictions. On March
14, 1997, the 1,000,000 common share purchase warrants were exercised and
converted to common shares for net proceeds of $3,500,000.

On October 16, 1996, another brokered private placement was carried out in
Canada. Seven Seas issued to a third party financial brokerage institution
500,000 special warrants at $15.00 per warrant for a net offering after
commissions and expenses of $7,013,370. Each special warrant was convertible
into one unit. Each unit consisted of one share of common stock and a one-half
common share purchase warrant at $18.50 per full share. The warrants were
convertible at the earlier of (a) one year from date of issuance or (b) the date
an approval is issued for a prospectus qualifying the conversion in the
appropriate jurisdictions. The 250,000 common share purchase warrants were not
converted at $18.50 and expired October 16, 1997.

An approval for qualification of the conversion of the 2,000,000 and
500,000 special warrants issued in the brokered private placements on March 15
and October 16, 1996, respectively, was received on February 7, 1997 by the
Ontario, Alberta, and British Columbia Securities Commissions. All special
warrants were exercised and have been converted to common shares.

The proceeds of the brokered private placements on March 15 and October 16,
1996 were used for drilling, seismic and production facilities related to the
Company's participation in the Association Contracts and for further exploration
activities.

8. STOCK BASED COMPENSATION PLANS:

Officers, directors and employees have been granted stock options under the
Company's Amended 1996 Stock Option Plan and the 1997 Stock Option Plan, which
is subject to approval by the shareholders (collectively referred to as "the
Plans"). Pursuant to the Plans, 6,000,000 shares were authorized for issuance,
of which 3,878,500 were outstanding as of December 31, 1997. The options granted
under the Amended 1996 Stock Option Plan were not subject to vesting
requirements and expire five years from the date of grant. Options granted under
the 1997 Stock Option Plan have been granted with either no vesting requirement
or vesting cumulatively on the anniversary of the grant date over a period of
two to five years and expire ten years from the date of grant. Option agreements
between the Company and optionees under the 1997 Stock Option Plan may include
stock appreciation rights. Under each plan, the option price equals the stock's
market price on the date of grant.

The Compensation Committee of the Board of Directors is responsible for
administering the plans, determining the terms upon which options may be
granted, prescribing, amending and rescinding such interpretations and
determinations and granting options to employees, directors, and officers.

F-13
<PAGE> 43
SEVEN SEAS PETROLEUM INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The following table presents a summary of stock option transactions for the
three years ended December 31, 1997:

<TABLE>
<CAPTION>
WEIGHTED AVERAGE
COMMON SHARES OPTION PRICE PER SHARE
<S> <C> <C>
Granted......................................... 985,000 $ .75
--------- ------
December 31, 1995................................. 985,000 .75
Granted......................................... 805,000 12.86
Exercised....................................... (625,333) .85
--------- ------
December 31, 1996................................. 1,164,667 9.07
Granted......................................... 3,197,500 13.56
Exercised....................................... (478,667) 3.05
Revoked......................................... (5,000) 12.25
--------- ------
December 31, 1997................................. 3,878,500 $13.51
========= ======
</TABLE>

Exercisable stock options amounted to 1,697,665; 764,667; and 985,000 at
December 31, 1997, 1996, and 1995, respectively. The weighted average fair value
of options granted during 1997, 1996, and 1995 were $7.68; $4.65; and $0.19,
respectively. The following table summarizes stock options outstanding and
exercisable at December 31, 1997:

<TABLE>
<CAPTION>
OUTSTANDING EXERCISABLE
-------------------------------------------- ---------------------------
WEIGHTED WEIGHTED
EXERCISE PRICE AVERAGE AVERAGE
RANGE SHARES AVERAGE LIFE EXERCISE PRICE SHARES EXERCISE PRICE
<S> <C> <C> <C> <C> <C>
$.75................. 33,000 2.5 $ .75 33,000 $ .75
7.13................ 325,000 3.5 7.13 325,000 7.13
10.70-10.90......... 1,458,000 7.0 10.76 774,665 10.81
12.25-13.23......... 740,000 9.7 13.18 160,000 13.17
18.23-18.75......... 1,322,500 8.1 18.61 405,000 18.74
---------- --- ------ --------- ------
3,878,500 1,697,665
========== =========
</TABLE>

As part of the arrangements surrounding the resignations of four former
officers, the exercise period of the options during their employment was
extended from ninety days to eighteen months. This action gave rise to a new
measurement date and the Company was required to record compensation expense of
$2,140,250 during 1997, representing the market value of the common shares on
the new measurement date less the exercise price of the options granted. Only
the exercisable options granted to the former Chairman, former President, former
Chief Financial Officer, and former Vice President of Exploration were
considered in the computation. The extension of the exercise period is subject
to approval by vote of the shareholders. Should the extension of the exercise
period be approved for all employees, the Company will be required to record
additional compensation expense of $3,603,425 using the March 26, 1998 closing
stock price.

In accordance with the provisions of Statement of Financial Accounting
Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"), the
Company applies APB Opinion 25 in accounting for its stock option plan, and
accordingly does not recognize compensation cost as it relates to SFAS 123.

F-14
<PAGE> 44
SEVEN SEAS PETROLEUM INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

If the Company had elected to recognize compensation cost based on the fair
value of the options granted at the grant date as prescribed by SFAS 123, net
loss and net loss per share would have increased to the proforma amounts shown
below:

<TABLE>
<CAPTION>
DECEMBER 31, 1997 DECEMBER 31, 1996 DECEMBER 31, 1995
<S> <C> <C> <C>
Pro Forma Net Loss................ ($32,426,733) ($5,938,372) ($2,309,940)
Pro Forma Net Loss Per Share...... ($1.00) ($.46) ($.25)
</TABLE>

The effects of applying SFAS 123 in this proforma are not indicative of
future amounts.

The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option pricing model with the following assumptions used for
grants during the year ended December 31, 1997: weighted average risk free
interest rate of 6.28 percent; no dividend yield; volatility of .3555; and
expected life of five to ten years. The Company granted options prior to public
trading on the Canadian Dealer Network on June 30, 1995. Consequently, the
underlying common shares had no historic volatility prior to June 30, 1995. The
fair values of the options granted prior to June 30, 1995 were based on the
difference between the present value of the exercise price of the option and the
estimated fair value price of the common shares.

9. OPERATIONS BY GEOGRAPHIC AREA:

The Company operates in one industry segment. Information about the
Company's operations for 1997, 1996, and from inception (February 3, 1995) to
December 31, 1995 by geographic area is shown below:

<TABLE>
<CAPTION>
OTHER
FOREIGN
CANADA UNITED STATES COLOMBIA AREAS TOTAL
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1997
Revenues..................... $ 753,433 $ 2,020 $ 810,077 $ 1,426 $ 1,566,956
Operating Loss............... (1,780,784) (4,515,142) (1,837,368) (88,359) (8,221,653)
Capital Expenditures......... -- 57,572 19,050,432 471,046 19,579,050
Identifiable Assets.......... 17,462,002 488,463 272,981,939 981,720 291,914,124
Depreciation and
Amortization.............. 110,695 20,708 16,662 -- 148,065
Year ended December 31, 1996
Revenues..................... $ 333,598 $ -- $ 239,345 $ 2,338 $ 575,281
Operating Loss............... (1,402,204) (277,456) (438,948) (140,264) (2,258,872)
Capital Expenditures......... -- -- 4,335,166 271,405 4,606,571
Identifiable Assets.......... 10,497,084 46,939 224,436,899 520,060 235,500,982
Depreciation and
Amortization.............. -- 66,490 42,755 2,089 111,334
</TABLE>

<TABLE>
<CAPTION>
OTHER
FOREIGN
CANADA COLOMBIA ARGENTINA NORTH AFRICA AREAS TOTAL
<S> <C> <C> <C> <C> <C> <C>
Period from inception
through December 31, 1995
Revenues................. $ 147,372 $ -- $ -- $ -- $ 5,011 $ 152,383
Operating Loss........... (863,787) (3,147) (625,771) (509,878) (117,402) (2,119,985)
Capital Expenditures..... -- 369,723 622,006 500,800 204,414 1,696,943
Identifiable Assets...... 3,565,647 385,999 -- -- 218,791 4,170,437
Depreciation and
Amortization.......... 36,875 297 -- -- 499 37,671
</TABLE>

F-15
<PAGE> 45
SEVEN SEAS PETROLEUM INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

10. COMMITMENTS AND CONTINGENCIES:

The Company is, from time to time, party to certain legal actions and
claims arising in the ordinary course of business. While the outcome of these
events cannot be predicted with certainty, management does not expect these
matters to have a materially adverse effect on the financial position or results
of the Company.

The Company leases property and equipment under various operating leases.
Aggregate minimum lease payments under existing contracts as of December 31,
1997, are as follows: $84,732 for 1998; $41,182 for 1999; $4,495 for 2000 and
thereafter. Rental expense amounted to $84,492 in 1997; $82,928 in 1996; $58,536
in 1995.

The Company has certain related commitments under existing oil and gas
exploration concession agreements. Management estimates future expenditures for
such commitments to be approximately of $863,000 in 1998; $2,385,000 in 1999;
$30,000 in 2000; and $30,000 in 2001.

11. RELATED PARTY TRANSACTIONS:

On November 1, 1997, the Executive Vice President and Chief Operating
Officer obtained a $200,000 loan from the Company. This loan bears a 6.06%
interest rate and is due November 1, 2002. The Company recognized interest
income of $2,020 in 1997.

The Company's Chairman and Chief Executive Officer wholly owns GHK Company
LLC ("GHK"). Effective July 1, 1997, the Company has entered into an
administrative service agreement with GHK. The Company recognized $10,500 of
such expenses in 1997. In addition, GHK pays certain miscellaneous costs
incurred on behalf of the Company. The Company reimbursed GHK $381,267 and
$288,505 in 1997 and 1996, respectively, for such costs.

MTV Investments Limited Partnership ("MTV") owns 37.037 percent of
Cimarrona LLC ("Cimarrona"), an Oklahoma company; Cimarrona is a consolidated
subsidiary of the Company. Resulting from cash calls, MTV owed $541,000 to the
Company at December 31, 1997.

12. SUBSEQUENT EVENTS (UNAUDITED):

The Company has signed a letter of intent to sell its 11.77 percent
interest in the Southern Perth Basin Permits (EP381 and EP408) located in
Southwestern Australia. The Company will receive cash of $850,000, reimbursement
of $263,000 for certain capital expenditures, and retain a small overriding
royalty interest in each permit. Completion of the transaction contemplated by
the letter of intent is subject to several conditions, including obtaining
approvals of third parties and governmental authorities. No assurance can be
given that the Company will complete this sale.

F-16
<PAGE> 46
SEVEN SEAS PETROLEUM INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

13. SUPPLEMENTAL OIL AND GAS INFORMATION (UNAUDITED):

Capitalized costs at December 31, 1997 and 1996, respectively, relating to
the Company's oil and gas activities are shown below:

<TABLE>
<CAPTION>
COLOMBIA OTHERS TOTAL
<S> <C> <C> <C>
As of December 31, 1997
Proved properties......................... $ 46,116,873 $ -- $ 46,116,873
============ ======== ============
Unproved properties....................... $220,771,518 $941,955 $221,713,473
Less: Dry Hole and Abandonment............ -- -- --
------------ -------- ------------
Unproved properties, net.................. $220,771,518 $941,955 $221,713,473
============ ======== ============
As of December 31, 1996
Proved properties......................... $ 1,611,665 $ -- $ 1,611,665
============ ======== ============
Unproved properties....................... $221,413,217 $475,819 $221,889,036
Less: Dry Hole and Abandonment............ -- (4,910) (4,910)
------------ -------- ------------
Unproved properties, net.................. $221,413,217 $470,909 $221,884,126
============ ======== ============
</TABLE>

Costs incurred during the years ended December 31, 1997, 1996, and 1995,
respectively, were as follows:

<TABLE>
<CAPTION>
COLOMBIA ARGENTINA NORTH AFRICA OTHERS TOTAL
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1997
Development cost............ $ 165,829 $ -- $ -- $ -- $ 165,829
Property acquisition cost:
Proved.................... 4,331,169 -- -- -- 4,331,169
Unproved.................. 20,704,532 -- -- -- 20,704,532
Exploration cost............ 18,661,979 -- -- 471,046 19,133,025
------------ -------- -------- -------- ------------
Total cost
incurred........ $ 43,863,509 $ -- $ -- $471,046 $ 44,334,555
============ ======== ======== ======== ============
Year ended December 31, 1996
Property acquisition cost:
Proved.................... $ 1,554,041 $ -- $ -- $ -- $ 1,554,041
Unproved.................. 215,536,257 -- -- 250,000 215,786,257
Exploration cost............ 5,564,861 -- -- 21,405 5,586,266
------------ -------- -------- -------- ------------
Total cost
incurred........ $222,655,159 $ -- $ -- $271,405 $222,926,564
============ ======== ======== ======== ============
Year ended December 31, 1995
Property acquisition cost:
Proved.................... $ -- $ -- $ -- $ -- $ --
Unproved.................. 106,383 75,000 500,800 6,073 688,256
Exploration cost............ 263,340 547,006 -- 198,341 1,008,687
------------ -------- -------- -------- ------------
Total cost
incurred........ $ 369,723 $622,006 $500,800 $204,414 $ 1,696,943
============ ======== ======== ======== ============
</TABLE>

As of December 31, 1997, the Company has not made a provision for
depletion. The Company has produced only insignificant amounts of oil under its
production-testing plan. At such time that the Company completes its evaluation
of the Association Contracts and if a significant level of production of proved
reserves occurs, the currently excluded oil and gas properties will be included
in the amortization base. The Company anticipates completion of its evaluation
of the Association Contracts mid-year 1998 and will commence development
immediately if the evaluation proves successful.

F-17
<PAGE> 47
SEVEN SEAS PETROLEUM INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

EXPLORATION COSTS

The Company has been involved in exploration activities in Colombia,
Australia, Argentina, Turkey and Papua New Guinea. Also, the Company purchased
an option for the right to participate in future exploration activities in North
Africa, but the option was never exercised. Additionally, the Company acquired
oil and gas properties in Colombia totaling $25,035,701 and $217,090,298 in 1997
and 1996, respectively. Capitalized acquisition costs incurred during 1997 and
1996 include $6,490,737 and $63,967,775, respectively, of deferred income tax as
disclosed in Note 2, Business Combination.

The Company had oil and gas sales of $779,767 and $233,682 in 1997 and
1996, respectively, pertaining to production testing of the exploratory wells on
the Association Contracts in Colombia.

On May 16, 1995, the Company entered into an agreement whereby Seven Seas
purchased an option for $500,000 to acquire a five percent participating
interest in three exploration blocks in North Africa upon completion of the
first exploration well drilled. The first exploration well was completed as a
dry hole in July of 1995. After careful review, Seven Seas decided not to
exercise its option. The cost of the option, $500,000, plus additional costs of
$800 incurred toward purchasing this option was originally recorded as unproved
oil and gas interests and was subsequently expensed.

The El Catamarqueno X-1 test well on the Sur Rio Deseado Block in the San
Jorge Basin, Argentina, was determined to be unsuccessful during the first week
of January 1996, prior to release of the 1995 financial statements.
Consequently, the Company determined that further drilling on the block was not
justified and exploration costs of $622,006 incurred in Argentina during 1995
were expensed in 1995.

Ecopetrol has the right to back into Seven Seas' participating interest in
the Association Contracts upon declaration of commerciality at an initial 50
percent participating interest. Ecopetrol's interest can increase based upon
accumulated production levels. Ecopetrol will at the time of commerciality bear
50 percent of the future costs in the field and reimburse the other parties in
these two blocks for 50 percent of previously incurred costs associated with
successful wells.

PROVED RESERVES (UNAUDITED)

Proved reserves represent estimated quantities of crude oil which
geological and engineering data demonstrate to be reasonably recoverable in the
future from known reservoirs under existing economic and operating conditions.
Estimates of proved developed oil reserves are subject to numerous uncertainties
inherent in the process of developing the estimates including the estimation of
the reserve quantities and estimated future rates of production and timing of
development expenditures. The accuracy of any reserve estimate is a function of
the quantity and quality of available data and of engineering and geological
interpretation and judgement. Results of drilling, testing and production
subsequent to the date of the estimate may justify revision of such estimate.
Additionally, the estimated volumes to be commercially recoverable may fluctuate
with changes in the price of oil.

Estimates of future recoverable oil reserves and projected future net
revenues were provided by Ryder Scott Company Petroleum Engineers. The Company's
proved reserves were comprised entirely of crude oil in Colombia.

F-18
<PAGE> 48
SEVEN SEAS PETROLEUM INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Proved developed and undeveloped reserves (barrels):

<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
Beginning of year........................................... 818,000 --
Extensions and discoveries.................................. 31,342,245 818,000
---------- -------
End of year................................................. 32,160,245 818,000
========== =======
Proved developed............................................ 11,494,236 408,000
========== =======
</TABLE>

The following table presents the standardized measure of discounted future
net cash flows relating to proved oil reserves. Future cash inflows and costs
were computed using prices and costs in effect at the end of the year without
escalation less a gravity and transportation adjustment of $6.85 to reference
prices. Future income taxes were computed by applying the appropriate statutory
income tax rate to the pretax future net cash flows reduced by future tax
deductions and net operating loss carryforwards.

Standardized Measure of Discounted Future Net Cash Flows:

<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
Future cash inflows...................................... $326,426,492 $12,520,000
Future costs
Production............................................. 50,986,737 2,112,000
Development............................................ 33,740,255 1,939,000
------------ -----------
Future net cash flows before income taxes................ 241,699,500 8,469,000
Future income taxes...................................... 78,141,020 4,027,000
------------ -----------
Future net cash flows.................................... 163,558,480 4,442,000
10% discount factor...................................... 62,941,503 641,000
------------ -----------
Standardized measure of discounted future net cash
flows.................................................. $100,616,977 $ 3,801,000
============ ===========
</TABLE>

Principal sources of changes in the standardized measure of discounted
future net cash flows during 1997:

<TABLE>
<S> <C>
Beginning of year........................................... $ 3,801,000
Net change in production costs.............................. (1,741,552)
Extensions, discoveries, and additions, less related
costs..................................................... 141,402,293
Net change in future development costs...................... (1,611,820)
Net change in income taxes.................................. (41,969,044)
Accretion of discount....................................... 736,100
------------
End of year................................................. $100,616,977
============
</TABLE>

The standardized measure of discounted future net cash flows shown above
relates to the Company's discovery of oil on the Association Contracts in
Colombia.

The standardized measure of discounted future net cash flows does not
purport to present the fair market value of the Company's proved reserves. An
estimate of fair value would also take into account, among other things, the
recovery of reserves in excess of proved reserves, anticipated future changes in
prices and costs and a discount factor more representative of the time value of
money and the risks inherent in reserve estimates.

F-19
<PAGE> 49

SUPPLEMENTARY FINANCIAL INFORMATION

Selected Quarterly Data. Results of development stage operations by quarter
for the years ended December 31, 1997, and 1996 were:

<TABLE>
<CAPTION>
1997 QUARTER ENDED
------------------------------------------
MARCH 31 JUNE 30 SEPT. 30 DEC. 31
-------- ------- -------- -------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
Operating revenues......................... $ 434 $ 237 $ 308 $ 588
Less costs and expenses.................... 1,194 2,408 1,340 4,847
(760) (2,171) (1,032) (4,259)
------ ------- ------- -------
Minority Interest.......................... 38 35 59 162
------ ------- ------- -------
Net loss................................... $ (722) $(2,137) $ (972) $(4,097)
====== ======= ======= =======
Net loss per share......................... $ (.03) $ (.06) $ (.03) $ (.12)
====== ======= ======= =======
</TABLE>

<TABLE>
<CAPTION>
1996 QUARTER ENDED
------------------------------------------
MARCH 31 JUNE 30 SEPT. 30 DEC. 31
-------- ------- -------- -------
<S> <C> <C> <C> <C>
Operating revenues......................... $ 45 $ 87 $ 221 $ 222
Less costs and expenses.................... 311 619 765 1,140
(266) (532) (544) (917)
Minority Interest.......................... 64
Net loss................................... $ (266) $ (532) $ (544) $ (853)
====== ======= ======= =======
Net loss per share......................... $ (.02) $ (.04) $ (.04) $ (.07)
====== ======= ======= =======
</TABLE>

ITEM 9. CHANGES AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE

None

28
<PAGE> 50

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS

The following table sets forth certain information regarding each director
and executive officers the Company:

<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Robert A. Hefner III..................... 63 Chairman, Chief Executive Officer, and
Managing Director
Breene M. Kerr........................... 68 Vice Chairman and Director
Brian Egolf.............................. 49 Director
Sir Mark Thomson Bt...................... 57 Director
Robert B. Panero......................... 69 Director
Gary F. Fuller........................... 61 Director
James D. Scarlett........................ 44 Director
Larry A. Ray............................. 50 Director, Executive Vice President,
and Chief Operating Officer
Herbert C. Williamson, III............... 49 Director, Executive Vice President,
and Chief Financial Officer
</TABLE>

Set forth below is a description of the backgrounds of the directors and
executive officers of the Company.

Robert A. Hefner III has served as Chairman of the Board, Chief Executive
Officer and Managing Director of the Company since May 1997 and a director of
the Company since November 1996. Since 1959, Mr. Hefner has been Owner and
Managing Member of The GHK Company L.L.C., a private oil and gas exploration
company.

Breene M. Kerr has served as Vice Chairman and director of the Company
since June 1997. Since 1994, Mr. Kerr has served as general partner of Talbot
Fairfield II L.P., an oil and gas exploration undertaking. From 1969 to 1995, he
served as Chairman and director of Kerr Consolidated, an equipment sales and
leasing undertaking. Since 1993, Mr. Kerr has served as a director of Chesapeake
Energy Corp., a publicly traded oil and gas exploration company.

Larry A. Ray has served as Executive Vice President and Chief Operating
Officer of the Company since September 1997 and as director of the Company since
June 1997. Prior to joining the Company, he was Manager of The GHK Company
L.L.C., where he had served in various capacities since 1990.

Herbert C. Williamson, III has served as Executive Vice President, Chief
Financial Officer and director of the Company since September 1997. From 1995
through September 1997, Mr. Williamson served as Director in the Investment
Banking Department of Credit Suisse First Boston. He served as Vice Chairman and
Executive Vice President of Parker & Parsley Petroleum Company, an oil and gas
exploration company (now Pioneer Natural Resources Company) from 1985 through
1995.

Brian Egolf has been a director of the Company since November 1996. Mr.
Egolf is President of Petroleum Management Corporation, a private oil and gas
exploration company.

Sir Mark Thomson Bt. has been a director of the Company since June 1997. He
is Managing Director of B&N Investments Limited, an investment management
company.

Robert B. Panero has been a director of the Company since June 1997. Mr.
Panero is Founder and President of Robert Panero Associates, international
strategic policy and project studies advisors.

Gary F. Fuller has been a director of the Company since June 1997. Mr.
Fuller is a Shareholder and Director of McAfee & Taft, attorneys-at-law.

James D. Scarlett has been a director of the Company since June 1997. Mr.
Scarlett is a Partner in McMillan, Binch, a Canadian law firm.

29
<PAGE> 51

Each director holds office until the next annual meeting of stockholders
for the election of directors and until his successor has been duly elected and
qualified. Vacancies on the Board are filled by the remaining directors, and
directors elected to fill such vacancies hold office until the next annual
meeting of the Company's shareholders. Executive officers generally are elected
annually by the Board of Directors to serve, subject to the discretion of the
Board of Directors, until their successors are elected or appointed.

There is no family relationship between any of the directors or between any
director and any executive officer of the Company. For information regarding
certain business relationships between the Company and certain of its directors
and executive officers, see "Certain/Related Transactions."

COMMITTEES OF THE BOARD

The Company has established three standing committees of the Board of
Directors: an Executive Committee, an Audit Committee and a Stock Option and
Compensation Committee. Messrs. Hefner (Chairman), Kerr and Ray are members of
the Executive Committee. Messrs. Kerr, Thomson and Scarlett are members of the
Audit Committee. Messrs. Kerr, Egolf and Fuller are members of the Stock Option
and Compensation Committee (the "Compensation Committee").

The Executive Committee is delegated, during the intervals between the
meetings of the Board of Directors, all the powers of the Board in respect of
the management and direction of the business and affairs of the Company (except
only those specified in Subsection 116(2) of the Yukon Business Corporation Act)
in all cases in which specified direction in writing shall not have been given
by the Board.

The Audit Committee consults with the auditors of the Company and such
other persons as the members deem appropriate, reviews the preparations for and
scope of the audit of the Company's annual financial statements, makes
recommendations concerning the engagement and fees of the independent auditors,
and performs such other duties relating to the financial statements of the
Company as the Board of Directors may assign from time to time.

The Compensation Committee has all the powers of the Board of Directors,
including the authority to issue shares or other securities of the Company, in
respect of any matters relating to the administration of the Company's 1996
stock Option Plan, 1997 Stock Option Plan and compensation of officers,
directors, employees and other persons performing substantial services for the
Company. See "-- Executive Compensation -- Employee Benefit Plans -- 1996 Stock
Option Plan and 1997 Stock Option Plan."

Director Compensation

Directors who are also officers or employees of the Company are not
separately compensated for serving on the Board of Directors or as members of
Board committees. Directors who are not officers or employees of the Company are
eligible to participate in the Company's Amended 1996 Stock Option Plan and are
reimbursed for their out-of-pocket expenses incurred in connection with their
service as directors, including travel expenses. In May 1997, each non-officer
director received an option for 15,000 shares of common stock at $10.90. Messrs.
Hefner and Egolf declined to accept such options. In June 1997, the Company
granted Mr. Ray an option to purchase 200,000 Common Shares at an exercise price
of $10.70 per share. One-third of these options vest immediately with the
remaining vesting in equal installments on the first and second anniversaries of
the date of grant. On September 9, 1997, the Company granted Mr. Ray options to
purchase an additional 200,000 Common Shares at an exercise price of $13.23 per
share. Such options vest in equal installments on the third, fourth and fifth
anniversaries of the date of grant. 105,000 of the options granted to Mr. Ray on
September 9, 1997 are subject to shareholders approval of the Company's 1997
Stock Option Plan at the Company's 1998 annual meeting. The Company granted
options to the other directors as follows on July 17, 1997 at an exercise price
of $10.70 per share: Mr. Hefner -- 300,000; Mr. Egolf -- 75,000; Mr.
Kerr -- 75,000; Mr. Fuller -- 75,000; Mr. Panero -- 50,000; Mr.
Scarlett -- 75,000; and Mr. Thomson -- 75,000. One-third of the options granted
vested immediately, with the remaining options vesting in equal installments on
the first and second anniversaries of the date of grant. Mr. Panero's options
will vest in equal installments on the first and second anniversaries of the
date of grant. Mr. Panero also

30
<PAGE> 52

received a payment of $37,500 in lieu of 25,000 options, which would have vested
immediately. In September 1997, the Corporation granted Mr. Williamson an option
to purchase 500,000 Common Shares at an exercise price of $13.23 per share.
Options to purchase 150,000 Common Shares vested immediately, options to
purchase 150,000 Common Shares vest on September 9, 1998 and options to purchase
50,000 Common Shares vest on each of September 9, 1999, 2000, 2001 and 2002,
respectively. Of the options granted to Mr. Williamson, 150,000 are under the
1996 Stock Option Plan and 350,000 are subject to approval of the 1997 Stock
Option Plan at the Meeting. See " -- Stock Option Plan Resolution". On November
25, 1997, the Company granted options at an exercise price of $18.55 per share
to the directors: Mr. Hefner -- 150,000; Mr. Williamson -- 150,000; Mr.
Egolf -- 100,000; Mr. Kerr -- 75,000; Mr. Fuller -- 75,000; Mr. Panero --
25,000, Mr. Scarlett -- 25,000; Mr. Thomson -- 25,000; and Mr. Ray -- 150,000.
Such options vest one-third on the first, second, and third anniversaries of the
grant date. In each case, the Company granted these options at the approximate
prevailing market price on the date of grant.

BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

The Securities and Exchange Act requires the Company's officers, directors,
and certain beneficial owners to file reports of ownership and changes in
ownership with the Commission and the American Stock Exchange. Based on its
review of such forms received, the Company believes that during the period from
January 1, 1997 through March 27, 1998 its officers, directors, and certain
beneficial owners complied with all applicable filing requirements except that
Robert A. Hefner III and Breene M. Kerr are late in filing two monthly reports.

INDEMNIFICATION AND LIMITATION OF LIABILITY

The Yukon Business Corporations Act and the Company's Bylaws provide the
following authority to indemnify directors or officers or former directors or
officers of the Company or of a company of which the Company is or was a
shareholder:

(1) Except in respect of an action by or on behalf of the corporation
or a body corporate to procure a judgment in its favor, a corporation may
indemnify a director or officer of the corporation, a former director or
officer of the corporation or a person who acts or acted at the
corporation's request as a director or officer of a body corporate of which
the corporation is or was a shareholder or creditor, and his heirs and
legal representatives, against all costs, charges and expenses, including
an amount paid to settle an action or satisfy a judgment, reasonably
incurred by him in respect of any civil, criminal or administrative action
or proceeding to which he is made a party by reason of being or having been
a director or officer of that corporation or body corporate, if (a) he
acted honestly and in good faith with a view to the best interests of the
corporation, and (b) in the case of a criminal or administrative action or
proceeding that is enforced by a monetary penalty, he had reasonable
grounds for believing that his conduct was lawful.

(2) A corporation may, with the approval of the Supreme Court,
indemnify a person referred to in subsection (1) in respect of an action by
or on behalf of the corporation or body corporate to procure a judgment in
its favor, to which he is made a party by reason by being or having been a
director or an officer of the corporation or body corporate, against all
costs, charges and expenses reasonably incurred by him in connection with
the action if he fulfills the conditions set out in paragraphs (1)(a) and
(b).

The Yukon Business Corporations Act also provides that:

(3) Notwithstanding anything in subsections (1) through (6), a person
referred to in subsection (1) is entitled to indemnity from the corporation
in respect of all costs, charges and expenses reasonably incurred by him in
connection with the defense of any civil, criminal or administrative action
or proceeding to which he is made a party by reason of being or having been
a director or officer of the corporation or body corporate, if the person
seeking indemnity (A) was substantially successful on the merits of his
defense of the action or proceeding, (B) fulfills the conditions set out in
paragraphs (1)(a) and (b), and (C) is fairly and reasonably entitled to
indemnity.

31
<PAGE> 53

(4) A corporation may purchase and maintain insurance for the benefit
of any person referred to in subsection (1) against any liability incurred
by him (a) in his capacity as a director or officer of the corporation,
except when the liability relates to his failure to act honestly and in
good faith with a view to the best interests of the corporation, or (b) in
his capacity as a director or officer of another body corporate if he acts
or acted in that capacity at the corporation's request, except when the
liability relates to his failure to act honestly and in good faith with a
view to the best interests of the body corporate.

(5) A corporation or a person referred to in subsection (1) may apply
to the Supreme Court for an order approving an indemnity under this section
and the Supreme Court may so order and make any further order it thinks
fit.

(6) On an application under subsection (5), the Supreme Court may
order notice to be given to any interested person and that person is
entitled to appear and be heard in person or by counsel.

The Bylaws of the Company also provide that the provisions for
indemnification contained in the Bylaws (outlined in subsections (1) and (2)
above) shall not be deemed exclusive of any other rights to which a person
seeking indemnification may be entitled under any Bylaws, agreement, vote of
shareholders or disinterested directors or otherwise both as to an action in his
official capacity and as to an action in any other capacity while holding such
office and shall continue as to a person who has ceased to be a director of
officer and shall ensure to the benefit of the heirs and legal representatives
of such person. The Company maintains director's and officer's insurance.

Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers, or persons controlling the
Company pursuant to the foregoing provisions, the Company has been informed that
in the opinion of the Securities and Exchange Commission, such indemnification
is against public policy as expressed in the Act and is therefore unenforceable.

32
<PAGE> 54

ITEM 11. EXECUTIVE COMPENSATION

The following table sets forth certain summary information concerning the
compensation paid by the Company to its Chief Executive Officer and each of the
other persons who served as executive officers of the Company whose annual
salary and bonus exceeded $100,000 for the fiscal year ended December 31, 1997
(the "Named Executive Officers"). The table does not include perquisites and
other personal benefits for any individual for whom the aggregate amount of such
compensation does not exceed the lesser of (i) $50,000 or (ii) 10% of individual
combined salary and bonus for the Named Executive Officer in that year.

SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
LONG TERM COMPENSATION
-----------------------------------
AWARDS PAYOUTS
ANNUAL COMPENSATION ------------------------- -------
-------------------------------- RESTRICTED SECURITIES
OTHER ANNUAL SHARES UNDERLYING LTIP ALL OTHER
SALARY BONUS COMPENSATION AWARD(S) OPTIONS/SARS PAYOUTS COMPENSATION
NAME AND PRINCIPAL POSITION YEAR ($) ($) ($)(1) ($) (#) ($) ($)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Robert A. Hefner III......... 1997 -- -- -- -- 450,000 -- --
Chairman, Chief Executive 1996 50,000(2)
Officer and Managing
Director
Malcolm Butler(3)............ 1997 $ 13,301 -- -- -- 200,000 -- $250,000
Former Chief Executive
Officer
Albert E. Whitehead(3)....... 1997 $ 77,308 -- -- -- 50,000(4) -- $125,000(3)
Former Chairman of the
Board 1996 150,000 -- -- -- 185,000 -- 14,634(5)
and Chief Executive Officer 1995 125,000 -- -- -- 200,000 -- --
Larry A. Ray(6).............. 1997 $139,062 -- -- -- 550,000 -- $ 33,330(5)
Executive Vice-President,
Chief Operating Officer and
Director
Timothy T. Stephens(3)....... 1997 $ 67,644 -- -- -- 50,000(4) -- $525,000(3)
Former President 1996 135,000 93,840 -- -- 172,000(6) -- 13,170(5)
1995... 106,875 -- -- -- 250,000 -- --
John P. Dorrier(7)........... 1997 $107,981 -- -- -- 40,000 -- $392,019
Former Executive 1996 120,000 83,520 -- -- 151,000 -- 11,707
Vice-President 1995 80,000 125,000
</TABLE>

- ---------------

(1) The dollar value of perquisites and other personal benefits for each of the
Named Executive Officers was less than established reporting thresholds.

(2) Mr. Hefner was granted options exercisable for 50,000 common shares at
$18.75 per share for his participation as a member of the Board of
Directors.

(3) On May 20, 1997, Messrs. Whitehead and Stephens resigned as executive
officers and directors of the Company. As part of a settlement agreement
with Mr. Stephens, the Company agreed to pay Mr. Stephens $525,000. The
Company also entered into a consulting agreement with Mr. Whitehead for a
three-year term for $200,000 per annum. Mr. Malcolm Butler was named Chief
Executive Officer of the Company in May 1997 and received options
exercisable for 200,000 common shares at $10.90 per share, but resigned on
May 20, 1997 when Mr. Hefner was named Chief Executive Officer. Mr. Butler
received a lump sum payment of $250,000, representing one year's salary, as
part of the settlement agreement with him.

(4) In May 1997, Messrs. Whitehead and Stephens were each granted options
exercisable for 50,000 common shares at $10.90 per share. As part of the
arrangements surrounding the resignation of such persons, the exercise
period of the options for Messrs. Whitehead and Stephens was extended from
90 days to 18 months, subject to shareholder approval at the Company's 1998
annual meeting.

(5) Consists solely of amounts contributed by the Company to the Named Executive
Officer's account in the Company's 401(k) Plan.

(6) Represents salary received from commencement of employment through December
31, 1997 from the Company, which amount does not reflect an annual rate of
compensation.

(7) Mr. Dorrier terminated his employment by the Company in September 1997 and
received payment for the remainder of compensation due under his contract of
employment. See "Employment Agreements" below.

33
<PAGE> 55

OPTION/SAR GRANTS DURING 1997

The following table sets forth information regarding individual grants of
options by the Company during the fiscal year ended December 31, 1997 to each of
the Named Executive Officers, and their potential realizable values.

<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
---------------------------------------------------
NUMBER OF POTENTIAL REALIZABLE VALUE
SHARES % OF TOTAL AT ASSUMED ANNUAL RATES OF
UNDERLYING OPTIONS/SARS EXERCISE SHARE PRICE APPRECIATION FOR
OPTIONS/SARS GRANTED TO OR BASE OPTION TERM(1)
GRANTED EMPLOYEES IN PRICE EXPIRATION ----------------------------
(#) FISCAL YEAR ($/SH) DATE 5%($) 10%($)
<S> <C> <C> <C> <C> <C> <C>
Robert A. Hefner III...... 300,000 9.4% 10.70 07/17/2007 2,018,752 5,115,913
150,000(2) 4.7% 18.55 11/25/2007 1,749,899 4,434,538
Malcolm Butler............ 200,000 6.3% 10.90 05/01/2002 602,294 1,330,912
Albert E. Whitehead....... 50,000 1.6% 10.90 05/01/2002 150,573 332,728
Larry A. Ray.............. 200,000 6.3% 10.70 06/12/2007 1,345,835 3,410,609
200,000(3) 6.3% 13.23 09/09/2007 1,664,835 4,217,843
150,000(2) 4.7% 18.55 11/25/2007 1,749,899 4,434,588
Timothy T. Stephens....... 50,000 1.6% 10.90 05/01/2002 150,573 332,728
John P. Dorrier........... 40,000 1.3% 10.90 05/01/2002 120,459 266,112
</TABLE>

- ---------------

(1) The assumed rates of annual appreciation are calculated from the date of
grant through the assumed expiration date. Actual gains, if any, on option
exercises and common share holdings are dependent on the future performance
of the common shares and overall stock market conditions. There can be no
assurance that the value reflected in the table will be achieved.

(2) Subject to shareholder approval at the Company's 1998 annual meeting.

(3) 105,000 of the options granted to Mr. Ray on September 9, 1997 are subject
to shareholder approval at the Company's 1998 annual meeting.

AGGREGATED OPTION EXERCISES DURING 1997 AND FISCAL YEAR-END OPTION VALUES

The following table provides information related to options exercised by
the Named Executive Officers during 1997 and the number and value of unexercised
options held by the Named Executive Officers at year-end. The Company does not
have any outstanding stock appreciation rights.

<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
SHARES UNDERLYING UNEXERCISED IN-THE-MONEY
ACQUIRED OPTIONS, WARRANTS/SARS AT OPTIONS, WARRANTS/SARS
ON VALUE FISCAL YEAR-END(#)(1) AT FISCAL YEAR-END($)(2)
EXERCISE REALIZED --------------------------- ---------------------------
NAME (#) ($)(1) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
<S> <C> <C> <C> <C> <C> <C>
Robert A. Hefner III..... 0 0 150,000 350,000 685,000 1,370,000
Malcolm Butler........... 0 0 200,000 0 1,330,000 0
Albert E. Whitehead...... 0 0 235,000 0 1,375,000 0
Larry A. Ray............. 0 0 66,666 483,334 456,662 1,777,338
Timothy T. Stephens...... 21,667 282,420 222,000 0 1,270,750 0
John P. Dorrier.......... 131,000 1,883,089 135,000 0 576,600 0
</TABLE>

- ---------------

(1) Represents the difference between the exercise price of the option and the
closing price on the date of exercise.

(2) Based on a closing price on December 31, 1997 of $17.55 per share.

EMPLOYMENT AGREEMENT

The Company and Mr. Dorrier entered into a three year employment contract
which provided that he would receive an annual base salary of $150,000 and, in
the sole discretion of the Compensation Committee of

34
<PAGE> 56

the Board, could have received annual merit increases, annual bonuses and stock
option awards. The contract could have been terminated for "cause" which
includes death or serious incapacity and the executive officer could have
resigned upon three months' prior written notice. The Company and Mr. Dorrier
also entered into an agreement which provide for payments to the executive in
the event there is a Change of Control of the Company and the executive's
employment is terminated (i) by the Company within twelve months thereafter,
(ii) by the executive within six months thereafter, or (iii) by the executive
between six and twelve months after a Change of Control if a triggering event
has occurred. In any such event, the executive shall be entitled to a payment
equal to the aggregate salary payable for the remaining term of his employment
agreement and the Company shall pay the executive's health insurance premium for
a period of one year unless the executive has secured comparable health
insurance prior thereto. If bonuses were paid by the Company for the year in
which the executive's employment terminated, the executive shall be entitled to
a bonus equal to the most recent annual bonus paid to him for each year or part
of the year remaining on his employment agreement, provided that such bonus
payment shall only be paid with respect to a year that the Company otherwise
pays bonuses to some or all of its employees. In addition, all stock options
held by the executive shall be extended until the earlier to occur of the
expiration date of the option or eighteen months after the date of the
termination of his employment by the Company or the date of his notice of intent
to terminate his employment if he elected to resign. The agreement also provides
that in the event the exercise price of any option granted simultaneously with
the option issued to the executive is reduced, the exercise price of the
executive's option shall also be reduced. As a result of the resignation by the
directors of the Company in May 1997, a change of control occurred with respect
to Mr. Dorrier's contract, and Mr. Dorrier resigned as an officer in September
1997.

The Company has entered into a five year employment agreement with Mr.
Larry A. Ray that provides for an annual base salary of $262,500 and in the sole
discretion of the Compensation Committee of the Board, Mr. Ray may receive
annual merit increases, annual bonuses and stock option awards. As part of his
employment agreement, Mr. Ray was granted options to purchase 200,000 Common
Shares at an exercise price of $10.70 per share. One-third of the options vested
immediately and the remainder vests one-half each on the first and second
anniversaries of the date of grant. On September 9, 1997, the Company granted
Mr. Ray options to purchase an additional 200,000 Common Shares 95,000 under the
Amended 1996 Stock Option Plan and 105,000 under the 1997 Stock Option Plan at a
price of $13.23 per share. Options granted under the 1997 Stock Option Plan are
subject to shareholder approval at the next annual or special meeting. Such
options vest one-third each on the third, fourth, and fifth anniversaries of the
date of grant. The employment agreement may be terminated for "cause" or as a
result of death or serious incapacity. Under the terms of the employment
agreement, Mr. Ray will receive payments equal to the amounts remaining to be
paid under the agreement in the event of a "change in control" and his
employment terminates for any reason, including resignation by Mr. Ray. For
purposes of this Agreement, the term "Change in Control" shall mean (1) any
merger, consolidation, or reorganization in which the Company is not the
surviving entity (or survives only as a subsidiary of an entity), (2) any sale,
lease, exchange, or other transfer of (or agreement to sell, lease, exchange, or
otherwise transfer) all or substantially all of the assets of the Company to any
other person or entity (in one transaction or a series of related transactions),
(3) dissolution or liquidation of the Company, (4) when any person or entity,
including a "group" as contemplated by Section 13(d) of the Securities Exchange
Act of 1934, as amended, acquires or gains ownership or control (including
without limitation, power to vote) of more than 50% of the outstanding shares of
the Company's voting stock (based upon voting power), or (5) as a result of or
in connection with a contested election of directors, the persons who were
directors of the Company before such election cease to constitute a majority of
the Board of Directors; provided, however, that the term "Change in Control"
shall not include any reorganization, merger, consolidation, sale, lease,
exchange, or similar transaction involving solely the Company and one or more
previously wholly-owned subsidiaries of the Company.

The Company has entered into a five year employment agreement with Mr.
Herbert C. Williamson, III effective September 9, 1997 that provides for an
annual base salary of $100,000, and in the sole discretion of the Compensation
Committee of the Board, Mr. Williamson may receive annual merit increases,
annual bonuses and stock option awards. As part of his employment agreement, Mr.
Williamson was granted options to purchase 500,000 Common Shares at an exercise
price of $13.23 per share. Options to purchase 150,000
35
<PAGE> 57

Common Shares vest immediately, options to purchase 150,000 Common Shares vest
on September 9, 1998, and options to purchase 50,000 Common Shares each vest on
September 9, 1999, 2000, 2001 and 2002, respectively. Of the options granted to
Mr. Williamson, 150,000 are under the 1996 Stock Option Plan and 350,000 are
subject to approval of the 1997 Stock Option Plan by the stockholders at the
next annual or special meeting. The remaining terms and conditions of Mr.
Williamson's employment agreement are substantially similar to Mr. Ray's
employment agreement.

EMPLOYEE BENEFIT PLANS

Amended 1996 Stock Option Plan

The Company's Amended 1996 Stock Option Plan provides a means whereby
selected employees, senior officers and directors of the Company, or of any
affiliate thereof, may be granted incentive stock options to purchase common
shares of the Company in order to attract and retain the services or advice of
such employees, senior officers and directors, and to provide added incentive to
such persons by encouraging share ownership in the Company. The Amended 1996
Stock Option Plan may provide options to purchase up to 3,000,000 of the
Company's common shares that are presently authorized but unissued or
subsequently acquired by the Company. The Amended 1996 Stock Option Plan will
terminate no later than June 10, 2006.

Pursuant to the Board's authorization, the Amended 1996 Stock Option Plan
is administered by the Compensation Committee. In the event a member of the
Board or the Compensation Committee is eligible for options under the Amended
1996 Stock Option Plan, such member of the Board or Compensation Committee will
not vote with respect to the granting of any option to himself or herself, as
the case may be. The Compensation Committee has the authority, in its
discretion, to determine all matters relating to options granted under the plan,
including selection of the individuals to be granted options, the number of
shares to be subject to each option, the exercise price, and all other terms and
conditions of the options. Grants under the Amended 1996 Stock Option Plan do
not have to be identical in any respect, even when made simultaneously. The
Compensation Committee's interpretation and construction of any terms or
provisions of the Amended 1996 Stock Option Plan on any option issued
thereunder, or of any rule or regulation promulgated in connection therewith,
will be conclusive and binding on all interested parties.

Grants of incentive stock options may be made under the Amended 1996 Stock
Option Plan only to an individual who, at the time the option is granted, is an
employee, senior officer or director of the Company or an affiliate of the
Company, as that term is defined in the Business Corporations Act (Yukon
Territory), a trustee on behalf of such individual, or an entity, all of the
voting securities of which are beneficially owned by an employee or director.

The Compensation Committee will establish the maximum number of shares that
may be reserved pursuant to the exercise of each option and the price per share
at which such option is exercisable, provided that the number of shares that may
be reserved pursuant to the exercise of such options and granted to any person
shall not exceed 5% of the issued and outstanding share capital of the Company.
Furthermore, the exercise price of such options must not be less than the
closing price of the Company's shares on The Toronto Stock Exchange on the day
immediately preceding the date of grant of such options. The Compensation
Committee may establish the term of each option, but if not so established, the
term of each option will be 5 years from the date it is granted, but in no event
shall the term of any option exceed 10 years.

Subject to any vesting schedule established by the Compensation Committee,
each option may be exercised in whole or in part at any time and from time to
time. Options must be exercised by delivery to the Company of a notice of the
number of shares with respect to which the option is being exercised, together
with payment of the exercise price. Payment of the option exercise price must be
made in full at the time notice of exercise of the option is delivered to the
Company and may be in cash or, to the extent permitted by the Compensation
Committee and applicable laws and regulations, by delivery of common shares of
the Company held by the optionee having a fair market value (as determined in
the discretion of the Compensation Committee) equal to the exercise price.
Payment by the optionee in Common Shares will not be accepted unless the
optionee has owned the common shares for a period of at least 6 months.

36
<PAGE> 58

Options granted under the Amended 1996 Stock Option Plan may not be
transferred, assigned, pledged, or hypothecated in any manner other than by will
or by the applicable laws of descent and distribution and shall not be subject
to execution, attachment, or similar process. In the event of death of an
optionee, the option may be exercised by the personal representative of the
optionee's estate or by the persons to whom the optionee's rights pass by will
or by the applicable laws of descent and distribution.

If the optionee's relationship with the Company or any affiliate ceases for
any reason other than termination for cause, death, or total disability, and
unless by its terms the option sooner terminates or expires, then the optionee
may exercise, for a 90-day period thereafter that portion of the optionee's
option that is exercisable at the time of such cessation, but the optionee's
option shall terminate at the end of such 90-day period as to all shares for
which it has not theretofore been exercised, unless such expiration has been
waived in the agreement evidencing the option or by resolution adopted at any
time by the Compensation Committee. Upon the expiration of the 90-day period
following cessation of an optionee's relationship with the Company or an
affiliate, the Compensation Committee has sole discretion in a particular
circumstance to extend the exercise period following such cessation beyond such
90-day period, subject to any such extension being pre-cleared by The Toronto
Stock Exchange. If an optionee is terminated for cause, any option granted under
the Amended 1996 Stock Option Plan will automatically terminate as of the first
discovery by the Company of any reason for termination for cause, and such
optionee will thereupon have no right to purchase any shares pursuant to such
option. "Termination for cause" means dismissal for dishonesty, conviction or
confession of a crime punishable by law (except a minor violation), fraud,
misconduct, or disclosure of confidential information.

Subject to the terms and conditions and within the limitations of the
Amended 1996 Stock Option Plan, the Compensation Committee may modify or amend
outstanding options granted under the plan, subject to the prior approval of The
Toronto Stock Exchange. The modification or amendment of an outstanding option
will not, without the consent of the optionee, impair or diminish any of such
optionee's rights or any of the Company's obligations under such option.

The aggregate number and class of shares for which options may be granted
under the Amended 1996 Stock Option Plan, the number and class of shares covered
by each outstanding option and the exercise price per share thereof (but not the
total price), and each such option, must all be proportionately adjusted for any
increase or decrease in the number of issued Common Shares of the Company
resulting from a split-up or consolidation of shares or any like capital
adjustment, or the payment of any share dividend out of the ordinary course. In
the event of a liquidation or reorganization of the Company in which the
shareholders of the Company receive cash, shares, or other property in exchange
for or in connection with their Common Shares, any option granted under the
Amended 1996 Stock Option Plan will terminate, but the optionee will have the
right immediately prior to such liquidation or reorganization to exercise his
option to the extent the vesting requirements set forth in the option agreement
have been satisfied. If the shareholders of the Company receive shares in the
capital of another corporation in exchange for their common shares, all options
granted under the Amended 1996 Stock Option Plan must be converted into options
to purchase such other corporation's shares, unless the Company and such other
corporation, in their sole discretion, determine that any or all such options
must terminate in accordance with the foregoing provisions applicable to a
liquidation or reorganization. The amount and price of such converted options
must be adjusted in the same proportion as used for determining the number of
shares the holders of the common shares receive in any such exchange. Unless
accelerated by the Compensation Committee, the vesting schedule set forth in the
option agreement will continue to apply to such converted options.

The Board of Directors of the Company may at any time suspend, amend, or
terminate the Amended 1996 Stock Option Plan, but in the case of amendments to
the plan, such amendments must be pre-cleared with The Toronto Stock Exchange.
Any amendment to the Amended 1996 Stock Option Plan that increases the number of
shares that may be issued under the plan, changes the designation of the
participants or class of participants eligible for participation in the plan, or
otherwise materially increases the benefits accruing to the participants under
the plan, must be approved by the holders of a majority of the Company's
outstanding voting shares, voting either in person or by proxy at a duly held
shareholders meeting, within 12 months before or after any such amendment.
37
<PAGE> 59

1997 Stock Option Plan

The 1997 Stock Option Plan will give certain directors, officers, and
employees of the Company, and its subsidiaries and affiliates an opportunity to
develop a sense of proprietorship and personal involvement in the development
and financial success of the Company, and to encourage them to remain with and
devote their best efforts to the business of the Company, thereby advancing the
interests of the Company and its shareholders. Accordingly, the Company may
grant to certain directors, officers, and employees options to purchase up to an
aggregate of 3,000,000 shares of the common stock of the Company ("Stock")
pursuant to the 1997 Stock Option Plan. Such common shares may consist of
authorized but unissued common shares or previously issued common shares
reacquired by the Company. The 1997 Stock Option Plan is an amendment and
restatement of the plan as previously adopted by the Board on September 9, 1997,
and supersedes and replaces in its entirety such previously adopted plan.
Effectiveness of the 1997 Stock Option Plan is subject to approval by the
Company's shareholders at the annual meeting scheduled in June 1998. If the 1997
Stock Option Plan is not so approved by the shareholders, then all options
granted thereunder will be void and of no further force and effect, and no
additional options will be granted under the plan. All options granted under the
1997 Stock Option Plan are subject to, and contingent upon, such shareholder
approval. Except with respect to options then outstanding, the 1997 Stock Option
Plan, as amended and restated, will terminate upon and no further options will
be granted thereunder after September 8, 2007.

The 1997 Stock Option Plan will be administered by the Compensation
Committee, which will have sole authority to select the optionees from among
those individuals eligible under the plan and to establish the number of shares
of Stock which may be issued under each option. The maximum number of shares of
Stock that may be subject to options granted under the plan to an individual
optionee may not exceed 5% of the Company's total Stock outstanding and during
any calendar year may not exceed 1,000,000 (subject to adjustment under certain
conditions described below). The Compensation Committee is authorized to
interpret the 1997 Stock Option Plan and may from time to time adopt such rules
and regulations, consistent with the provisions of the plan, as it may deem
advisable to carry out the plan. All decisions made by the Compensation
Committee in selecting optionees, in establishing the number of shares of Stock
which may be issued under each option and in construing the provisions of the
1997 Stock Option Plan will be final.

Options granted under the 1997 Stock Option Plan may be either incentive
stock options, within the meaning of section 422 of the Internal Revenue Code of
1986, as amended (the "Code"), ("Incentive Stock Options") or options which do
not constitute Incentive Stock Options ("Non-Qualified Stock Options").
Incentive Stock Options may be granted only to individuals who are employees
(including officers and directors who are also employees) of the Company or any
parent or subsidiary corporation (as defined in section 424 of the Code) of the
Company at the time the option is granted. Non-Qualified Stock Options may be
granted to individuals who are directors (but not also employees), officers and
employees of the Company, any parent or subsidiary corporation of the Company,
or any other affiliate of the Company. Options may be granted to the same
individual on more than one occasion. No Incentive Stock Option will be granted
to an individual if, at the time the option is granted, such individual owns
stock possessing more than 10% of the total combined voting power of all classes
of securities of the Company or of its parent or subsidiary corporation, within
the meaning of section 422(b)(6) of the Code, unless at the time such option is
granted the option price is at least 110% of the fair market value of Stock
subject to the option and such option by its terms is not exercisable after the
expiration of five years from the date of grant.

Each option that is an Incentive Stock Option and all rights granted
thereunder will not be transferable other than by will or the laws of descent
and distribution or pursuant to a qualified domestic relations order as defined
by the Code or Title I of the Employee Retirement Income Security Act of 1974,
as amended, or the rules thereunder, and will be exercisable during the
optionee's lifetime only by the optionee or the optionee's guardian or legal
representative. Each option that is a Non-Qualified Stock Option will bear the
same transfer restrictions as an Incentive Stock Option except a Non-Qualified
Stock Option may be assigned to a limited liability company or partnership if
(i) the terms of such transfer are approved in advance by the Compensation
Committee, (ii) 95% or more of all the member or partnership interests in such
limited liability company or partnership are held by the holder of the option
and members of his family, determined in accordance with section 318(a)(1) of
the Code, or trusts for their benefit, (iii) such limited liability company or
partnership is
38
<PAGE> 60

treated as a partnership for federal income tax purposes, and (iv) such limited
liability company or partnership is controlled, directly or indirectly, as a
fiduciary or otherwise, by the holder of the option.

The purchase price of common shares issued under each option will be
determined by the Compensation Committee, but such purchase price must not be
less than the fair market value of common shares subject to the option on the
date the option is granted. Each option must be evidenced by a written agreement
between the Company and the optionee which shall contain such terms and
conditions as may be approved by the Compensation Committee, provided that each
such option must expire not later than 10 years after its date of grant. The
terms and conditions of the respective option agreements need not be identical.
An option agreement may provide for the surrender of the right to purchase
common shares under the option in return for a payment in cash or common shares
equal in value to the excess of the fair market value of the common shares with
respect to which the right to purchase is surrendered over the option price
therefor ("Stock Appreciation Rights"), on such terms and conditions as the
Compensation Committee in its sole discretion may prescribe. The Compensation
Committee will retain final authority (i) to determine whether an optionee will
be permitted, or (ii) to approve an election by an optionee, to receive cash in
full or partial settlement of such Stock Appreciation Rights. Moreover, an
option agreement may provide for the payment of the option price, in whole or in
part, by the delivery of a number of shares of Stock (plus cash if necessary)
having a fair market value equal to such option price.

Common shares with respect to which options may be granted are shares of
common shares as presently constituted, but if, and whenever, prior to the
expiration of an option theretofore granted, the Company effects a subdivision
or consolidation of common shares or the payment of a stock dividend on the
common shares without receipt of consideration by the Company, the number of
common shares with respect to which such option may thereafter be exercised (i)
in the event of an increase in the number of outstanding shares will be
proportionately increased, and the purchase price per share will be
proportionately reduced, and (ii) in the event of a reduction in the number of
outstanding shares will be proportionately reduced, and the purchase price per
share will be proportionately increased.

If the Company recapitalizes, reclassifies its capital stock, or otherwise
changes its capital structure (a "recapitalization"), the number and class of
shares of Stock covered by an option theretofore granted will be adjusted so
that such option will thereafter cover the number and class of shares and
securities to which the optionee would have been entitled pursuant to the terms
of the recapitalization if, immediately prior to the recapitalization, the
optionee had been the holder of record of the number of common shares then
covered by such option. If the Company declares an extraordinary dividend, which
arises from any sale or exchange of assets, payable in cash or any other
property, then the purchase price per common share under any option theretofore
granted shall be reduced by the amount of such extraordinary dividend payable on
a common share if paid in cash or the fair market value (as determined by the
Compensation Committee) of any property distributable on a common share if paid
in kind.

If in the event of any "Corporate Change", as defined in the 1997 Stock
Option Plan, the Compensation Committee, acting in its sole discretion without
the consent or approval of any optionee, will act to effect one or more of the
following alternatives, which may vary among individual optionees and which may
vary among options held by any individual optionee: (1) accelerate the time at
which options then outstanding may be exercised so that such options may be
exercised in full for a limited period of time on or before a specified date
(before or after such Corporate Change) fixed by the Compensation Committee,
after which specified date all unexercised options and all rights of optionees
thereunder will terminate, (2) require the mandatory surrender to the Company by
selected optionees of some or all of the outstanding options held by such
optionees (irrespective of whether such options are then exercisable under the
provisions of the plan) as of a date, before or after such Corporate Change,
specified by the Compensation Committee, in which event the Compensation
Committee will thereupon cancel such options and the Company will pay to each
optionee an amount of cash per common share according to a formula specified in
the 1997 Stock Option Plan, (3) make any adjustments to options then outstanding
as the Compensation Committee, in its sole discretion, deems appropriate to
reflect such Corporate Change, or (4) provide that the number and class of
shares of covered overed by an option theretofore granted will be adjusted so
that such option will thereafter cover the number and class of common shares or
securities or property (including, without limitation, cash) to which the
optionee would
39
<PAGE> 61

have been entitled pursuant to the terms of any Corporate Change if, immediately
prior to such Corporate Change, the optionee had been the holder of record of
the number of shares of Stock then covered by such option.

The Board in its discretion may terminate the 1997 Stock Option Plan at any
time with respect to common shares for which options have not theretofore been
granted. The Board has the right to alter or amend the plan, or any part thereof
from time to time. No change in any outstanding option will be made which would
impair the rights of the optionee without the consent of such optionee. The
Board may not make any alteration or amendment which would increase the
aggregate number of common shares which may be issued pursuant to the provisions
of the 1997 Stock Option Plan or change the class of individuals eligible to
receive options under the plan without the approval of the shareholders of the
Company.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The following table sets forth certain information as of February 28, 1998,
with respect to the beneficial ownership of the Common Shares, by (i) each
person known by the Company to own beneficially more than 5% of the issued and
outstanding Common Shares, (ii) each director of the Company and each of the
Named Officers, and (iii) all executive officers and directors of the Company as
a group.

<TABLE>
<CAPTION>
NUMBER OF
COMMON PERCENT
BENEFICIAL OWNER SHARES(1) OF CLASS
<S> <C> <C>
Robert A. Hefner III........................................ 6,565,300(2) 19%
c/o Seven Seas Petroleum Inc. Suite 960, Three Post Oak
Central 1990 Post Oak Boulevard Houston, Texas 77056
Breene M. Kerr.............................................. 3,048,417(3) 9%
c/o Brookside Company 115 Bay Street Easton, Maryland
21601
George Soros and Stanley F. Drukenmiller.................... 3,058,000(4) 9%
888 Seventh Avenue, 33rd Floor New York, New York 10106
Robert W. Moore............................................. 2,184,900 6%
MTV Investment Limited Partnership 3600 West Main Street,
Suite 150 Norman, Oklahoma 73072
Brian F. Egolf.............................................. 126,386(5) *
Sir Mark Thomson, Bt........................................ 452,566(6) 1%
Robert B. Panero............................................ 17,445(7) *
Gary F. Fuller.............................................. 27,000(8) *
James Scarlett.............................................. 25,000(8) *
Herbert C. Williamson, III.................................. 150,256(9) *
Timothy T. Stephens......................................... 353,500(10)(11) 1%
Albert E. Whitehead......................................... 1,246,758(12)(11) 4%
Malcolm Butler.............................................. 200,000 *
Larry A. Ray................................................ 193,887(13) *
John P. Dorrier............................................. 277,486(14)(11) *
All Executive officers and directors as a group (13
persons).................................................. 12,684,001(15) 36%
</TABLE>

- ---------------

* Less than 1%

(1) Unless otherwise indicated, each of the parties listed has sole voting and
investment power over the common shares owned. The number of shares
indicated includes, in each case, the number of common

40
<PAGE> 62

shares issuable upon exercise of options to purchase common shares
("Options") subject to the Amended 1996 Stock Option Plan, to the extent
that such Options are currently exercisable. For purposes of this table,
Options are deemed to be "currently exercisable" if they may be exercised
within 60 days following February 28, 1998.

(2) Includes 150,000 common shares currently issuable upon exercise of Options,
20,000 shares held by an entity in which Mr. Hefner has a substantial
interest and 3,360,607 common shares beneficially owned by Mr. Hefner and
held in escrow pursuant to the Escrow Agreement.

(3) Includes 25,000 common shares currently issuable upon exercise of an
Option, consists of 828,579 shares beneficially owned by a limited
partnership in which Mr. Kerr serves as a general partner and includes
2,194,838 common shares held in escrow pursuant to the Escrow Agreement.

(4) Of the common shares identified, Mr. Soros, Mr. Drukenmiller, and Soros
Fund Management LLC. may be deemed the beneficial owner of 1,258,700 common
shares. Mr. Drukenmiller and Duquesne Capital Management, LLC may also be
deemed the beneficial owner of the remaining 1,799,300 common shares.

(5) Includes 12,650 common shares owned by a member of Mr. Egolf's family,
2,000 common shares owned by a trust for the benefit of members of Mr.
Egolf's family, 50,000 common shares currently issuable upon exercise of
Options and 39,147 shares held in escrow pursuant to the Escrow Agreement.

(6) Includes 25,000 common shares currently issuable upon exercise of an Option
and 199,531 common shares held in escrow pursuant to the Escrow Agreement.

(7) Includes 16,666 common shares currently exercisable upon exercise of an
Option, 234 common shares held by Mr. Panero's wife, and 363 common shares
held in escrow pursuant to the Escrow Agreement.

(8) Includes 25,000 common shares currently issuable upon exercise of an
Option.

(9) Includes 150,000 common shares currently issuable upon the exercise of
Options.

(10) Includes 222,000 common shares currently issuable upon exercise of Options.
Mr. Stephens resigned as an officer and director of the Company in May
1997.

(11) Number of shares held by the former executives is based on information
available to the Company as of October 27, 1997.

(12) Includes 235,000 common shares currently issuable upon exercise of Options
and 166,667 common shares held in escrow pursuant to the Founder's Escrow
Agreement. Mr. Whitehead resigned as an officer and director of the Company
in May 1997.

(13) Includes 66,667 common shares currently issuable upon exercise of an Option
and an additional 124,500 common shares owned by Mr. Ray's wife.

(14) Includes 135,000 common shares currently issuable upon exercise of Options.

(15) Includes 1,100,333 common shares currently issuable upon exercise of
Options and an aggregate of 5,794,486 common shares and 166,667 common
shares held in escrow pursuant to the GHK Escrow Agreement and the
Founder's Escrow Agreement, respectively.

VOTING SUPPORT AGREEMENT

Under the terms of a voting support agreement by and between the Company
and Hazel Ventures Ltd., the sole shareholder of Petrolinson ("Hazel Ventures"),
Hazel Ventures agreed that prior to July 19, 1998, it will vote all Common
Shares of the Company owned or controlled by it in favor of the slate of
directors proposed by the Company's chief executive officer and will require any
purchaser of its shares to agree to be bound by the terms of the agreement
unless the purchaser acquires the shares in the open market. Hazel acquired
1,000,000 Common Shares, or 2.9% of the Company's outstanding Common Shares, in
exchange for the transfer of its ownership of Petrolinson, the holder of a 6%
interest in the Association Contracts, to a subsidiary of the Company.

41
<PAGE> 63

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

TRANSACTIONS WITH DIRECTORS, OFFICERS, AND SECURITY HOLDERS

On November 1, 1997, the Company made a loan of $200,000 at 6.06% to Larry
A. Ray, Executive Vice President and Chief Operating Officer. Interest on the
loan is payable monthly with a single principle payment due November 1, 2002.

The Company's Chairman and Chief Executive Officer wholly owns GHK Company
LLC ("GHK"). Effective July 1, 1997, the Company has entered into an
administrative service agreement with GHK. The Company recognized fees of
$10,500 of such expenses in 1997. In addition, GHK pays certain miscellaneous
costs incurred on behalf of the Company. The Company reimbursed GHK $381,270 and
$288,505 in 1997 and 1996, respectively, for such costs.

MTV Investments Limited Partnership ("MTV"), beneficial owner of more than
6% of the Company and owner of the minority interest in Cimarrona LLC, a
consolidated subsidiary of the Company. Resulting from cash calls to fund oil
and gas exploration activities, an account receivable of $541,000 was due from
MTV at December 31, 1997.

42
<PAGE> 64

PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K

(a) Financial Statements and Schedules:

(1) Financial Statements: The financial statements required to be filed are
included under Item 8 of this report.

(2) Schedules: All schedules for which provision is made in applicable
accounting regulations of the SEC have been omitted as the schedules
are either not required under the related instructions, are not
applicable or the information required thereby is set forth in the
Company's Consolidated Financial Statements or the Notes thereto.

(3) Exhibits:

<TABLE>
<CAPTION>
NO. EXHIBIT DOCUMENT
--- ----------------
<C> <S> <C>
(1) -- Not Applicable
(2) -- Not Applicable
(3) -- Articles of Incorporation and By-laws
*(A) -- The Amalgamation Agreement effective June 29, 1995 by and
between Seven Seas Petroleum Inc., a British Columbia
corporation; and Rusty Lake Resources Ltd.
*(B) -- Certificate of Continuance and Articles of Continuance
into the Yukon Territory
*(C) -- By-Laws
(4) -- Instruments defining the rights of security holders,
including indentures
*(A) -- Excerpts from the Articles of Continuance
*(B) -- Excerpts from the By-laws
*(C) -- Specimen stock certificate
*(D) -- Form of Class B Warrant
*(E) -- Class B Warrant Indenture dated as of October 15, 1996 by
and between the Company of Canada and Montreal Trust
Company
(9) -- Not Applicable
(10) -- Material Contracts
*(A) -- Agreement dated August 14, 1995 by and between the
Company and GHK Company Colombia, as amended by letter
agreement dated November 30, 1995
*(A) -- Agreement dated August 14, 1995 by and between the
Company and GHK Company Colombia, as amended by letter
agreement dated November 30, 1995
*(B) -- The Association Contract by and between Ecopetrol, GHK
Company Colombia and Petrolinson, S.A. relating to the
Dindal block, as amended
*(C) -- The Association Contract by and between Ecopetrol and GHK
Company Colombia relating to the Rio Seco block
*(D) -- Joint Operating Agreement dated as of August 1, 1994 by
and between GHK Company Colombia and the holders of
interests in the Dindal block
*(E) -- The GHK Company Colombia Share Purchase Agreement dated
as of July 26, 1996 by and between Robert A. Hefner III,
Seven Seas Petroleum Colombia Inc. and the Company
*(F) -- The Cimarrona Purchase Agreement dated as of July 26,
1996 by and between the members of Cimarrona Limited
Liability Company, the Company, Seven Seas Petroleum
Colombia Inc., and Robert A. Hefner III
</TABLE>

43
<PAGE> 65

<TABLE>
<CAPTION>
NO. EXHIBIT DOCUMENT
--- ----------------
<C> <S> <C>
*(G) -- The Esmeralda Purchase Agreement dated as of July 26,
1996 by and between the members of Esmeralda Limited
Liability Company, Robert A. Hefner III, the Company,
Seven Seas Petroleum Holdings, Inc. and Seven Seas
Petroleum Colombia Inc.
*(H) -- The Registration Rights Agreement dated as of July 26,
1996 by and between the Company and certain individuals
*(I) -- Shareholders' Voting Support Agreement dated as of July
26, 1996 by and between Seven Seas Petroleum Inc. and
Messrs. Hefner, Kerr, Whitehead, Plewes and Stephens
*(J) -- Management Services Agreement by and among GHK Company
Colombia, the Company and The GHK Company LLC
*(K) -- The Escrow Agreement for a Natural Resources Company by
and among Montreal Trust Company as trustee, the Company
and certain individuals and entities
*(L) -- The Escrow Agreement for a Natural Resources Company by
and among Montreal Trust Company, as trustee, the Company
and Albert E. Whitehead
*(M) -- Amended 1996 Stock Option Plan
*(N) -- Form of Incentive Stock Option Agreement
*(O) -- Form of Directors' Stock Option Agreement
*(P) -- Form of Employment Agreement between the Company and each
of Messrs. Stephens, Dorrier and DeCort
*(Q) -- Form of Agreement between the Company and each of Messrs.
Stephens, Dorrier and DeCort relating to a change of
control
*(R) -- Form of Employment Agreement between the Company and
Larry A. Ray
*(S) -- Settlement Agreement between the Company and Mr.
Whitehead dated May 20, 1997
*(T) -- Petrolinson S.A. Share Purchase Agreement dated February
14, 1997, between Hazel Ventures LTD., Seven Seas
Petroleum Colombia Inc. and Seven Seas Petroleum Inc.
*(U) -- Pledge Agreement dated March 5, 1997 among Hazel Ventures
LTD., Seven Seas Petroleum Inc., Seven Seas Petroleum
Colombia Inc., and Integro Trust (BVI Limited)
*(V) -- Shareholder Voting Support Agreement made as of March 5,
1997 between Seven Seas Petroleum Inc. and Hazel Ventures
LTD.
*(W) -- Purchase Warrant Indenture made as of August 7, 1997
between Seven Seas Petroleum Inc. and Montreal Trust
Company of Canada
*(X) -- Indenture made as of August 7, 1997 between Seven Seas
Petroleum Inc. and Montreal Trust Company of Canada
*(Y) -- Limited Recourse Guarantee, Security and Pledge Agreement
made as of August 7, 1997 between Seven Seas Petroleum
Holdings Inc. and Montreal Trust Company of Canada
*(Z) -- Limited Recourse Guarantee, Security and Pledge Agreement
made as of August 7, 1997 between Seven Seas Petroleum
Colombia Inc. and Montreal Trust Company of Canada
*(AA) -- Private Placement Subscription Agreement made as of
August 7, 1997 between Seven Seas Petroleum Inc. and
Jasopt Pty Limited
*(BB) -- 1997 Stock Option Plan
</TABLE>

44
<PAGE> 66

<TABLE>
<CAPTION>
NO. EXHIBIT DOCUMENT
--- ----------------
<C> <S> <C>
(11.1) -- Not Applicable
(12) -- Not Applicable
(13) -- Not Applicable
(16) -- Not Applicable
(18) -- Not Applicable
(21) -- Not Applicable
*(22) -- Subsidiaries of the Registrant
(23) -- Consent of experts and counsel
*(A) -- Consent of Jerry L. Williams, Independent Public
Accountants
*(B) -- Consent of Arthur Andersen LLP
**(C) -- Consent of Arthur Andersen LLP
**(D) -- Consent of Rider Scott Company Petroleum Engineers
(24) -- Not Applicable
*(27) -- Financial Data Schedule
(28) -- Not Applicable
(29) -- Consent of Ryder Scott Company Petroleum Engineers
(30) -- English Translation of the Rosablanca Association
Contract between Empresa Colombiana De Petroleos and
Seven Seas Petroleum Colombia
(31) -- English Translation of the Montecristo Association
Contract between Empresa Colombiana De Petroleos and
Seven Seas Petroleum Colombia
(99) -- Not Applicable
</TABLE>

- ---------------

* Incorporated herein by reference to Exhibit on like registration on Form 10
(File No. 022483)

** Filed herewith

(b) Reports on Form 8-K

None

45
<PAGE> 67

SIGNATURES

Pursuant to the requirements of the Securities and Exchange Act of 1934,
this report has been signed as of the 3rd day of April, 1998 by the following
persons in their capacity as officers of the Registrant.

SEVEN SEAS PETROLEUM INC.

<TABLE>
<S> <C>
By: /s/ ROBERT A. HEFNER III By: /s/ HERBERT C. WILLIAMSON, III
- -------------------------------------------- --------------------------------------------
Robert A. Hefner III Herbert C. Williamson, III
Chief Executive Officer Chief Financial Officer
</TABLE>

By: /s/ RAY A. HOUSLEY, JR.
-----------------------------------
Ray A. Housley, Jr.
Treasurer and Controller

Pursuant to the requirements of the Securities and Exchange Act of 1934,
this report has been signed as of the 3rd day of April, 1998 by the following
persons in their capacity as directors of the Registrant.

/s/ ROBERT A. HEFNER III
------------------------------------------------
Robert A. Hefner III

/s/ BREENE M. KERR
------------------------------------------------
Breene M. Kerr

/s/ SIR MARK THOMSON BT.
------------------------------------------------
Sir Mark Thomson Bt.

/s/ BRIAN EGOLF
------------------------------------------------
Brian Egolf

/s/ ROBERT B. PANERO
------------------------------------------------
Robert B. Panero

/s/ HERBERT C. WILLIAMSON, III
------------------------------------------------
Herbert C. Williamson, III

/s/ JAMES D. SCARLETT
------------------------------------------------
James D. Scarlett

/s/ LARRY A. RAY
------------------------------------------------
Larry A. Ray

/s/ GARY F. FULLER
------------------------------------------------
Gary F. Fuller

<PAGE> 1
EXHIBIT 23(c)

CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS

As independent public accountants, we hereby consent to the incorporation of
our reports included in this Form 10-K, into the Company's previously filed
Registration Statement on Form S-8 File No. 333-46749.

ARTHUR ANDERSEN LLP

Houston, Texas
May 4, 1998

<PAGE> 1

[RYDER SCOTT COMPANY PETROLEUM ENGINEERS LETTERHEAD]

EXHIBIT 23(d)

CONSENT OF INDEPENDENT PETROLEUM ENGINEERS

As independent petroleum engineers, we hereby consent to the use of our
name in the Annual Report and Form 10K of Seven Seas Petroleum Inc., for the
period ended December 31, 1997. We further consent to the inclusion of our
estimate of reserves and present value of future net reserves in such Annual
Report.

/s/ RYDER SCOTT COMPANY
PETROLEUM ENGINEERS

RYDER SCOTT COMPANY
PETROLEUM ENGINEERS

Houston, Texas
May 4, 1998