Oceanic Exploration (PetroTimor)

Form 10QSB Quarterly Report to
U.S. Securities and Exchange Commission
9-Nov-2005

(excerpts relevant to Oceanicís lawsuit against ConocoPhillips et. al.)

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Cash Flow.

Cash used in operating activities was $1,646,383 for the first nine months of 2005, compared to $2,150,780 in the first nine months of 2004. Financing activities, including the sale of short-term investments and borrowings from the note payable from NWO, generated positive cash flows in the first nine months of 2005 of $1,327,413 compared to the 2004 proceeds from the rights offering of $2,087,107. The first nine months of 2005 ended with a net decrease in total cash of $318,970. This decrease in cash is primarily because of legal and professional fees paid in connection with the pending litigation regarding the East Timor disputed concession. Ongoing legal and professional fees associated with the pending litigation have required substantial expenditures. During the nine months ended September 30, 2005 and 2004, Oceanic actually paid cash of $862,795 and $1,437,168, respectively, related to legal and professional activities in Australia and the Timor Gap area. An additional $395,501 of expenses were accrued and remained unpaid as of September 30, 2005. These costs are included in exploration expenses. Exploration expenses have decreased in 2005 compared to the same period in 2004, primarily because much of the legal research for the pending litigation has been completed. Until a final judgment is obtained or settlement of the lawsuit occurs, exploration expenses will continue to be high and will consume a majority of Oceanic's cash resources. Oceanic had $63,466 in cash and cash equivalents at September 30, 2005 compared with $382,436 in cash and cash equivalents at December 31, 2004. The Company had a negative working capital of ($1,403,963), where current liabilities exceeded cash and other current assets, at September 30, 2005, compared to a positive working capital of $392,375 at December 31, 2004. This decrease in working capital was a result of the payment of legal and investigatory expenses charged to exploration expenses as discussed above.

Revenue.

Oceanic provides management services to various entities with which our Chairman of the Board of Directors and Chief Executive Officer is affiliated. Services provided are:

Together, these management services provided all of Oceanic's total revenue for the nine months ended September 30, 2005 and 2004.

Management Fee Revenue (Unaudited)
 
Nine months ended September 30, 20052004
Cordillera
$355,23050%$267,61343%
San Miguel Valley Corporation320,58045%334,42054%
Harvard International Resources, Ltd.38,3685%22,5003%
Total management fee revenue$714,178 $624,533 


Results of Operations

Revenue.

Although Oceanic is not currently directly involved in any other oil and gas exploration or production activities, the Company continues to evaluate potential exploration and production activities elsewhere in the world, including Indonesia and Libya. The Company did not receive any revenue from oil and gas properties in 2005 or 2004. Other than the potential recovery of damages from the pending litigation, the Company is not currently conducting any activities that would result in material oil and gas revenue in 2005.

Exploration Expenses.

The Company continues to have ongoing legal and professional fees associated with the litigation in the U.S. District Court and the pursuit of commercial opportunities in East Timor. During the nine months ended September 30, 2005 and 2004, the Company incurred total exploration expenses of $1,282,238 and $1,576,987, respectively. These related primarily to legal and professional fees associated with the litigation in the U.S. court and the pursuit of commercial opportunities in East Timor. These expenses have been recorded as exploration expenses.

In 1974, Petrotimor, a 99% owned subsidiary of Oceanic, was granted an exclusive offshore concession by Portugal to explore for and develop oil and gas in an approximately 14.8 million-acre area between East Timor and Australia in an area known as the 'Timor Gap.' At that time, Portugal had administrative control and was internationally recognized as having sovereignty over East Timor. On January 5, 1976, following Indonesia's unlawful invasion and occupation of East Timor, Petrotimor applied for and obtained on April 14, 1976, Portugal's consent to a suspension of performance under the concession agreement based upon force majeure. This force majeure status remained in effect until at least October 25, 1999.

On December 11, 1989, Australia and Indonesia, ignoring Petrotimor's rights under its concession from Portugal, signed the Timor Gap Treaty purporting to create a joint zone of cooperation, whereby these two countries could control the exploration and development of hydrocarbons in an area over which both countries claimed rights. A portion of this area, designated as Zone A, falls largely within the area where Petrotimor holds rights under its concession agreement with Portugal. The treaty created a Joint Authority that purported to grant and enter into production contracts with various companies who have subsequently carried out exploration activities in the joint zone of cooperation.

On March 6, 2003, the Australian Parliament ratified the Timor Sea Treaty governing oil and gas projects in the Joint Development Area between Australia and East Timor. In addition, an Australian senior official and Timorese ministers in Dili initialed the Sunrise International Unitization Agreement ('IUA') and a related memorandum of understanding on fiscal issues. Published reports indicate that the IUA states that Australia and East Timor have overlapping maritime claims in the Timor Sea, and that the current boundaries are not permanent. It is uncertain when, if ever, these overlapping maritime claims will be resolved.

Commercial Opportunity in East Timor.

The Company submitted an application for an Expansion of Seabed Concession to the transitional government of East Timor in October 2001 requesting that Petrotimor's 1974 concession area be expanded to include the additional maritime areas within the properly determined seabed delimitation of East Timor. The Company believes that East Timor is entitled, under international law, to exercise sovereign jurisdiction over its seabed and to have an Exclusive Economic Zone as codified in the 1982 United Nations Convention on the Law of the Sea. Oceanic believes that by so doing, East Timor could acquire jurisdiction over hydrocarbon reserves containing approximately 12 trillion cubic feet of natural gas and associated condensate.

Neither the transitional government, nor the new East Timor government that took effect on May 20, 2002 has recognized the Company's concession in East Timor. The Company submitted an application for an Expansion of Seabed Concession to the transitional government in East Timor and received no formal response acknowledging the application. An article carried on the Dow Jones Newswires on September 26, 2002 quotes a 'senior East Timor government official' stating that the government does not recognize this concession. Oceanic has not been officially advised of the status of the application or if the new East Timor government is even considering it. A formal response may never be issued, or the Company could receive an unfavorable response.

If the East Timor government were to recognize the concession and grant the application, it would expand the 1974 Petrotimor concession to correspond with the offshore area over which East Timor is entitled to claim sovereign rights under international law. The Company sponsored a seminar in East Timor in 2001 for the purpose of explaining appropriate maritime boundaries under applicable international law and the resulting benefits to East Timor if such boundaries are enforced.

On August 21, 2001, Oceanic and Petrotimor issued a Statement of Claim (as amended) out of the Federal Court of Australia against the Commonwealth of Australia, the Joint Authority established under the Timor Gap Treaty and the Phillips Petroleum companies operating within the Timor Gap area (the "Respondents"). Oceanic and Petrotimor claim that the Timor Gap Treaty and the related legislation of the Australian Parliament was void or invalid for a number of reasons including (i) the Timor Gap Treaty and the legislation sought to claim significant portions of the continental shelf over which it had no sovereign rights for Australia, which the Company believed under international law belonged to East Timor, and (ii) the Timor Gap Treaty and the legislation attempted to extinguish the property interest and rights granted by the then legitimate power, Portugal, to Oceanic and Petrotimor, without providing for just compensation as required by Australian law.

There were several procedural challenges by the Respondents. A hearing by the full court on the question of whether the Court had jurisdiction over this claim was held on May 16 and 17, 2002. On February 3, 2003, the Federal Court of Australia issued an adverse decision in Petrotimor v. Commonwealth of Australia, ruling that it lacked the jurisdiction to hear the claims made by Oceanic and Petrotimor. On May 6, 2003, the Federal Court ruled that it lacked jurisdiction relating to claims of misuse of confidential information. The Company sought special leave in 2003 to appeal to the High Court. These appeals were discontinued on February 6, 2004 when the Company determined that the most appropriate venue, under the circumstances, would be in the United States courts.

As part of the Australian litigation, Oceanic was required to provide Bank Guarantees as security for costs. The Australia and New Zealand Banking Group ("ANZ Bank") in Sydney, Australia provided the necessary guarantees. As of September 30, 2005 and December 31, 2004, the Company had $282,907 and $282,031, respectively, on deposit with ANZ Bank as collateral for the guarantees. The change in the balance is due to the exchange rate fluctuation between the U.S. and Australian dollars offset by interest earned on the account. In September 2005, the Australian Government Solicitor accepted the Company's offer of $250,000AU ($190,075 in U.S. dollars) in full and final settlement of their outstanding costs. The Company expects this amount to be withdrawn from the ANZ bank account in November 2005. The Company has increased the reserve to $750,000AU ($570,225 in U.S. Dollars) to cover any other claims for costs. At the present time, the Company does not know whether there will be claims for further costs assessed against it by the Court. The Company believes that the remaining deposit may be forfeited to pay for the defendants' legal expenses. Accordingly, the Company maintains an accrued amount of $287,318 to cover the estimated full liability.

Pending Litigation.

On March 1, 2004, Oceanic and Petrotimor filed a Complaint in the United States District Court for the District of Columbia. Oceanic and Petrotimor, as plaintiffs, brought this action to redress the harm caused by the defendants' (collectively including ConocoPhillips, Inc. and designated subsidiaries, the Timor Sea Designated Authority for the Joint Petroleum Development Area, the Timor Gap Joint Authority for the Zone of Cooperation, PT Pertamina and BP Migas) theft, misappropriation and conversion of oil and gas resources within our 14.8 million-acre Timor Gap concession. On March 1, 2005, the Complaint was amended to reflect claims that the misdeeds of the defendants effectively prevented the Company from competing for concessions granted by the Designated Authority.

The Complaint describes violations of the following United States statutes: Racketeer Influenced Corrupt Organizations Act ("RICO"), the Lanham Act and the Robinson-Patman Act. The Complaint seeks damages of at least $10.5 billion from the defendants, also citing unjust enrichment, unfair competition, and intentional interference with the contract and with prospective economic advantage. Based upon the RICO and anti-trust claims, Oceanic and Petrotimor seek to recover treble damages, reasonable attorneys' fees and punitive damages. On February 8, 2005, the Court heard oral arguments on the defendants' motions to dismiss. The Court denied the defendants' motions to dismiss as moot. However, the Court also dismissed the plaintiffs' First Amended Complaint without prejudice to the filing of a Second Amended Complaint, as described above, to more fully reflect the plaintiffs' case. The Complaint was amended to reflect claims that the Company was effectively prevented from obtaining concessions granted by the Designated Authority due to the misdeeds of other defendants. The Court directed the plaintiffs to precisely respond to each and every argument raised by the defendants' "compelling motions to dismiss." The Second Amended Complaint was filed with the Court on March 1, 2005. The defendants filed new motions to dismiss with the Court on March 28, 2005. The Company's opposition to defendants' motions to dismiss was filed with the Court on April 18, 2005. A final response, by the defendants, to the Company's revised complaint was filed on April 28, 2005. No communication has been received from the Court since the last filing with the Court.

The Company awaits the decision of the Court on the defendants' motion to dismiss. The Company is unable to predict when the Court will reach a decision on this motion, nor can the Company predict the Court's decision on the merits of this motion. As stated in the Second Amended Complaint, the Company has consistently proposed to locate liquefied natural gas facilities in East Timor which would significantly benefit the people of East Timor, yet the company has not been given an opportunity to bid on production sharing contracts granted by the Designated Authority due to bribes and corruption. Under these circumstances, the Company believes it is entitled to prove its case, and if given the opportunity by the Court, intends to do so. The Company continues to believe that it has a persuasive case against the defendants based on the evidence.

The Company anticipates that the defendants will continue to deny the allegations of the Second Amended Complaint and will otherwise vigorously defend against the Company's claims. The Company understands that pursuing this lawsuit to its fullest extent in 2005 could take substantial time by Company personnel and substantial Company expense. Additional resources will be required in connection with this litigation. The Company believes that the financial opportunity justifies this substantial commitment of time and expense.