The company will sell the zero- interest convertible debentures to Kelton Capital Group, a private company. The debentures are convertible to shares at 25 HK cents and due in 2009, representing a price 4.4 percent higher than South Sea's 23.9 HK cents closing share price on March 29, a day before share trading was suspended. Proceeds are to be spent on oilfields in the Philippines province of Agusan-Davao.

Half will be used to conduct a seismic survey of 2,000 square kilometers of the exploration area, and the remaining HK$100 million will be spent on drilling between 10 and 15 wells.

Assuming full conversion of the debentures, 800 million new shares will be issued, which represents 45.05 percent of South Sea's enlarged capital. Before the execution of this option, any debenture holder has not been able to own more than 5percent of South Sea. In December 2004, South Sea signed a contract with the Philippines government which allows the company to search for oil and gas in a 7,500 square kilometer area at Agusan-Davao Basin.

The initial exploitation term is seven years, with a 25-year production term.

Meanwhile, the company also has invested in an oil project in Indonesia. Last April, it acquired a 65 percent interest in PT Cahayu Batu Raja Blok for US$5.8 million (HK$45.24 million).

PT Cahayu is to explore and develop petroleum and natural gas in Indonesia's Air Komering Block for 30 years. To finance the exploitation and production of crude oil in Indonesia, last month PT Cahayu offered shares on the basis of one share for every two shares to raise HK$65.04 million net proceeds.

South Sea recorded a US$3.01 million half-year loss at the end of June 2005, compared to a US$2.14 million profit a year ago. It had US$3.36 million cash at the end of last June.