STERLING DRILLING FUND 1983-2 - 10-K Annual Report

Back to GetFilings.com

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

SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-K
(Mark One)

[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2001
OR

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

COMMISSION FILE NO. 2-84452-01

STERLING DRILLING FUND 1983-2, L.P.
(Exact name of Registrant as specified in its charter)

NEW YORK 13-3167551
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)

ONE LANDMARK SQUARE
STAMFORD, CONNECTICUT 06901
(Address of principal executive offices) (Zip Code)

Registrant's telephone number, including area code: (203) 358-5700

Securities registered pursuant to Section 12(b) of the Act:
NONE
Securities registered pursuant to Section 12(g) of the Act:

UNITS OF LIMITED PARTNERSHIP
(Title of Class)

Indicate by check mark whether Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.YES X NO

Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
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.

The Registrant has no voting stock. There is no market for the Units
and therefore no market value of the Units is reported.

The number of Units of the Registrant outstanding as of March 15, 2002,
was: 15,697.

DOCUMENTS INCORPORATED BY REFERENCE

NONE

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

STERLING DRILLING FUND 1983-2, L.P.

FORM 10-K ANNUAL REPORT
FOR THE FISCAL YEAR ENDED
DECEMBER 31, 2001

PART I

ITEM 1. BUSINESS

Sterling Drilling Fund 1983-2, L.P., formerly Sterling-Fuel Resources
Drilling Fund 1983-2 (the "Registrant" or the "Partnership") is a limited
partnership formed under the laws of the State of New York on May 26, 1983. The
sole business of the Partnership was the drilling of formation extension wells
principally for natural gas in various locations in the State of West Virginia.
No exploratory drilling was undertaken.

The principal place of business of the Partnership is at One Landmark
Square, Stamford, Connecticut 06901, telephone (203) 358-5700. The Managing
General Partner of the Partnership is PrimeEnergy Management Corporation, a New
York corporation, which is a wholly-owned subsidiary of PrimeEnergy Corporation,
a publicly held Delaware corporation. Messrs. Charles E. Drimal, Jr., Oliver J.
Sterling and Samuel R. Campbell also are General Partners. Mr. Drimal is a
Director, President and Chief Executive Officer of PrimeEnergy Management
Corporation and PrimeEnergy Corporation, and Mr. Campbell is a Director of
PrimeEnergy Corporation.

The aggregate contributions to the Partnership were $15,697,000, all of
which, net of the organization expenses of the Partnership, was expended in the
drilling of such formation extension wells. Such properties are located in Clay,
Roane, Calhoun, Wirt, Kanawha, Lincoln and Putnam Counties, West Virginia. The
Partnership does not operate any of the properties in which it has an interest,
but generally such properties are operated and serviced by Prime Operating
Company, a Texas corporation, and Eastern Oil Well Service Company, a West
Virginia corporation, both wholly-owned subsidiaries of PrimeEnergy Corporation.

During 2001, the Partnership did not engage in any other development
drilling activities or the acquisition of any significant additional properties,
but engaged in the production of oil and gas from its producing properties in
the usual and customary course. Since January 1, 2002, and to the date of this
Report, the Partnership has not engaged in any drilling activities nor
participated in the acquisition of any material producing oil and gas
properties.

During early 2001, PrimeEnergy Management negotiated a Farmout
Agreement with Eastern American Energy. (EAE) covering leasehold interests in
approximately 5,000 acres in Clay County, West Virginia. Acreage held by
Sterling Drilling Fund 1983-2 Limited Partnership has been included in the
Farmout Agreement. This agreement provided for a small cash bonus paid at
closing and gives EAE the right but not the obligation to select acreage and
drill a deep well on the selected acreage, subject to an overriding royalty
interest due to the leasehold owners. This agreement closed in May 2001 and will
be in effect till May 1, 2003. If EAE does not exercise their rights under this

agreement PrimeEnergy will attempt to find other parties interested in this
acreage, however there is no guarantee that a new agreement will be made.

During 2000, PrimeEnergy Management negotiated a Farmout Agreement with
Columbia Natural Resources, Inc. (CNR) covering leasehold interests in
approximately 5,000 acres in Clay County, West Virginia. Acreage held by
Sterling Drilling Fund 1983-2 Limited Partnership was included in the Farmout
Agreement. Pursuant to this agreement, CNR had the right but not the obligation
to select acreage and drill a deep well on the selected acreage, subject to an
overriding royalty interest due to the leasehold owners. This agreement
terminated in April 2001. CNR did not exercise their rights to select acreage
and drill a well.

COMPETITION AND MARKETS

Competitors of the Partnership in the marketing of its oil and gas
production include oil and gas companies, independent concerns, and individual
producers and operators, many of which have financial resources, staffs and
facilities substantially greater than those available to the Partnership.
Furthermore, domestic producers of oil and gas must not only compete with each
other in marketing their output, but must also compete with producers of
imported oil and gas and alternative energy sources such as coal, nuclear power
and hydro-electric power.

The availability of a ready market for any oil and gas produced by the
Partnership at acceptable prices per unit of production will depend upon
numerous factors beyond the control of the Partnership, including the extent of
domestic production and importation of oil and gas, the proximity of the
Partnership's producing properties to gas pipelines and the availability and
capacity of such pipelines, the marketing of other competitive fuels,
fluctuation in demand, governmental regulation of production, refining,
transportation and sales, general national and worldwide economic conditions,
and pricing, use and allocation of oil and gas and their substitute fuels.

The Partnership does not currently own or lease any bulk storage
facilities or pipelines, other than adjacent to and used in connection with
producing wells. The Partnership deals with a number of major and independent
companies for the purchase of its oil and gas production, in the areas of
production. In 2001, approximately $637,121 or 87.08% and $86,219 or 11.78% of
the Partnership's gas production was sold to Dominion Field Services( formerly
named Phoenix Diversified) and Cabot Oil & Marketing Corporation, respectively,
and about $39,656 or 100% of the Partnership's oil production was sold to
Clearfield Appalachian Holdings ( formerly named American Refining Group). None
of the purchasers has any relationship or is otherwise affiliated with the
Partnership. The Partnership believes that its current purchasers will continue
to purchase oil and gas products and, if not, could be replaced by other
purchasers.

ENVIRONMENTAL MATTERS

The petroleum industry is subject to numerous federal and state
environmental statutes, regulations and other pollution controls. In general,
the Partnership is, and will be subject to, present and future environmental
statutes and regulations, and in the future the cost of its activities may

materially increase as a result thereof. The Partnership's expenses relating to
preserving the environment during 2001 as they relate to its oil and gas
operations were not significant in relation to operating costs and the
Partnership expects no material change in the near future. The Partnership
believes that environmental regulations should not, in the future, result in a
curtailment of production or otherwise have a materially adverse effect on the
Partnership's operations or financial condition.

REGULATION

The Partnership's oil and gas operations are subject to a wide variety
of federal, state and local regulations. Administrative agencies in such
jurisdictions may promulgate and enforce rules and regulations relating to,
among other things, drilling and spacing of oil and gas wells, production rates,
prevention of waste, conservation of natural gas and oil, pollution control, and
various other matters, all of which may affect the Partnership's future
operations and production of oil and gas. The Partnership's natural gas
production and prices received for natural gas are regulated by the Federal
Energy Regulatory Commission ("FERC") and the Natural Gas Policy Act of 1978 and
various state regulations. The Partnership is also subject to state drilling and
proration regulations affecting its drilling operations and production rates.

The FERC continues to regulate interstate natural gas pipeline
transportation rates and service conditions pursuant to the NGA and NGPA.
Federal regulation of interstate transporter's affects the marketing of natural
gas produced by the Partnership as well as the revenues received by the
Partnership for sales of such natural gas. Since the latter part of 1985,
through its Order Nos. 436, 500 and 636 rulemakings, the FERC has endeavored to
make natural gas transportation accessible to gas buyers and sellers on an open
and non-discriminatory basis. The FERC's efforts have significantly altered the
marketing and pricing of natural gas. No prediction can be made as to what
additional legislation may be proposed, if any, affecting the competitive status
of a gas producer, restricting the prices at which a producer may sell its gas,
or the market demand for gas, nor can it be predicted which proposals, including
those presently under consideration, if enacted, might be effective.

Additional proposals and proceedings that might affect the natural gas
industry are considered from time to time by Congress, the FERC, state
regulatory bodies and the courts. The Partnership cannot predict when or if any
such proposals might become effective, or their effect, if any, on the
Partnership's operations. The Partnership believes that it will comply with all
orders and regulation changes applicable to its operations. However, in view of
the many uncertainties with respect to the current controls, including their
duration and possible modification together with any new proposals that may be
enacted, the Partnership cannot predict the overall effect, if any, of such
controls on its operations.

TAXATION

The Partnership received an opinion of its counsel that the Partnership
would be classified as a partnership and the holders of Partnership Units would
be treated as limited partners for federal income tax purposes. The Partnership
itself, to the extent that it is treated for federal income tax purposes as a
partnership, is not subject to any federal income taxation, but it is required
to file

annual partnership returns. Each holder of Partnership Units will be allocated
his distributive shares of the Partnership's income, gain, profit, loss,
deductions, credits, tax preference items and distributions for any taxable year
of the Partnership ending within or with his taxable year without regard as to
whether such holder has received or will receive any cash distributions from the
Partnership.

ITEM 2. PROPERTIES

The Partnership has no interest in any properties other than its oil
and gas properties. The information set forth below summarizes the Partnership's
oil and gas wells, production and reserves, for the periods indicated.

PRODUCING WELLS AND OPERATING INFORMATION

The Partnership, following its formation, and in December, 1983,
contracted for the drilling of 52 development wells, which resulted in 51
producing wells and one dry hole.

As of December 31, 2001, the Partnership had ownership interests in the
following gross and net producing oil and gas wells and gross and net producing
acres.(1) The Partnership has no material undeveloped leasehold, mineral or
royalty acreage.

Producing wells:

(1) A gross well is a well in which an interest is owned; a net
well is the sum of the interests owned in gross wells. Wells
are classified by their primary product. Some wells produce
both oil and gas.

The following table sets forth the Partnership's oil and gas
production, average sales prices and average production costs as of and for the
periods indicated:

OIL AND GAS RESERVES

The Partnership's interests in proved developed oil and gas properties
have been evaluated by Ryder Scott Company,L.P. for the periods indicated below.
All of the Partnership's reserves are located in the continental United States.
The following table summarizes the Partnership's oil and gas reserves at the
dates shown (figures rounded):

The estimated future net revenue using current prices and costs as of
the dates indicated, exclusive of income taxes (at a 10% discount for estimated
timing of cash flow) for the Partnership's proved developed oil and gas reserves
for the periods indicated are summarized as follows (figures rounded):

The estimated reserve quantities and future income quantities are
related to hydrocarbon prices. Therefore, volumes of reserves actually recovered
and amounts of income actually received may differ significantly from the
estimated quantities presented in this report.

In accordance with FASB Statement No. 69, December 31, 2001 market
prices were determined using the daily oil price or daily gas sales price ("spot
price") adjusted for oilfield or gas gathering hub and wellhead price
differentials (e.g. grade, transportation, gravity, sulfur, and BS&W) as
appropriate. Also, in accordance with SEC and FASB specifications, changes in
market prices subsequent to December 31, 2000 and 2001 were not considered. The
spot price for gas at December 31, 2000 was $9.23 per MMBTU. The range of spot
prices during the year 2000 was a low of $2.14 and a high of $10.50 and the
average was $4.28. The spot price for gas at December 31, 2001 was $2.63 per
MMBTU. The range of spot prices during the year 2001 was a low of $1.77 and a
high of $10.29 and the average was $3.94. The range during the first quarter of
2002 has been from $2.01 to $3.31 with an average of $2.42. The recent futures
market prices have been in the $3.00 range.

While it may reasonably be anticipated that the prices received by
Sterling Drilling Fund 1983-2 for the sale of its production may be higher or
lower than the prices used in this evaluation, as described above, and the
operating costs relating to such production may also increase or decrease from
existing levels, such possible changes in prices and costs were, in accordance
with rules adopted by the SEC, omitted from consideration in making this
evaluation for the SEC case. Actual volumes produced, prices received and costs
incurred by the partnership may vary significantly from the SEC case.

Since January 1, 2001, the Partnership has not filed any estimates of
its oil and gas reserves with, nor were any such estimates included in any
reports, to any federal authority or agency, other than the Securities and
Exchange Commission.

ITEM 3. LEGAL PROCEEDINGS

The Partnership is not a party to, nor is any of its property the
subject of, any legal proceedings actual or threatened, which would have a
material adverse effect on the business and affairs of the Partnership.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

There were no matters submitted during 2001 for vote by the holders of
Partnership Units.

PART II

ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS

There is no market for the Limited Partnership Units (the "Units) of
the Partnership. As of March 15, 2002, there were 900 holders of record of the
Units.

The Units are not regarded as stock and payments or distributions to
holders of Units are not made in the form of dividends. Cash distributions to
the holders of Units for 2001 aggregated $78,485. Aggregate cash distributions
to the holders of the Units as of December 31, 2001, is $1,907,186.

The Managing General Partner may purchase Units directly from the unit
holders if presented to the Managing General Partner, subject to conditions,
including limitations on numbers of Units, and at a price to be fixed by the
Managing General Partner in accordance with certain procedures, all as provided
for in the Limited Partnership Agreement of the Partnership.

ITEM 6. SELECTED FINANCIAL DATA

The information required hereunder is set forth under "Selected
Financial Data" in the Financial Information section included in this Report.
The index to the Financial Information section is at page F-1.

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

The information required hereunder is set forth under "Management's
Discussion and Analysis of Financial Condition and Results of Operations" in the
Financial Information section included in this Report. The index to the
Financial Information section is at page F-1.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Registrant is a "small business issuer" as defined in the Securities
and Exchange Act Rule 12b-2 and no information is required to be provided by
this Item 7A.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The information required hereunder is set forth under "Report of
Independent Public Accountants," "Balance Sheets," "Statements of Operations,"
"Statements of Changes in Partners' Equity," "Statements of Cash Flows" and
"Notes to Financial Statements" in the Financial Information section included in
this Report. The index to the Financial Information section is at page F-1.

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

There was no disagreement between the Partnership and its certified
public accountants on any matter of accounting principles or practices or
financial statement disclosure.

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

The Managing General Partner of the Partnership is PrimeEnergy
Management Corporation, a New York corporation ("Management"). The principal
business of Management is the management of the Partnership and other publicly
and privately held exploration and development limited partnerships and joint
ventures and publicly held asset and income fund limited partnerships. As of
March 15, 2002, Management acts as the Managing General Partner in a total of 45
limited partnerships and joint ventures, of which 4 are publicly held, and is
the Managing Trustee of 2 Delaware Business Trusts. The primary activity of such
Partnerships, joint ventures and trusts is the production of oil and gas and
Management, as the Managing General Partner of the Partnership, will

devote such of its time as it believes necessary in the conduct and management
of the business and affairs of the Partnership. Management, and other of the
General Partners of the Partnership, are engaged in and intend to continue to
engage in the oil and gas business for their own accounts and for the accounts
of others.

Management, which provides all of the executive, management and
administrative functions of the Partnership, is a wholly owned subsidiary of
PrimeEnergy Corporation ("PrimeEnergy"), a publicly held Delaware corporation.
The principal offices of PrimeEnergy and Management are in Stamford,
Connecticut. The operating subsidiaries of PrimeEnergy, Prime Operating Company
and Eastern Oil Well Service Company maintain their principal offices in
Houston, Texas, with district offices in Midland, Texas, Oklahoma City,
Oklahoma, and Charleston, West Virginia. PrimeEnergy and its subsidiaries have
approximately 200 employees, including their principal officers, providing
management and administrative services, accounting, engineers, geologists,
production engineers, land department personnel and field employees.

Set forth below is information concerning the directors and executive
officers of Management and PrimeEnergy that are involved with the conduct of the
business and operations of the Partnership.

Charles E. Drimal, Jr., age 54, is a Director and President of
Management and has held those positions since May 1983. He is also a Director
and President of Prime Energy and the operating subsidiaries. He graduated from
the University of Maryland in 1970 and from Samford University School of Law in
1973 and is a member of the New York State Bar.

Beverly A. Cummings, age 49, has been a Director and Vice President,
Finance, of Management since August 1985. She is also a Director and Vice
President, Finance, and Treasurer of PrimeEnergy and the operating subsidiaries.
Ms. Cummings is a Certified Public Accountant and holds a Bachelor of Science
degree from the State University of New York and a Master in Business
Administration from Rutgers University.

Lynne G. Pizor, age 42, has been Controller of Prime Operating Company
since January 1992, and Eastern Oil Well Service Company since September 1990.
She also held that position with Management from January 1986, through August
1994, and PrimeEnergy from May 1990, through August 1994. She joined Management
in October 1984, as Manager of Partnership Accounting. She is a graduate of
Wagner College with a Bachelor of Science degree in Economics and Business
Administration and is a Certified Public Accountant.

James F. Gilbert, age 69, has been Secretary of Management since June
1990, and has been Secretary of PrimeEnergy since March 1973, and was a Director
of PrimeEnergy from that date to October 1987. He also serves as Secretary of
the operating subsidiaries. He is an attorney in Dallas, Texas.

ITEM 11. EXECUTIVE COMPENSATION

The Partnership has no officers, directors or employees. The officers
and employees of the Managing General Partner and PrimeEnergy perform all
management and operational functions of the Partnership. The Partnership does
not pay any direct salaries or other remuneration to the officers, directors or
employees of the Managing General Partner or PrimeEnergy. The Managing General
Partner is reimbursed for the general and administrative expenses of the
Partnership, which are allocated to the Partnership, together with
administrative work by third parties limited annually to 5% of the aggregate
capital contribution of the holders of the Partnership Units. During 2001, the
allocation of general and administrative expenses to the Partnership was
approximately $100,800.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The following table shows as of March 16, 2000, the name and address
and the number and percent of Units beneficially and directly owned by each
person, entity or group, known to the Partnership to own more than 5% of the
Units.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Prime Operating Company acts as the operator for most of the
producing oil and gas wells of the Partnership pursuant to operating agreements
with the Partnership and other working interest owners, including other
partnerships managed by the Managing General Partner. PrimeOperating Company was
paid, in 2001, well operating fees ranging from about $248 to $686 per month per
well. Well operating supplies and equipment and related servicing operations are
generally provided by Eastern Oil Well Service Company. The Partnership pays its
proportionate part of such operating fees and expenses. Such fees and expenses
vary depending on such matters as the location of the well, the complexity of
the producing equipment, whether wells produce oil or gas or both and similar
factors. The Partnership believes that such services are as favorable to the
Partnership as they would be if the Partnership entered into such transactions
with unaffiliated third parties. In 2001 and 2000, the Partnership paid an
aggregate of $194,034 and $147,899, respectively, in such fees and expenses.

PART IV

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

(a) The following documents are filed as a part of this Report:

1. Financial Statements (Index to the Financial
Information at page F-1)

2. Financial Statement Schedules:

Schedule V Property and Equipment - Oil and Gas
Properties

Schedule VI Accumulated Depreciation, Depletion and
Amortization - Oil and Gas Properties

3. Exhibits:

(3) Form of Agreement of Limited Partnership of
Sterling Drilling Fund 1983-2 (Incorporated
by reference to Exhibit (3) of Sterling
Drilling Fund 1983-2 Form 10-K for the year
ended December 31, 1994.)

(23) Consent of Ryder Scott Company, L.P. (filed
herewith)

(b) Reports on Form 8-K:

No reports on Form 8-K have been filed during the last quarter
of the year covered by this Report.

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, on the 28 day of
March, 2002.

Sterling Drilling Fund 1983-2, L.P.
By: PrimeEnergy Management Corporation
Managing General Partner

By: /S/ Charles E. Drimal Jr.
-------------------------------------
Charles E. Drimal, Jr.
President

Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities indicated and on the 28 day of March, 2002.

/S/ Charles E. Drimal Jr. Director and President,
- -------------------------------- PrimeEnergy Management Corporation;
Charles E. Drimal, Jr.
The Principal Executive Officer

/S/ Beverly A. Cummings Director and Vice President and Treasurer,
- -------------------------------- PrimeEnergy Management Corporation;
Beverly A. Cummings
The Principal Financial
and Accounting Officer

STERLING DRILLING FUND 1983-2, L.P.

(A NEW YORK LIMITED PARTNERSHIP)

INDEX TO FINANCIAL STATEMENTS AND SCHEDULES

All other schedules have been omitted as the information required is either
included in the financial statements, related notes, or is not applicable.

F-1

ITEM 6. SELECTED FINANCIAL DATA

The following table summarizes certain selected financial data to
highlight significant trends in the Registrant's financial condition and results
of operations for the periods indicated. The selected financial data should be
read in conjunction with the financial statements and related notes included
elsewhere in this report.

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

1. Liquidity: The oil and gas industry is intensely competitive in all
its phases. There is also competition between this industry and other industries
in supplying energy and fuel requirements of industrial and residential
consumers. It is not possible for the Registrant to calculate its position in
the industry as the Registrant competes with many other companies having
substantially greater financial and other resources. In accordance with the
terms of the Agreement of Limited Partnership of the Partnership, the General
Partners of the Registrant will make cash distributions of as much of the
Partnership cash credited to the capital accounts of the partners as the General
Partners have determined is not necessary or desirable for the payment of any
contingent debts, liabilities or expenses for the conduct of the Partnership
business. As of December 31, 2001, the General partners have distributed
$1,907,186 or 12.15%, of original Limited Partner capital contributions, to the
Limited Partners.

The net proved oil and gas reserves of the Partnership are considered
to be a primary indicator of financial strength and future liquidity. The
present value of unescalated future net revenues (S.E.C. case) associated with
such reserves, discounted at 10% as of December 31, 2001, was approximately
$1,476,995 as compared to the discounted reserves as of December 31, 2000, which
were approximately $7,413,300. Overall reservoir engineering is a subjective
process of estimating underground accumulations of gas and oil that cannot be
measured in an exact manner. The estimated reserve quantities and future income
quantities are related to hydrocarbon prices. Therefore, volumes of reserves
actually recovered and amounts of income actually received may differ
significantly from the estimated quantities presented in this report.

F-2

In accordance with FASB Statement No. 69, December 31, 2001 market
prices were determined using the daily oil price or daily gas sales price ("spot
price") adjusted for oilfield or gas gathering hub and wellhead price
differentials (e.g. grade, transportation, gravity, sulfur, and BS&W) as
appropriate. Also, in accordance with SEC and FASB specifications, changes in
market prices subsequent to December 31, 2000 and 2001 were not considered. The
spot price for gas at December 31, 2000 was $9.23 per MMBTU. The range of spot
prices during the year 2000 was a low of $2.14 and a high of $10.50 and the
average was $4.28. The spot price for gas at December 31, 2001 was $2.63 per
MMBTU. The range of spot prices during the year 2001 was a low of $1.77 and a
high of $10.29 and the average was $3.94. The range during the first quarter of
2002 has been from $2.01 to $3.31 with an average of $2.42. The recent futures
market prices have been in the $3.00 range.

While it may reasonably be anticipated that the prices received by
Sterling Drilling Fund 1983-2 for the sale of its production may be higher or
lower than the prices used in this evaluation, as described above, and the
operating costs relating to such production may also increase or decrease from
existing levels, such possible changes in prices and costs were, in accordance
with rules adopted by the SEC, omitted from consideration in making this
evaluation for the SEC case. Actual volumes produced, prices received and costs
incurred by the partnership may vary significantly from the SEC case

Since January 1, 2001, the Partnership has not filed any estimates of
its oil and gas reserves with, nor were any such estimates included in any
reports, to any federal authority or agency, other than the Securities and
Exchange Commission.

2. Capital Resources: The Partnership was formed for the sole intention
of drilling oil and gas wells. The Partnership entered into a drilling contract
with an independent contractor in December 1993, for $13,400,000. Pursuant to
the terms of this contract fifty-two wells were drilled resulting in fifty-one
producing wells and one dry hole.

3. Results of operations:

2001 compared to 2000

The Partnership gas and oil production remained constant from 141,004
MCF and 1,861 barrels in 2000 to 140,730 MCF and 1,748 barrels in 2001. The
partnership received a significantly higher average price per MCF from $3.57 in
2000 to $5.20 in 2001. The combination of constant gas production and high gas
prices were the main factors to overall operating revenue to increase from
$553,449 in 2000 to $771,282 in 2001. For most of 2001 the Partnership's revenue
was based upon a higher contract price than was the average spot market price. A
new contract was entered into in December 2001 and the Partnership will be paid
based upon current spot market prices until November 2002.

The Partnership's other income is a result of a cash bonus
paid to the partnership for a farmout agreement. The farmout agreement allows a
third party the right to drill a deep well on leasehold acerage owned by the
partnership for a period of two years. If the third party exercises their rights
within the two years the Partnership could receive an overriding royalty
interest.

Interest income fluctuates with changes in the interest rates received
as well as the amount of cash in the bank at any given time.

F-3

Some production expenses may be variable in nature, vary with
production volumes or others are directly related to repairs, labor, location
costs and maintenance of the wells and well site. Occasionally the Partnership
will expend additional funds on light repairs or capital improvements, which the
operator has deemed necessary. The operator expended funds on capital
improvements in the amount of $37,607. These repairs and capital expenditures
are considered an appropriate means to increase, sustain or halt changes in
production. These repairs, which may include additional labor and well site
maintence, as well as the additional or replacement equipment contributed to
additional production operating cost incurred during 2001. The Partnership's
production expenses increased from $231,866 in 2000 to $363,020 in 2001.

General and administrative costs remained relatively unchanged from
$123,270 in 2000 to $116,851 in 2001. The stable amounts reflect management's
efforts to limit costs, both incurred and allocated to the Partnership.
Management will use in-house resources if it will provide efficient and timely
services to the partnership. Amounts in both years are substantially less than
the $784,850 allocable to the Partnership under the Partnership Agreement.

The Partnership records additional depreciation, depletion and
amortization to the extent that the net capitalized costs exceed the
undiscounted future net cash flows attributable to the Partnership. No
additional depletion deduction was needed in 2000 or 2001. The overall
Partnership depreciation and depletion expense was consistent with the current
basis in the Partnership properties and the rates applied.

2000 compared to 1999

The Partnership experienced changes in gas and oil production 118,204
MCF and 1,790 barrels in 1999 to 141,004 MCF and 1,861 barrels in 2000. The
partnership received a significantly higher average price per MCF and per barrel
from $2.48 and $15.63 in 1999 to $3.57 and $26.91in 2000. The combination of
positive production and prices changes contributed to overall operating revenue
to increase from $321,377 in 1999 to $553,449 in 2000. The Partnership also
received $12,395 as part of a one time settlement from a class action lawsuit it
participated in.

Interest income fluctuates with changes in the interest rates received
as well as the amount of cash in the bank at any given time.

Some production expenses may be variable in nature, vary with production volumes
or others are directly related to repairs, labor, location costs and maintenance
of the wells and well site. The expenditures made in 1999 were for the general
upkeep and maintenance of the Partnership's wells. Occasionally the Partnership
will expend additional funds on light repairs or capital improvements, which the
operator has deemed necessary. . The operator expended funds on capital
improvements in the amount of $87,732. These repairs and capital expenditures
are considered an appropriate means to increase, sustain or halt changes in
production. These repairs as well as the additional or replacement equipment
contributed to additional production operating cost incurred during 2000.
The Partnership's production expenses increased from $150,423 in 1999 to
$231,866 in 2000.

F-4

General and administrative costs remained relatively unchanged from
$126,852 in 1999 to $123,270 in 2000. The stable amounts reflect management's
efforts to limit costs, both incurred and allocated to the Partnership.
Management will use in-house resources if it will provide efficient and timely
services to the partnership. Amounts in both years are substantially less than
the $784,850 allocable to the Partnership under the Partnership Agreement.

The Partnership records additional depreciation, depletion and amortization to
the extent that the net capitalized costs exceed the undiscounted future net
cash flows attributable to the Partnership. No additional depletion deduction
was needed in 1999 or 2000. The overall Partnership depreciation and depletion
expense was consistent with the current basis in the Partnership properties and
the rates applied.

F-5

STERLING DRILLING FUND 1983-2, L.P.
(a New York limited partnership)

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To the Partners of
Sterling Drilling Fund 1983-2, L.P.:

We have audited the accompanying balance sheets of Sterling Drilling Fund
1983-2, L.P. (a New York limited partnership) as of December 31, 2001 and 2000,
and the related statements of operations, changes in partners' equity, and cash
flows for the years ended December 31, 2001, 2000 and 1999. These financial
statements are the responsibility of the Partnership's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.

We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. 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 financial statements referred to above present fairly, in
all material respects, the financial position of Sterling Drilling Fund 1983-2,
L.P. as of December 31, 2001 and 2000, and the results of its operations and
cash flows for the years ended December 31, 2001, 2000 and 1999 in conformity
with accounting principles generally accepted in the United States of America.

Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedules listed in the index to
financial statements and schedules are presented for purposes of complying with
the Securities and Exchange Commission's rules and are not part of the basic
financial statements. These schedules have been subjected to the auditing
procedures applied in the examination of the basic financial statements and, in
our opinion, fairly state in all material respects the financial data required
to be set forth therein in relation to the basic financial statements taken as a
whole.

PUSTORINO, PUGLISI & CO., LLP
New York, New York
March 26, 2002

F-6

STERLING DRILLING FUND 1983-2
(A NEW YORK LIMITED PARTNERSHIP)

BALANCE SHEETS

DECEMBER 31, 2001 AND 2000

The Notes to Financial Statements are an integral part of
these statements.

F-7

STERLING DRILLING FUND 1983-2
(a New York limited partnership)

STATEMENTS OF OPERATIONS

FOR THE YEARS ENDED DECEMBER 31, 2001, 2000, 1999

The Notes to Financial Statements are integral part of these statements.

F-8

STERLING DRILLING FUND 1983-2
(a New York limited partnership)

STATEMENTS OF CHANGES IN PARTNERS' EQUITY

FOR THE YEARS ENDED DECEMBER 31, 2001, 2000, 1999

The Notes to Financial Statements are an integral part of these statements.

F-9

STERLING DRILLING FUND 1983-2
(A NEW YORK LIMITED PARTNERSHIP)

STATEMENTS OF CASH FLOWS

FOR THE YEARS ENDED DECEMBER 31, 2001, 2000, 1999

The Notes to Financial Statements are an integral part of
these statements.

F-10

STERLING DRILLING FUND 1983-2, L.P.
(a New York limited partnership)

NOTES TO FINANCIAL STATEMENTS

DECEMBER 31, 2001, 2000 AND 1999

(1) Organization and Capital Contributions:

Sterling Drilling Fund 1983-2, L.P., a New York limited partnership (the
"Partnership"), was formed on May 26, 1983 for the primary purpose of acquiring,
developing and producing oil and gas in the state of West Virginia. The general
partners are: PrimeEnergy Management Corporation (PEMC), a wholly owned
subsidiary of PrimeEnergy Corporation (PEC), Charles E. Drimal, Jr., Oliver J.
Sterling and Samuel R. Campbell. Fifteen thousand six hundred ninety-seven
limited partnership units, (15,697), were sold at $1,000 per unit aggregating
total limited partner contributions of $15,697,000. The general partners'
contributions amounted to $1,284,839. Partnership operations commenced on
December 22, 1983.

(2) Summary of Significant Accounting Policies:

Revenue Recognition:

The Partnership recognizes operating revenues, consisting of sales of
oil and gas production, in the month of sale. Uncollected revenue is accrued
based on known facts and trends of the relevant oil and gas properties on a
monthly basis.

Basis of Accounting:

The accounts of the Partnership are maintained in accordance with
accounting practices permitted for federal income tax reporting purposes. Under
this method of accounting, (a) substantially all exploration and development
costs except leasehold and equipment costs are expensed as paid, (b) costs of
abandoned leases and equipment are expensed when abandoned, and (c) depreciation
(for equipment placed in service) is provided on an accelerated basis. In order
to present the accompanying financial statements in accordance with generally
accepted accounting principles, memorandum adjustments have been made to account
for oil and gas properties, as discussed below.

F-11

STERLING DRILLING FUND 1983-2, L.P.
(a New York limited partnership)

NOTES TO FINANCIAL STATEMENTS

DECEMBER 31, 2001, 2000 AND 1999

(2) Summary of Significant Accounting Policies - (Cont'd):

Oil and Gas Producing Activities:

The Partnership accounts for its oil and gas operations using the
successful efforts method of accounting on a property by property basis. The
Partnership only participates in developmental drilling. Accordingly, all costs
of drilling and equipping these wells, together with leasehold acquisition
costs, are capitalized. These capitalized costs are amortized on a property by
property basis by the unit-of-production method based upon the ratio of
production to proved oil and gas reserves. Additional depreciation, depletion
and amortization may be recorded if net capitalized costs exceed the
undiscounted future net cash flows attributable to Partnership properties. (See
Note 4)

Federal Income Taxes:

As federal income taxes are the liability of the individual partners,
the accompanying financial statements do not include any provision for federal
income taxes. (See Note 8)

Limited Partners' Loss Per Equity Unit:

The limited partners' income (loss) per equity unit is computed on the
15,697 limited partner equity units.

Cash and Cash Equivalents:

For purposes of the statements of cash flows the Partnership considers
all highly liquid debt instruments with a maturity of three months or less to be
cash equivalents.

Use of Estimates:

The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.

F-12

STERLING DRILLING FUND 1983-2, L.P.
(a New York limited partnership)

NOTES TO FINANCIAL STATEMENTS

DECEMBER 31, 2001, 2000 AND 1999

(3) Oil and Gas Properties:

The Partnership acquired leases or farmouts from PEMC at its cost. Cost
is defined as any amount paid for delay rentals, lease bonuses, if any, surveys
and other expenses including such portion of any of the general partners', or
their affiliates' reasonable, necessary and actual expenses for geological,
geophysical, seismic, land, engineering, drafting, accounting, legal and other
services. The Partnership currently pays royalties of approximately 12.50% to
18.75% of the selling price of the oil and gas extracted.

The following table sets forth certain revenue and expense data
concerning the Partnership's oil and gas activities for the years ended December
31, 2001, 2000 and 1999:

(4) Quantities of Oil and Gas Reserves:

The amount of proved reserves (all of which are developed) presented
below has been estimated by an independent firm of petroleum engineers as of
January 1, 2002. Petroleum engineers on the staff of PEC have also reviewed the
data presented below, as of December 31, 2001, for consistency with current year
production and operating history. All of the Partnership's oil and gas reserves
are located within the United States.

F-13

STERLING DRILLING FUND 1983-2, L.P.
(a New York limited partnership)

NOTES TO FINANCIAL STATEMENTS

DECEMBER 31, 2001, 2000 AND 1999

(4) Quantities of Oil and Gas Reserves - (Cont'd):

Should future prices decline, operation of certain wells would become
uneconomic, on a pretax basis, as production levels decline with age. In
accordance with the rules and regulations of the Securities and Exchange
Commission, proved reserves exclude production which would be uneconomic. The
partners are entitled to certain tax benefits and credits which, if available in
the future, may result in production continuing beyond the level included in the
above table.

Revisions arise from changes in current prices, as well as engineering
and geological data which would alter the useful life and therefore the overall
predicted production of each well. Future changes in these estimates are common
and would impact the reserve quantities used to calculate depreciation,
depletion and amortization.

As discussed in Note 2, the Partnership may record additional
depreciation, depletion and amortization if net capitalized costs exceed the
undiscounted future net cash flows attributable to Partnership properties.
Significant price declines affect estimated future net revenues both directly
and as a consequence of their impact on estimates of future production. The
Partnership has recorded no additional provision for 2001, 2000 and 1999.

F-14

STERLING DRILLING FUND 1983-2, L.P.
(a New York limited partnership)

NOTES TO FINANCIAL STATEMENTS

DECEMBER 31, 2001, 2000 AND 1999

(5) Allocation of Partnership Revenues, Costs and Expenses:

Under the terms of the Limited Partnership Agreement, all Partnership
revenues and expenses, including deductions attributable thereto, are
to be allocated as follows:

(6) Transactions With Affiliates:

(a) The receivable from affiliates at December 2001 and 2000
represents general and administrative and certain other
expenses incurred on behalf of the Partnership by PEC and its
subsidiaries, and amounts due for production operator's fees
(Note 6(b)), net of production revenues collected on behalf of
the Partnership.

(b) As operator of the Partnership's properties, Prime Operating
Company (POC), a subsidiary of PEC, receives, as compensation
from the Partnership, a monthly production operator's fee of
$495 for each producing gas well and $686 for each producing
oil or combination gas and oil well, based on the
Partnership's

F-15

STERLING DRILLING FUND 1983-2, L.P.
(a New York limited partnership)

NOTES TO FINANCIAL STATEMENTS

DECEMBER 31, 2001, 2000 AND 1999

(6) Transactions With Affiliates - (Cont'd):

percentage of working interest in the well. Such fee is subject
to annual adjustment by the percentage increase in the Cost of
Living Index published by the U.S. Department of Labor over the
year in which production began. During 2001, 2000 and 1999,
$183,130, $132,107, and $84,742, of production operator's fees
were incurred, respectively.

(c) In accordance with the terms of the Partnership Agreement, the
general partners are required to pay 8.5% of drilling and
completion costs, lease acquisition costs and certain other
costs, of which 1% will be paid for by the general partners out
of revenues received by them from the Partnership. At December
31, 2001, $25,927 was due from certain general partners for such
costs.

(d) Eastern Oil Well Services Company (EOWSC), a subsidiary of PEC,
provided field services to the Partnership during the years
ending December 31, 2001, 2000, and 1999 for which it was billed
$10,904, $15,790, and $18,779, respectively.

(7) General and Administrative Expenses:

In accordance with the Management Agreement, the general partners will
be reimbursed for the portion of their in-house overhead, including salaries and
related benefits, attributable to the affairs and operations of the Partnership.

This amount, combined with certain direct expenses for geology,
engineering, legal, accounting, auditing, insurance and other items shall not
exceed an annual amount equal to 5% of limited partner capital contributions.
Excess expenses shall be borne by the general partners in their individual
capacity.

During 2001, 2000 and 1999, the Partnership recognized general and
administrative expenses incurred on its behalf by a general partner of $100,800,
$100,000 and $100,000,respectively.

F-16

STERLING DRILLING FUND 1983-2, L.P.
(a New York limited partnership)

NOTES TO FINANCIAL STATEMENTS

DECEMBER 31, 2001, 2000 AND 1999

(8) Federal Income Taxes:

The following is a reconciliation between the net income (loss) as
reported on the Partnership's federal income tax return and the net income
(loss) reported in the accompanying financial statements:

The tax returns of the Partnership, the qualifications of the
Partnership as such for tax purposes, and the amount of Partnership income or
loss are subject to examination by federal and state taxing authorities. If such
examinations result in changes with respect to Partnership's qualifications or
in changes to its income or loss, the tax liability of the partners would be
changed accordingly.

F-17

STERLING DRILLING FUND 1983-2, L.P.
(a New York limited partnership)

NOTES TO FINANCIAL STATEMENTS

DECEMBER 31, 2001, 2000 AND 1999

(9) Major Customers:

A schedule of the major purchases of the Partnership's production is as
follows:

The Partnership renewed its gas purchase contracts in December, 2001
resulting in a gas contract price based upon spot market pricing.

(10) Other Revenue:

In 2001 the Partnerships other income is a result of a cash bonus paid
to the partnership for a two-year farmout agreement. The farmout agreement
allows a third party the right to drill a deep well on leasehold acerage owned
by the partnership for a period of two years. If the third party exercises their
rights with in the two years the Partnership could receive an overriding royalty
interest.

In 2000 the Partnership was a member of Class of Oil Producers involved
in litigation alleging that the principal refiners of Penn Grade crude engaged
in a conspiracy to fix, lower, maintain and stabilize the purchase prices of
crude purchased by the refiners from the oil producers. The Partnership received
this amount pursuant to the Settlement Agreement of this litigation.

In 1999 other revenue represents settled claims against Columbia Gas
Transmission Corp. (Columbia) arising from amounts due from Columbia when they
declared bankruptcy. No significant additional claims are expected concerning
this matter.

F-18

SCHEDULE V

STERLING DRILLING FUND 1983-2, L.P.
(a New York limited partnership)

PROPERTY AND EQUIPMENT - OIL AND GAS PROPERTIES

FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1998

F-19

SCHEDULE VI

STERLING DRILLING FUND 1983-2, L.P.
(a New York limited partnership)

ACCUMULATED DEPRECIATION, DEPLETION AND AMORTIZATION - OIL AND GAS PROPERTIES

FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1998

F-20

INDEX TO EXHIBITS