Attached files
file | filename |
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10-K - FORM 10-K - PETROQUEST ENERGY INC | c96877e10vk.htm |
EX-32.2 - EXHIBIT 32.2 - PETROQUEST ENERGY INC | c96877exv32w2.htm |
EX-21.1 - EXHIBIT 21.1 - PETROQUEST ENERGY INC | c96877exv21w1.htm |
EX-31.1 - EXHIBIT 31.1 - PETROQUEST ENERGY INC | c96877exv31w1.htm |
EX-23.3 - EXHIBIT 23.3 - PETROQUEST ENERGY INC | c96877exv23w3.htm |
EX-99.1 - EXHIBIT 99.1 - PETROQUEST ENERGY INC | c96877exv99w1.htm |
EX-31.2 - EXHIBIT 31.2 - PETROQUEST ENERGY INC | c96877exv31w2.htm |
EX-23.2 - EXHIBIT 23.2 - PETROQUEST ENERGY INC | c96877exv23w2.htm |
EX-32.1 - EXHIBIT 32.1 - PETROQUEST ENERGY INC | c96877exv32w1.htm |
EX-23.1 - EXHIBIT 23.1 - PETROQUEST ENERGY INC | c96877exv23w1.htm |
Exhibit 99.2
Chairman & CEO | Executive Committee | |||
C.H. (Scott) Rees III | P. Scott Frost Dallas | |||
President & COO | J. Carter Henson, Jr. Houston | |||
Danny D. Simmons | Dan Paul Smith Dallas | |||
WORLDWIDE PETROLEUM CONSULTANTS
|
Executive VP | Joseph J. Spellman Dallas | ||
ENGINEERING GEOLOGY GEOPHYSICS PETROPHYSICS
|
G. Lance Binder | Thomas J. Tella II Dallas |
February 1, 2010
Mr. Rene P. Ledet
PetroQuest Energy, Inc.
400 East Kaliste Saloom Road, Suite 6000
Lafayette, Louisiana 70508
PetroQuest Energy, Inc.
400 East Kaliste Saloom Road, Suite 6000
Lafayette, Louisiana 70508
Dear Mr. Ledet:
In accordance with your request, we have estimated the proved reserves and future revenue, as of
December 31, 2009, to the PetroQuest Energy, Inc. (PetroQuest) interest in certain oil and gas
properties located in Arkansas and Oklahoma. It is our understanding that the proved reserves
estimated in this report constitute approximately 60 percent of all proved reserves owned by
PetroQuest. The estimates in this report have been prepared in accordance with the definitions and
guidelines of the U.S. Securities and Exchange Commission (SEC) and, with the exception of the
exclusion of future income taxes, conform to the FASB Accounting Standards Codification Topic 932,
Extractive ActivitiesOil and Gas. Definitions are presented immediately following this letter.
This report has been prepared for PetroQuests use in filing with the SEC.
We estimate the net reserves and future net revenue to the PetroQuest interest in these properties,
as of December 31, 2009, to be:
Net Reserves | Future Net Revenue (M$) | |||||||||||||||
Oil | Gas | Present Worth | ||||||||||||||
Category | (MBBL) | (MMCF) | Total | at 10% | ||||||||||||
Proved Developed Producing |
1.4 | 57,093.4 | 94,862.7 | 58,176.9 | ||||||||||||
Proved Developed Non-Producing |
0.2 | 938.0 | 934.1 | 415.8 | ||||||||||||
Proved Undeveloped(1) |
0.0 | 50,253.4 | 16,908.1 | (15,161.6 | ) | |||||||||||
Total Proved |
1.6 | 108,284.8 | 112,704.9 | 43,431.1 |
(1) | These reserves have been included based on the operators declared intent to drill these
wells. |
The oil reserves shown include crude oil and condensate. Oil volumes are expressed in thousands of
barrels (MBBL); a barrel is equivalent to 42 United States gallons. Gas volumes are expressed in
millions of cubic feet (MMCF) at standard temperature and pressure bases.
The estimates shown in this report are for proved reserves. As requested, probable and possible
reserves that exist for these properties have not been included. Estimates of proved undeveloped
reserves have been included for certain locations that would generate positive
future net revenue but would have negative present worth discounted at 10 percent based on the
prices and costs discussed in subsequent paragraphs of this letter. These locations have been
included based on the operators declared intent to drill these wells, which is based on
PetroQuests stated internal price forecast and investment criteria. This report does not include
any value that could be attributed to interests in undeveloped acreage beyond those tracts for
which undeveloped reserves have been estimated. Reserves categorization conveys the relative
degree of certainty; reserves subcategorization is based on development and production status. The
estimates of reserves and future revenue included herein have not been adjusted for risk.
4500 Thanksgiving Tower 1601 Elm Street Dallas, Texas 75201-4754 Ph: 214-969-5401 Fax: 214-969-5411
|
nsai@nsai-petro.com | |
1221 Lamar Street, Suite 1200 Houston, Texas 77010-3072 Ph: 713-654-4950 Fax: 713-654-4951
|
netherlandsewell.com |
Future gross revenue to the PetroQuest interest is prior to deducting state production taxes and ad
valorem taxes. Future net revenue is after deductions for these taxes, future capital costs, and
operating expenses but before consideration of federal income taxes. State tax rates have been
adjusted as applicable for (1) Fayetteville Shale wells that are eligible for High Cost Gas and
Marginal High Cost Gas reduced tax rates through the Arkansas State Oil and Gas Commission and (2)
Hartshorne Coal and Woodford wells that are eligible for Horizontally Drilled Producing Wells
reduced tax rates through the Oklahoma Corporation Commission. The future net revenue has been
discounted at an annual rate of 10 percent to determine its present worth. The present worth is
shown to indicate the effect of time on the value of money and should not be construed as being the
fair market value of the properties.
For the purposes of this report, we did not perform any field inspection of the properties, nor did
we examine the mechanical operation or condition of the wells and facilities. We have not
investigated possible environmental liability related to the properties; therefore, our estimates
do not include any costs due to such possible liability. Also, our estimates do not include any
salvage value for the lease and well equipment or the cost of abandoning the properties.
Prices used in this report are based on the 12-month unweighted arithmetic average of the
first-day-of-the-month price for the period January through December 2009. For oil volumes, the
average Wall Street Journal NYMEX West Texas Intermediate (WTI) price of $61.18 per barrel is
adjusted by lease for quality, transportation fees, and regional price differentials. As a
reference, for the same time period the average Plains Marketing, L.P. WTI posted price was $57.65
per barrel. For gas volumes, the prices used are based on (1) a contract price, (2) the average
Platts Gas Daily Henry Hub spot price of $3.870 per MMBTU, or (3) the average Platts Gas Daily
CenterPoint East spot price of $3.139 per MMBTU and are adjusted by lease or field for energy
content, transportation fees, and regional price differentials. The contract gas price for
Woodford wells that are part of the LaClede Energy Resources gas supply contract is $3.870 per
MMBTU, the average Platts Gas Daily Henry Hub spot price, with a -$0.850 per MMBTU price
adjustment. The contract gas price is held constant until the contract expiration date of October
31, 2013. At contract expiration, the price is adjusted to the average Platts Gas Daily
CenterPoint East spot price and held constant thereafter. All other prices are held constant
throughout the lives of the properties.
Lease and well operating costs used in this report are based on operating expense records of
PetroQuest. These costs have been divided into per-well, per-MCF of gas, and per-barrel of water
costs. Included in the per-well costs are the per-well overhead expenses allowed under joint
operating agreements along with estimates of costs to be incurred at and below the district and
field levels. Headquarters general and administrative overhead expenses of PetroQuest are included
to the extent that they are covered under joint operating agreements for the operated properties.
Lease and well operating costs are held constant throughout the lives of the properties. Capital
costs are included as required for workovers, new development wells, and production equipment. The
future capital costs are held constant to the date of expenditure.
We have made no investigation of potential gas volume and value imbalances resulting from
overdelivery or underdelivery to the PetroQuest interest. Therefore, our estimates of reserves and
future revenue do not include adjustments for the settlement of any such imbalances; our
projections are based on PetroQuest receiving its net revenue interest share of estimated future
gross gas production after field usage and shrinkage.
The reserves shown in this report are estimates only and should not be construed as exact
quantities. Proved reserves are those quantities of oil and gas which, by analysis of engineering
and geoscience data, can be estimated with reasonable certainty to be economically producible. If
the reserves are recovered, the revenues therefrom and the costs related thereto could be more or
less than the estimated amounts. Because of governmental policies and uncertainties of supply and
demand, the sales rates, prices received for the reserves, and costs incurred in recovering such
reserves may vary from assumptions made while preparing this report. Estimates of reserves may
increase or decrease as a result of future operations, market conditions, or changes in
regulations.
For the purposes of this report, we used technical and economic data including, but not limited to,
well logs, geologic maps, seismic data, well test data, production data, historical price and cost
information, and property ownership interests. The reserves in this report have been estimated
using deterministic methods; these estimates have been prepared in accordance with generally
accepted petroleum engineering and evaluation principles. We used standard engineering and
geoscience methods, or a combination of methods, such as performance analysis, volumetric analysis,
and analogy, that we considered to be appropriate and necessary to establish reserves quantities
and reserves categorization that conform to SEC definitions and guidelines. A substantial portion
of these reserves are for undeveloped locations and producing wells that lack sufficient production
history upon which performance-related estimates of reserves can be based. Therefore, these
reserves are based on analogy to properties with similar geologic and reservoir characteristics.
In evaluating the information at our disposal concerning this report, we have excluded from our
consideration all matters as to which the controlling interpretation may be legal or accounting,
rather than engineering and geoscience. As in all aspects of oil and gas evaluation, there are
uncertainties inherent in the interpretation of engineering and geoscience data; therefore, our
conclusions necessarily represent only informed professional judgment.
The titles to the properties have not been examined by Netherland, Sewell & Associates, Inc.
(NSAI), nor has the actual degree or type of interest owned been independently confirmed. The data
used in our estimates were obtained from PetroQuest, public data sources, and the nonconfidential
files of NSAI and were accepted as accurate. Supporting geoscience, field performance, and work
data are on file in our office. The technical persons responsible for preparing the reserves
estimates presented herein meet the requirements regarding qualifications, independence,
objectivity, and confidentiality set forth in the Standards Pertaining to the Estimating and
Auditing of Oil and Gas Reserves Information promulgated by the Society of Petroleum Engineers. We
are independent petroleum engineers, geologists, geophysicists, and petrophysicists; we do not own
an interest in these properties and are not employed on a contingent basis.
Sincerely, NETHERLAND, SEWELL & ASSOCIATES, INC. Texas Registered Engineering Firm F-002699 |
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By: | /s/ C.H. (Scott) Rees III | |||
C.H. (Scott) Rees III, P.E. | ||||
Chairman and Chief Executive Officer | ||||
By:
|
/s/ William Z. (Zack) Warren | By: | /s/ William J. Knights | |||||
William Z. (Zack) Warren, P.E. 105203 | William J. Knights, P.G. 1532 | |||||||
Petroleum Engineer | Vice President | |||||||
Date Signed: February 1, 2010 | Date Signed: February 1, 2010 |
WZW:VRP
Please be advised that the digital document you are viewing is provided by Netherland, Sewell &
Associates, Inc. (NSAI) as a convenience to our clients. The digital document is intended to be
substantively the same as the original signed document maintained by NSAI. The digital document is
subject to the parameters, limitations, and conditions stated in the original document. In the
event of any differences between the digital document and the original document, the original
document shall control and supersede the digital document.
DEFINITIONS OF OIL AND GAS RESERVES
Adapted from U.S. Securities and Exchange Commission Regulation S-X Section 210.4-10(a)
Adapted from U.S. Securities and Exchange Commission Regulation S-X Section 210.4-10(a)
The following definitions are set forth in U.S. Securities and Exchange Commission (SEC) Regulation
S-X Section 210.4-10(a). Also included is supplemental information from (1) the 2007 Petroleum
Resources Management System approved by the Society of Petroleum Engineers, (2) the FASB Accounting
Standards Codification Topic 932, Extractive ActivitiesOil and Gas, and (3) the SECs Compliance
and Disclosure Interpretations.
(1) Acquisition of properties. Costs incurred to purchase, lease or otherwise
acquire a property, including costs of lease bonuses and options to purchase or lease properties,
the portion of costs applicable to minerals when land including mineral rights is purchased in fee,
brokers fees, recording fees, legal costs, and other costs incurred in acquiring properties.
(2) Analogous reservoir. Analogous reservoirs, as used in resources assessments,
have similar rock and fluid properties, reservoir conditions (depth, temperature, and pressure) and
drive mechanisms, but are typically at a more advanced stage of development than the reservoir of
interest and thus may provide concepts to assist in the interpretation of more limited data and
estimation of recovery. When used to support proved reserves, an analogous reservoir refers to a
reservoir that shares the following characteristics with the reservoir of interest:
(i) | Same geological formation (but not necessarily in pressure communication with the reservoir of interest); |
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(ii) | Same environment of deposition; |
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(iii) | Similar geological structure; and |
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(iv) | Same drive mechanism. |
Instruction to paragraph (a)(2): Reservoir properties must, in the aggregate, be no
more favorable in the analog than in the reservoir of interest.
(3) Bitumen. Bitumen, sometimes referred to as natural bitumen, is petroleum in a
solid or semi-solid state in natural deposits with a viscosity greater than 10,000 centipoise
measured at original temperature in the deposit and atmospheric pressure, on a gas free basis. In
its natural state it usually contains sulfur, metals, and other non-hydrocarbons.
(4) Condensate. Condensate is a mixture of hydrocarbons that exists in the gaseous
phase at original reservoir temperature and pressure, but that, when produced, is in the liquid
phase at surface pressure and temperature.
(5) Deterministic estimate. The method of estimating reserves or resources is called
deterministic when a single value for each parameter (from the geoscience, engineering, or economic
data) in the reserves calculation is used in the reserves estimation procedure.
(6) Developed oil and gas reserves. Developed oil and gas reserves are reserves of
any category that can be expected to be recovered:
(i) | Through existing wells with existing equipment and operating methods or in which the cost of the required equipment is
relatively minor compared to the cost of a new well; and |
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(ii) | Through installed extraction equipment and infrastructure operational at the time of the reserves estimate if the extraction is
by means not involving a well. |
Supplemental definitions from the 2007 Petroleum Resources Management System: |
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Developed Producing Reserves Developed Producing Reserves are expected to be recovered from
completion intervals that are open and producing at the time of the estimate. Improved
recovery reserves are considered producing only after the improved recovery project is in
operation. |
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Developed Non-Producing Reserves Developed Non-Producing Reserves include shut-in and
behind-pipe Reserves. Shut-in Reserves are expected to be recovered from (1) completion
intervals which are open at the time of the estimate but which have not yet started producing,
(2) wells which were shut-in for market conditions or pipeline connections, or (3) wells not
capable of production for mechanical reasons. Behind-pipe Reserves are expected to be
recovered from zones in existing wells which will require additional completion work or future
recompletion prior to start of production. In all cases, production can be initiated or
restored with relatively low expenditure compared to the cost of drilling a new well. |
(7) Development costs. Costs incurred to obtain access to proved reserves and to
provide facilities for extracting, treating, gathering and storing the oil and gas. More
specifically, development costs, including depreciation and applicable operating costs of support
equipment and facilities and other costs of development activities, are costs incurred to:
(i) | Gain access to and prepare well locations for drilling, including surveying well locations
for the purpose of determining specific development drilling sites, clearing ground, draining, road
building, and relocating public roads, gas lines, and power lines, to the extent necessary in
developing the proved reserves. |
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(ii) | Drill and equip development wells, development-type stratigraphic test wells, and service
wells, including the costs of platforms and of well equipment such as casing, tubing, pumping
equipment, and the wellhead assembly. |
Definitions Page 1 of 6
DEFINITIONS OF OIL AND GAS RESERVES
Adapted from U.S. Securities and Exchange Commission Regulation S-X Section 210.4-10(a)
(iii) | Acquire, construct, and install production facilities such as lease flow lines,
separators, treaters, heaters, manifolds, measuring devices, and production storage tanks,
natural gas cycling and processing plants, and central utility and waste disposal systems. |
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(iv) | Provide improved recovery systems. |
(8) Development project. A development project is the means by which petroleum
resources are brought to the status of economically producible. As examples, the development of a
single reservoir or field, an incremental development in a producing field, or the integrated
development of a group of several fields and associated facilities with a common ownership may
constitute a development project.
(9) Development well. A well drilled within the proved area of an oil or gas
reservoir to the depth of a stratigraphic horizon known to be productive.
(10) Economically producible. The term economically producible, as it relates to a
resource, means a resource which generates revenue that exceeds, or is reasonably expected to
exceed, the costs of the operation. The value of the products that generate revenue shall be
determined at the terminal point of oil and gas producing activities as defined in paragraph
(a)(16) of this section.
(11) Estimated ultimate recovery (EUR). Estimated ultimate recovery is the sum of
reserves remaining as of a given date and cumulative production as of that date.
(12) Exploration costs. Costs incurred in identifying areas that may warrant
examination and in examining specific areas that are considered to have prospects of containing oil
and gas reserves, including costs of drilling exploratory wells and exploratory-type stratigraphic
test wells. Exploration costs may be incurred both before acquiring the related property
(sometimes referred to in part as prospecting costs) and after acquiring the property. Principal
types of exploration costs, which include depreciation and applicable operating costs of support
equipment and facilities and other costs of exploration activities, are:
(i) | Costs of topographical, geographical and geophysical studies, rights of access to properties to conduct
those studies, and salaries and other expenses of geologists, geophysical crews, and others
conducting those studies. Collectively, these are sometimes referred to as geological and geophysical or G&G costs. |
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(ii) | Costs of carrying and retaining undeveloped properties, such as delay rentals, ad valorem
taxes on properties, legal costs for title defense, and the maintenance of land and lease
records. |
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(iii) | Dry hole contributions and bottom hole contributions. |
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(iv) | Costs of drilling and equipping exploratory wells. |
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(v) | Costs of drilling exploratory-type stratigraphic test wells. |
(13) Exploratory well. An exploratory well is a well drilled to find a new field or
to find a new reservoir in a field previously found to be productive of oil or gas in another
reservoir. Generally, an exploratory well is any well that is not a development well, an extension
well, a service well, or a stratigraphic test well as those items are defined in this section.
(14) Extension well. An extension well is a well drilled to extend the limits of a
known reservoir.
(15) Field. An area consisting of a single reservoir or multiple reservoirs all
grouped on or related to the same individual geological structural feature and/or stratigraphic
condition. There may be two or more reservoirs in a field which are separated vertically by
intervening impervious strata, or laterally by local geologic barriers, or by both. Reservoirs
that are associated by being in overlapping or adjacent fields may be treated as a single or common
operational field. The geological terms structural feature and stratigraphic condition are
intended to identify localized geological features as opposed to the broader terms of basins,
trends, provinces, plays, areas-of-interest, etc.
(16) Oil and gas producing activities.
(i) | Oil and gas producing activities include: |
(A) | The search for crude oil, including condensate and natural gas liquids, or
natural gas (oil and gas) in their natural states and original locations; |
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(B) | The acquisition of property rights or properties for the purpose of further exploration or for the purpose of removing
the oil or gas from such properties; |
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(C) | The construction, drilling, and production activities necessary to retrieve oil and gas from their natural reservoirs, including the acquisition,
construction, installation, and maintenance of field gathering and storage systems, such as: |
(1) | Lifting the oil and gas to the surface; and |
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(2) | Gathering, treating, and field processing (as in the case of processing gas to extract liquid hydrocarbons); and |
Definitions Page 2 of 6
DEFINITIONS OF OIL AND GAS RESERVES
Adapted from U.S. Securities and Exchange Commission Regulation S-X Section 210.4-10(a)
Adapted from U.S. Securities and Exchange Commission Regulation S-X Section 210.4-10(a)
(D) | Extraction of saleable hydrocarbons, in the solid, liquid, or gaseous state, from oil
sands, shale, coalbeds, or other nonrenewable natural resources which are intended to be
upgraded into synthetic oil or gas, and activities undertaken with a view to such
extraction. |
Instruction 1 to paragraph (a)(16)(i): The oil and gas production function shall be
regarded as ending at a terminal point, which is the outlet valve on the lease or field storage
tank. If unusual physical or operational circumstances exist, it may be appropriate to regard the
terminal point for the production function as: |
a. | The first point at which oil, gas, or gas liquids, natural or synthetic, are delivered to a main pipeline, a common carrier, a refinery,
or a marine terminal; and |
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b. | In the case of natural resources that are intended to be upgraded into
synthetic oil or gas, if those natural resources are delivered to a purchaser prior to upgrading,
the first point at which the natural resources are delivered to a main pipeline, a common carrier,
a refinery, a marine terminal, or a facility which upgrades such natural resources into synthetic
oil or gas. |
Instruction 2 to paragraph (a)(16)(i): For purposes of this paragraph (a)(16), the
term saleable hydrocarbons means hydrocarbons that are saleable in the state in which the
hydrocarbons are delivered. |
(ii) | Oil and gas producing activities do
not include: |
(A) | Transporting, refining, or marketing oil and gas; |
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(B) | Processing of produced oil, gas, or natural resources that can be upgraded into
synthetic oil or gas by a registrant that does not have the legal right to produce or a
revenue interest in such production; |
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(C) | Activities relating to the production of natural resources other than oil, gas, or natural resources from which synthetic oil and gas can be
extracted; or |
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(D) | Production of geothermal steam. |
(17) Possible reserves. Possible reserves are those additional reserves that are
less certain to be recovered than probable reserves.
(i) | When deterministic methods are used, the total quantities ultimately recovered
from a project have a low probability of exceeding proved plus probable plus possible reserves.
When probabilistic methods are used, there should be at least a 10% probability that the total
quantities ultimately recovered will equal or exceed the proved plus probable plus possible
reserves estimates. |
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(ii) | Possible reserves may be assigned to areas of a reservoir adjacent to probable reserves
where data control and interpretations of available data are progressively less certain.
Frequently, this will be in areas where geoscience and engineering data are unable to define
clearly the area and vertical limits of commercial production from the reservoir by a defined
project. |
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(iii) | Possible reserves also include incremental quantities associated with a greater
percentage recovery of the hydrocarbons in place than the recovery quantities assumed for
probable reserves. |
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(iv) | The proved plus probable and proved plus probable plus possible reserves estimates must be
based on reasonable alternative technical and commercial interpretations within the reservoir
or subject project that are clearly documented, including comparisons to results in successful
similar projects. |
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(v) | Possible reserves may be assigned where geoscience and engineering data identify directly
adjacent portions of a reservoir within the same accumulation that may be separated from proved
areas by faults with displacement less than formation thickness or other geological
discontinuities and that have not been penetrated by a wellbore, and the registrant believes
that such adjacent portions are in communication with the known (proved) reservoir.
Possible reserves may be assigned to areas that are structurally higher or lower than the
proved area if these areas are in communication with the proved reservoir. |
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(vi) | Pursuant to paragraph (a)(22)(iii) of this section, where direct observation has defined a
highest known oil (HKO) elevation and the potential exists for an associated gas cap, proved
oil reserves should be assigned in the structurally higher portions of the reservoir above the
HKO only if the higher contact can be established with reasonable certainty through reliable
technology. Portions of the reservoir that do not meet this reasonable certainty criterion may
be assigned as probable and possible oil or gas based on reservoir fluid properties and
pressure gradient interpretations. |
(18) Probable reserves. Probable reserves are those additional reserves that are
less certain to be recovered than proved reserves but which, together with proved reserves, are as
likely as not to be recovered.
(i) | When deterministic methods are used, it is as likely as not that actual remaining
quantities recovered will exceed the sum of estimated proved plus probable reserves. When
probabilistic methods are used, there should be at least a 50% probability that the actual
quantities recovered will equal or exceed the proved plus probable reserves estimates. |
Definitions Page 3 of 6
DEFINITIONS OF OIL AND GAS RESERVES
Adapted from U.S. Securities and Exchange Commission Regulation S-X Section 210.4-10(a)
Adapted from U.S. Securities and Exchange Commission Regulation S-X Section 210.4-10(a)
(ii) | Probable reserves may be assigned to areas of a reservoir adjacent to proved reserves
where data control or interpretations of available data are less certain, even if the
interpreted reservoir continuity of structure or productivity does not meet the reasonable
certainty criterion. Probable reserves may be assigned to areas that are structurally higher
than the proved area if these areas are in communication with the proved reservoir. |
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(iii) | Probable reserves estimates also include potential incremental quantities associated with a
greater percentage recovery of the hydrocarbons in place than assumed for proved reserves. |
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(iv) | See also guidelines in paragraphs (a)(17)(iv) and (a)(17)(vi) of this section. |
(19) Probabilistic estimate. The method of estimation of reserves or resources is
called probabilistic when the full range of values that could reasonably occur for each unknown
parameter (from the geoscience and engineering data) is used to generate a full range of possible
outcomes and their associated probabilities of occurrence.
(20) Production costs.
(i) | Costs incurred to operate and maintain wells and related equipment and
facilities, including depreciation and applicable operating costs of support equipment and
facilities and other costs of operating and maintaining those wells and related equipment and
facilities. They become part of the cost of oil and gas produced. Examples of production costs
(sometimes called lifting costs) are: |
(A) | Costs of labor to operate the wells and related equipment and facilities. |
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(B) | Repairs and maintenance. |
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(C) | Materials, supplies, and fuel consumed and supplies utilized in operating the wells and
related equipment and facilities. |
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(D) | Property taxes and insurance applicable to proved properties and wells and related
equipment and facilities. |
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(E) | Severance taxes. |
(ii) | Some support equipment or facilities may serve two or more oil and gas producing
activities and may also serve transportation, refining, and marketing activities. To the extent
that the support equipment and facilities are used in oil and gas producing activities, their
depreciation and applicable operating costs become exploration, development or production costs, as
appropriate. Depreciation, depletion, and amortization of capitalized acquisition, exploration,
and development costs are not production costs but also become part of the cost of oil and gas
produced along with production (lifting) costs identified above. |
(21) Proved area. The part of a property to which proved reserves have been
specifically attributed.
(22) Proved oil and gas reserves. Proved oil and gas reserves are those quantities of
oil and gas, which, by analysis of geoscience and engineering data, can be estimated with
reasonable certainty to be economically produciblefrom a given date forward, from known
reservoirs, and under existing economic conditions, operating methods, and government
regulationsprior to the time at which contracts providing the right to operate expire, unless
evidence indicates that renewal is reasonably certain, regardless of whether deterministic or
probabilistic methods are used for the estimation. The project to extract the hydrocarbons must
have commenced or the operator must be reasonably certain that it will commence the project within
a reasonable time.
(i) | The area of the reservoir considered as proved includes: |
(A) | The area identified by drilling and limited by fluid contacts, if any, and |
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(B) | Adjacent undrilled portions of the reservoir that can, with reasonable certainty, be
judged to be continuous with it and to contain economically producible oil or gas on the
basis of available geoscience and engineering data. |
(ii) | In the absence of data on fluid contacts, proved quantities in a reservoir are
limited by the lowest known hydrocarbons (LKH) as seen in a well penetration unless geoscience,
engineering, or performance data and reliable technology establishes a lower contact with
reasonable certainty. |
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(iii) | Where direct observation from well penetrations has defined a highest known oil (HKO)
elevation and the potential exists for an associated gas cap, proved oil reserves may be
assigned in the structurally higher portions of the reservoir only if geoscience, engineering,
or performance data and reliable technology establish the higher contact with reasonable
certainty. |
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(iv) | Reserves which can be produced economically through application of improved recovery
techniques (including, but not limited to, fluid injection) are included in the proved
classification when: |
(A) | Successful testing by a pilot project in an area of the reservoir with properties no more favorable than in the reservoir as a whole, the operation of
an installed program in the reservoir or an analogous |
Definitions Page 4 of 6
DEFINITIONS OF OIL AND GAS RESERVES
Adapted from U.S. Securities and Exchange Commission Regulation S-X Section 210.4-10(a)
Adapted from U.S. Securities and Exchange Commission Regulation S-X Section 210.4-10(a)
reservoir, or other evidence using reliable technology establishes the reasonable
certainty of the engineering analysis on which the project or program was based; and |
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(B) | The project has been approved for development by all necessary parties and
entities, including governmental entities. |
(v) | Existing economic conditions include prices and costs at which economic
producibility from a reservoir is to be determined. The price shall be the average price during
the 12-month period prior to the ending date of the period covered by the report, determined as an
unweighted arithmetic average of the first-day-of-the-month price for each month within such
period, unless prices are defined by contractual arrangements, excluding escalations based upon
future conditions. |
(23) Proved properties. Properties with proved reserves.
(24) Reasonable certainty. If deterministic methods are used, reasonable certainty
means a high degree of confidence that the quantities will be recovered. If probabilistic methods
are used, there should be at least a 90% probability that the quantities actually recovered will
equal or exceed the estimate. A high degree of confidence exists if the quantity is much more
likely to be achieved than not, and, as changes due to increased availability of geoscience
(geological, geophysical, and geochemical), engineering, and economic data are made to estimated
ultimate recovery (EUR) with time, reasonably certain EUR is much more likely to increase or remain
constant than to decrease.
(25) Reliable technology. Reliable technology is a grouping of one or more
technologies (including computational methods) that has been field tested and has been demonstrated
to provide reasonably certain results with consistency and repeatability in the formation being
evaluated or in an analogous formation.
(26) Reserves. Reserves are estimated remaining quantities of oil and gas and
related substances anticipated to be economically producible, as of a given date, by application of
development projects to known accumulations. In addition, there must exist, or there must be a
reasonable expectation that there will exist, the legal right to produce or a revenue interest in
the production, installed means of delivering oil and gas or related substances to market, and all
permits and financing required to implement the project.
Note to paragraph (a)(26): Reserves should not be assigned to adjacent reservoirs
isolated by major, potentially sealing, faults until those reservoirs are penetrated and evaluated
as economically producible. Reserves should not be assigned to areas that are clearly separated
from a known accumulation by a non-productive reservoir (i.e., absence of reservoir, structurally
low reservoir, or negative test results). Such areas may contain prospective resources (i.e.,
potentially recoverable resources from undiscovered accumulations).
Excerpted from the FASB Accounting Standards Codification Topic 932, Extractive ActivitiesOil and Gas: | ||
932-235-50-30 A standardized measure of discounted future net cash flows relating to an entitys interests in both of the following shall be disclosed as of the end of the year: |
a. | Proved oil and gas reserves (see paragraphs 932-235-50-3 through 50-11B) |
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b. | Oil and gas subject to purchase under long-term supply, purchase, or similar agreements and contracts in
which the entity participates in the operation of the properties on which the oil or gas is
located or otherwise serves as the producer of those reserves (see paragraph 932-235-50-7). |
The standardized measure of discounted future net cash flows relating to those two types of
interests in reserves may be combined for reporting purposes. |
932-235-50-31 All of the following information shall be disclosed in the aggregate and for each geographic area for which reserve quantities are disclosed in accordance with paragraphs 932-235-50-3 through 50-11B: |
a. | Future cash inflows. These shall be computed by applying prices used in estimating the entitys proved oil and gas reserves to the year-end quantities
of those reserves. Future price changes shall be considered only to the extent provided by
contractual arrangements in existence at year-end. |
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b. | Future development and production costs. These costs shall be computed by estimating the expenditures to be incurred in developing and
producing the proved oil and gas reserves at the end of the year, based on year-end costs and
assuming continuation of existing economic conditions. If estimated development expenditures
are significant, they shall be presented separately from estimated production costs. |
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c. | Future income tax expenses. These expenses shall be computed by applying the appropriate year-end
statutory tax rates, with consideration of future tax rates already legislated, to the future
pretax net cash flows relating to the entitys proved oil and gas reserves, less the tax basis
of the properties involved. The future income tax expenses shall give effect to tax deductions
and tax credits and allowances relating to the entitys proved oil and gas reserves. |
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d. | Future net cash flows. These amounts are the result of subtracting future development and production
costs and future income tax expenses from future cash inflows. |
Definitions Page 5 of 6
DEFINITIONS OF OIL AND GAS RESERVES
Adapted from U.S. Securities and Exchange Commission Regulation S-X Section 210.4-10(a)
Adapted from U.S. Securities and Exchange Commission Regulation S-X Section 210.4-10(a)
e. | Discount. This amount shall be derived from using a discount rate of 10 percent
a year to reflect the timing of the future net cash flows relating to proved oil and gas
reserves. |
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f. | Standardized measure of discounted future net cash flows. This amount is the
future net cash flows less the computed discount. |
(27) Reservoir. A porous and permeable underground formation containing a natural
accumulation of producible oil and/or gas that is confined by impermeable rock or water barriers
and is individual and separate from other reservoirs.
(28) Resources. Resources are quantities of oil and gas estimated to exist in
naturally occurring accumulations. A portion of the resources may be estimated to be recoverable,
and another portion may be considered to be unrecoverable. Resources include both discovered and
undiscovered accumulations.
(29) Service well. A well drilled or completed for the purpose of supporting
production in an existing field. Specific purposes of service wells include gas injection, water
injection, steam injection, air injection, salt-water disposal, water supply for injection,
observation, or injection for in-situ combustion.
(30) Stratigraphic test well. A stratigraphic test well is a drilling effort,
geologically directed, to obtain information pertaining to a specific geologic condition. Such
wells customarily are drilled without the intent of being completed for hydrocarbon production.
The classification also includes tests identified as core tests and all types of expendable holes
related to hydrocarbon exploration. Stratigraphic tests are classified as exploratory type if
not drilled in a known area or development type if drilled in a known area.
(31) Undeveloped oil and gas reserves. Undeveloped oil and gas reserves are reserves
of any category that are expected to be recovered from new wells on undrilled acreage, or from
existing wells where a relatively major expenditure is required for recompletion.
(i) | Reserves on undrilled acreage shall be limited to those directly offsetting
development spacing areas that are reasonably certain of production when drilled, unless evidence
using reliable technology exists that establishes reasonable certainty of economic producibility at
greater distances. |
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(ii) | Undrilled locations can be classified as having undeveloped reserves only if a development
plan has been adopted indicating that they are scheduled to be drilled within five years,
unless the specific circumstances, justify a longer time. |
From the SECs Compliance and Disclosure Interpretations (October 26, 2009): |
Although several types of projects such as constructing offshore platforms and development
in urban areas, remote locations or environmentally sensitive locations by their nature
customarily take a longer time to develop and therefore often do justify longer time periods,
this determination must always take into consideration all of the facts and circumstances. No
particular type of project per se justifies a longer time period, and any extension beyond five
years should be the exception, and not the rule. |
Factors that a company should consider in determining whether or not circumstances justify
recognizing reserves even though development may extend past five years include, but are not
limited to, the following: |
| The companys level of ongoing significant
development activities in the area to be developed (for example, drilling only the minimum
number of wells necessary to maintain the lease generally would not constitute significant
development activities); |
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| The companys historical record at completing
development of comparable long-term projects; |
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| The amount of time in which the company has maintained the leases, or booked the reserves, without significant development
activities; |
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| The extent to which the company has followed a previously adopted
development plan (for example, if a company has changed its development plan several times
without taking significant steps to implement any of those plans, recognizing proved
undeveloped reserves typically would not be appropriate); and |
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| The extent to which delays in development are caused by external factors related to the physical operating
environment (for example, restrictions on development on Federal lands, but not obtaining
government permits), rather than by internal factors (for example, shifting resources to
develop properties with higher priority). |
(iii) | Under no circumstances shall estimates for undeveloped reserves be attributable
to any acreage for which an application of fluid injection or other improved recovery technique is
contemplated, unless such techniques have been proved effective by actual projects in the same
reservoir or an analogous reservoir, as defined in paragraph (a)(2) of this section, or by other
evidence using reliable technology establishing reasonable certainty. |
(32) Unproved properties. Properties with no proved reserves.
Definitions Page 6 of 6