Attached files
file | filename |
---|---|
10-K - FORM 10-K - HARVEST NATURAL RESOURCES, INC. | h80534e10vk.htm |
EX-23.1 - EX-23.1 - HARVEST NATURAL RESOURCES, INC. | h80534exv23w1.htm |
EX-32.1 - EX-32.1 - HARVEST NATURAL RESOURCES, INC. | h80534exv32w1.htm |
EX-23.2 - EX-23.2 - HARVEST NATURAL RESOURCES, INC. | h80534exv23w2.htm |
EX-99.1 - EX-99.1 - HARVEST NATURAL RESOURCES, INC. | h80534exv99w1.htm |
EX-31.2 - EX-31.2 - HARVEST NATURAL RESOURCES, INC. | h80534exv31w2.htm |
EX-23.3 - EX-23.3 - HARVEST NATURAL RESOURCES, INC. | h80534exv23w3.htm |
EX-31.1 - EX-31.1 - HARVEST NATURAL RESOURCES, INC. | h80534exv31w1.htm |
EX-21.1 - EX-21.1 - HARVEST NATURAL RESOURCES, INC. | h80534exv21w1.htm |
EX-32.2 - EX-32.2 - HARVEST NATURAL RESOURCES, INC. | h80534exv32w2.htm |
Exhibit
99.2
FAX (303) 623-4258 | ||||||
621 SEVENTEENTH STREET | SUITE 1550 | DENVER, COLORADO | ||||
80293
|
TELEPHONE (303) 623-9147 |
February 24, 2011
HNR Finance B.V.
Prins Bernhardplein 200
P.O. Box 990
1000 AZ Amsterdam, Netherlands
Prins Bernhardplein 200
P.O. Box 990
1000 AZ Amsterdam, Netherlands
Attention: | Harvest (US) Holdings, Inc. Director A Fortis Intertrust (Netherlands) B.V. Director B |
At your request, Ryder Scott Company (Ryder Scott) has prepared an estimate of the proved,
probable and possible reserves, future production, and income attributable to HNR Finance B.V.s
(HNR Finance) interest in certain properties located in the Greater Oficina Trend of Eastern
Venezuela. These properties have been included in a company called Petrodelta S.A., in which HNR
Finance has a 40 percent interest, and Corporación Venezolana del Petroleo S.A. (CVP) has 60
percent interest. The properties include six fields, Uracoa, Tucupita, Bombal, Temblador, Isleño,
and El Salto (Petrodelta fields). The reserves and income data were estimated based on the
definitions and disclosure guidelines of the United States Securities and Exchange Commission (SEC)
contained in Title 17, Code of Federal Regulations, Modernization of Oil and Gas Reporting, Final
Rule released January 14, 02009 in the Federal Register (SEC regulations). Our third party study,
completed on February 24, 2011 and presented herein, was prepared for public disclosure by HNR
Finance in filings made with the SEC in accordance with the disclosure requirements set forth in
the SEC regulations.
The properties evaluated by Ryder Scott represent 100 percent of the total net proved,
probable and possible liquid hydrocarbon reserves and 100 percent of the total net proved, probable
and possible gas reserves of HNR Finance as of December 31, 2010.
The estimated reserves and future net income amounts presented in this report, as of December
31, 2010 are related to hydrocarbon prices. The hydrocarbon prices used in the preparation of this
report are based on the average prices during the 12-month period prior to the ending date of the
period covered in this report, determined as the unweighted arithmetic averages of the prices in
effect on the first-day-of-the-month for each month within such period, unless prices were defined
by contractual arrangements, as required by the SEC regulations. Actual future prices may vary
significantly from the prices required by SEC regulations; therefore, volumes of reserves actually
recovered and the amounts of income actually received may differ significantly from the estimated
quantities presented in this report. The results of this study are summarized below.
1100 LOUISIANA, SUITE 3800 | HOUSTON, TEXAS 77002-5218 | TEL (713) 651-9191 | FAX (713) 651-0849 | |||
530 8TH AVENUE, S.W., SUITE 1200 | CALGARY, ALBERTA T2P 3S8 | TEL (403) 262-2799 | FAX (403) 262-2790 |
HNR Finance
February 24, 2011
Page 2
February 24, 2011
Page 2
SEC PARAMETERS
Estimated Net Reserves and Income Data
Certain Leasehold and Royalty Interests of
HNR Finance
As of December 31, 2010
Estimated Net Reserves and Income Data
Certain Leasehold and Royalty Interests of
HNR Finance
As of December 31, 2010
Proved | ||||||||||||||||
Developed | Total | |||||||||||||||
Producing | Non-Producing | Undeveloped | Proved | |||||||||||||
Net Remaining Reserves |
||||||||||||||||
Oil/Condensate Barrels |
14,247,791 | 2,094,321 | 35,762,446 | 52,104,558 | ||||||||||||
Gas MMCF |
22,321 | 530 | 39,717 | 62,568 | ||||||||||||
Income Data M$ |
||||||||||||||||
Future Gross Revenue |
$ | 1,020,185 | $ | 148,319 | $ | 2,579,915 | $ | 3,748,419 | ||||||||
Deductions |
176,512 | 30,906 | 855,100 | 1,062,518 | ||||||||||||
Future Net Income (FNI) |
$ | 843,673 | $ | 117,413 | $ | 1,724,815 | $ | 2,685,901 | ||||||||
Discounted FNI @ 10% |
$ | 513,953 | $ | 66,443 | $ | 919,579 | $ | 1,499,975 |
Probable | ||||||||||||
Developed | Total | |||||||||||
Non-Producing | Undeveloped | Probable | ||||||||||
Net Remaining Reserves |
||||||||||||
Oil/Condensate Barrels |
165,237 | 63,635,948 | 63,801,185 | |||||||||
Gas MMCF |
67 | 19,174 | 19,241 | |||||||||
Income Data M$ |
||||||||||||
Future Gross Revenue |
$ | 11,741 | $ | 4,511,408 | $ | 4,523,149 | ||||||
Deductions |
2,958 | 1,405,547 | 1,408,505 | |||||||||
Future Net Income (FNI) |
$ | 8,783 | $ | 3,105,861 | $ | 3,114,644 | ||||||
Discounted FNI @ 10% |
$ | 5,710 | $ | 1,364,647 | $ | 1,370,357 |
Possible | ||||||||||||
Developed | Total | |||||||||||
Non-Producing | Undeveloped | Possible | ||||||||||
Net Remaining Reserves |
||||||||||||
Oil/Condensate Barrels |
11,048 | 139,434,759 | 139,445,807 | |||||||||
Gas MMCF |
0 | 40,464 | 40,464 | |||||||||
Income Data M$ |
||||||||||||
Future Gross Revenue |
$ | 778 | $ | 9,882,705 | $ | 9,883,483 | ||||||
Deductions |
609 | 2,866,695 | 2,867,304 | |||||||||
Future Net Income (FNI) |
$ | 169 | $ | 7,016,010 | $ | 7,016,179 | ||||||
Discounted FNI @ 10% |
$ | 53 | $ | 2,665,108 | $ | 2,665,161 |
Liquid hydrocarbons are expressed in standard 42 gallon barrels. All gas volumes are
reported on an as sold basis expressed in millions of cubic feet (MMCF) at the official
temperature and pressure bases of the areas in which the gas reserves are located. In this report,
the revenues, deductions, and income data are expressed as thousands of U.S. dollars (M$).
RYDER SCOTT COMPANY PETROLEUM CONSULTANTS TBPE FIRM LIC. NO. F-1580
HNR Finance
February 24, 2011
Page 3
February 24, 2011
Page 3
The estimates of the reserves, future production, and income attributable to properties in
this report were prepared using the economic software package PHDWin Petroleum Economic Evaluation
Software, a copyrighted program of TRC Consultants L.C. The program was used at the request of HNR
Finance. Ryder Scott has found this program to be generally acceptable, but notes that certain
summaries and calculations may vary due to rounding and may not exactly match the sum of the
properties being summarized. Furthermore, one line economic summaries may vary slightly from the
more detailed cash flow projections of the same properties, also due to rounding. The rounding
differences are not material.
The deductions incorporate the normal direct costs of operating the wells, recompletion costs
and development costs. Net taxes levied by Venezuela and state governments are incorporated into
the ad valorem tax category. The future net income is before the deduction of U.S. state and
federal income taxes and general administrative overhead, and has not been adjusted for outstanding
loans that may exist nor does it include any adjustment for cash on hand or undistributed income.
Liquid hydrocarbon reserves account for approximately 98 percent and gas reserves account for
the remaining 2 percent of total future gross revenue from proved reserves. Liquid hydrocarbon
reserves account for approximately 99 percent and gas reserves account for the remaining 1 percent
of total future gross revenue from probable reserves. Liquid hydrocarbon reserves account for
approximately 99 percent and gas reserves account for the remaining 1 percent of total future gross
revenue from possible reserves.
The discounted future net income shown above was calculated using a discount rate of 10
percent per annum compounded monthly. Future net income was discounted at four other discount
rates which were also compounded monthly. These results are shown in summary form as follows.
Discounted Future Net Income (M$) | ||||||||||||
As of December 31, 2010 | ||||||||||||
Discount Rate | Total | Total | Total | |||||||||
Percent | Proved | Probable | Possible | |||||||||
5 |
$ | 1,972,012 | $ | 2,036,703 | $ | 4,261,324 | ||||||
8 |
$ | 1,666,971 | $ | 1,600,498 | $ | 3,204,443 | ||||||
12 |
$ | 1,356,177 | $ | 1,178,188 | $ | 2,226,639 | ||||||
15 |
$ | 1,175,593 | $ | 946,243 | $ | 1,714,393 |
The results shown above are presented for your information and should not be construed as
our estimate of fair market value.
Reserves Included in This Report
The proved, probable and possible reserves included herein conform to the definitions as set
forth in the Securities and Exchange Commissions Regulations Part 210.4-10(a). An abridged
version of the SEC reserves definitions from 210.4-10(a) entitled Petroleum Reserves Definitions
is included as an attachment to this report.
The various reserve status categories are defined under the attachment entitled Petroleum
Reserves Definitions in this report. The proved, probable and possible developed non-producing
reserves included herein consist of the behind pipe and shut-in categories.
RYDER SCOTT COMPANY PETROLEUM CONSULTANTS TBPE FIRM LIC. NO. F-1580
HNR Finance
February 24, 2011
Page 4
February 24, 2011
Page 4
No attempt was made to quantify or otherwise account for any accumulated gas production
imbalances that may exist. The proved gas volumes included herein recognize gas consumed in
operations as 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. All reserve estimates involve an assessment of the uncertainty relating the
likelihood that the actual remaining quantities recovered will be greater or less than the
estimated quantities determined as of the date the estimate is made. The uncertainty depends
chiefly on the amount of reliable geologic and engineering data available at the time of the
estimate and the interpretation of these data. The relative degree of uncertainty may be conveyed
by placing reserves into one of two principal classifications, either proved or unproved. Unproved
reserves are less certain to be recovered than proved reserves and may be further sub-classified as
probable and possible reserves to denote progressively increasing uncertainty in their
recoverability. At HNR Finances request, this report addresses the proved, probable and possible
reserves attributable to the properties evaluated herein.
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
producible from a given date forward. If deterministic methods are used, the SEC has defined
reasonable certainty for proved reserves as a high degree of confidence that the quantities will
be recovered. 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. Possible reserves are those additional reserves which are less certain to be
recovered than probable reserves and thus the probability of achieving or exceeding the proved
plus probable plus possible reserves is low.
The reserves included herein were estimated using deterministic methods and presented as
incremental quantities. Under the deterministic incremental approach, discrete quantities of
reserves are estimated and assigned separately as proved, probable or possible based on their
individual level of uncertainty. Because of the differences in uncertainty, caution should be
exercised when aggregating quantities of oil and gas from different reserves categories.
Furthermore, the reserves and income quantities attributable to the different reserve categories
that are included herein have not been adjusted to reflect these varying degrees of risk associated
with them and thus are not comparable.
Reserve estimates will generally be revised only as additional geologic or engineering data
become available or as economic conditions change. For proved reserves, the SEC states that as
changes due to increased availability of geoscience (geological, geophysical, and geochemical),
engineering, and economic data are made to the estimated ultimate recovery (EUR) with time,
reasonably certain EUR is much more likely to increase or remain constant than to decrease.
Moreover, estimates of proved, probable and possible reserves may be revised as a result of future
operations, effects of regulation by governmental agencies or geopolitical or economic risks.
Therefore, the proved, probable and possible reserves included in this report are estimates only
and should not be construed as being exact quantities, and if recovered, the revenues therefrom,
and the actual costs related thereto, could be more or less than the estimated amounts.
The reserves reported herein are limited to the period prior to expiration of current
contracts providing the legal rights to produce or a revenue interest in such production unless
evidence indicates that contract renewal is reasonably certain. Furthermore, properties in
Venezuela may be subjected to significantly varying contractual fiscal terms that affect the net
revenue to HNR Finance for the production of these volumes. The prices and economic return
received for these net volumes can vary significantly based on the terms of these contracts.
Therefore, when applicable, Ryder Scott reviewed the fiscal terms of such contracts and discussed
with HNR Finance the net economic benefit attributed
RYDER SCOTT COMPANY PETROLEUM CONSULTANTS TBPE FIRM LIC. NO. F-1580
HNR Finance
February 24, 2011
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February 24, 2011
Page 5
to such operations for the determination of the net hydrocarbon volumes and income thereof.
Ryder Scott has not conducted an exhaustive audit or verification of such contractual information.
Neither our review of such contractual information nor our acceptance of HNR Finances
representations regarding such contractual information should be construed as a legal opinion on
this matter.
Ryder Scott did not evaluate the country and geopolitical risks in the countries where HNR
Finance operates or has interests. HNR Finances operations may be subject to various levels of
governmental controls and regulations. These controls and regulations may include, but may not be
limited to, matters relating to land tenure and leasing, the legal rights to produce hydrocarbons
including the granting, extension or termination of production sharing contracts, the fiscal terms
of various production sharing contracts, drilling and production practices, environmental
protection, marketing and pricing policies, royalties, various taxes and levies including income
tax, and foreign trade and investment and are subject to change from time to time. Such changes in
governmental regulations and policies may cause volumes of proved, probable and possible reserves
actually recovered and amounts of proved, probable and possible income actually received to differ
significantly from the estimated quantities.
The estimates of reserves presented herein were based upon a detailed study of the properties
in which HNR Finance owns an interest; however, we have not made any field examination of the
properties. No consideration was given in this report to potential environmental liabilities that
may exist nor were any costs included for potential liabilities to restore and clean up damages, if
any, caused by past operating practices.
Estimates of Reserves
The estimation of reserves involves two distinct determinations. The first determination
results in the estimation of the quantities of recoverable oil and gas and the second determination
results in the estimation of the uncertainty associated with those estimated quantities in
accordance with the definitions set forth by the Securities and Exchange Commissions Regulations
Part 210.4-10(a). The process of estimating the quantities of recoverable oil and gas reserves
relies on the use of certain generally accepted analytical procedures. These analytical procedures
fall into three broad categories or methods: (1) performance-based methods, (2) volumetric-based
methods and (3) analogy. These methods may be used singularly or in combination by the reserve
evaluator in the process of estimating the quantities of reserves. Reserve evaluators must select
the method or combination of methods which in their professional judgment is most appropriate given
the nature and amount of reliable geoscience and engineering data available at the time of the
estimate, the established or anticipated performance characteristics of the reservoir being
evaluated and the stage of development or producing maturity of the property.
In many cases, the analysis of the available geoscience and engineering data and the
subsequent interpretation of this data may indicate a range of possible outcomes in an estimate,
irrespective of the method selected by the evaluator. When a range in the quantity of reserves is
identified, the evaluator must determine the uncertainty associated with the incremental quantities
of the reserves. If the reserve quantities are estimated using the deterministic incremental
approach, the uncertainty for each discrete incremental quantity of the reserves is addressed by
the reserve category assigned by the evaluator. Therefore, it is the categorization of reserve
quantities as proved, probable and/or possible that addresses the inherent uncertainty in the
estimated quantities reported. For proved reserves, uncertainty is defined by the SEC as
reasonable certainty wherein the quantities actually recovered are much more likely than not to be
achieved. The SEC states that 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. The SEC states that
RYDER SCOTT COMPANY PETROLEUM CONSULTANTS TBPE FIRM LIC. NO. F-1580
HNR Finance
February 24, 2011
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February 24, 2011
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possible reserves are those additional reserves that are less certain to be recovered than
probable reserves and the total quantities ultimately recovered from a project have a low
probability of exceeding proved plus probable plus possible reserves. All quantities of reserves
within the same reserve category must meet the SEC definitions as noted above.
Estimates of reserves quantities and their associated reserve categories may be revised in the
future as additional geoscience or engineering data become available. Furthermore, estimates of
reserves quantities and their associated reserve categories may also be revised due to other
factors such as changes in economic conditions, results of future operations, effects of regulation
by governmental agencies or geopolitical or economic risks as previously noted herein.
The proved reserves for the properties included herein were estimated by performance methods,
the volumetric method, analogy, or a combination of methods. All of the proved producing reserves
attributable to producing wells and/or reservoirs were estimated by performance methods. These
performance methods include, but may not be limited to, decline curve analysis, material balance
and/or reservoir simulation which utilized extrapolations of historical production and pressure
data available through November, 2010 in those cases where such data were considered to be
definitive. The data utilized in this analysis were supplied to Ryder Scott by HNR Finance or
obtained from public data sources and were considered sufficient for the purpose thereof. These
methods were used where there were inadequate historical performance data to establish a definitive
trend and where the use of production performance data as a basis for the reserve estimates was
considered to be inappropriate.
All of the proved non-producing and undeveloped reserves included herein were estimated by a
combination of the volumetric and analogy methods. The volumetric analysis utilized pertinent well
and seismic data supplied to Ryder Scott by HNR Finance or which we have obtained from public data
sources that were available through November, 2010. The data utilized from the analogues as well
as well and seismic data incorporated into our volumetric analysis were considered sufficient for
the purpose thereof.
To estimate economically recoverable proved, probable and possible oil and gas reserves and
related future net cash flows, we consider many factors and assumptions including, but not limited
to, the use of reservoir parameters derived from geological, geophysical and engineering data which
cannot be measured directly, economic criteria based on current costs and SEC pricing requirements,
and forecasts of future production rates. Under the SEC regulations 210.4-10(a)(22)(v) and (26),
proved, probable and possible reserves must be anticipated to be economically producible from a
given date forward based on existing economic conditions including the prices and costs at which
economic producibility from a reservoir is to be determined. While it may reasonably be
anticipated that the future prices received for the sale of production and the operating costs and
other costs relating to such production may increase or decrease from those under existing economic
conditions, such changes were, in accordance with rules adopted by the SEC, omitted from
consideration in making this evaluation.
HNR Finance has informed us that they have furnished us all of the material accounts, records,
geological and engineering data, and reports and other data required for this investigation. In
preparing our forecast of future proved, probable and possible production and income, we have
relied upon data furnished by HNR Finance with respect to property interests owned, production and
well tests from examined wells, normal direct costs of operating the wells or leases, other costs
such as transportation and/or processing fees, ad valorem and production taxes, recompletion and
development costs, abandonment costs after salvage, product prices based on the SEC regulations,
adjustments or differentials to product prices, geological structural and isochore maps, well logs,
core analyses, and
RYDER SCOTT COMPANY PETROLEUM CONSULTANTS TBPE FIRM LIC. NO. F-1580
HNR Finance
February 24, 2011
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February 24, 2011
Page 7
pressure measurements. Ryder Scott reviewed such factual data for its reasonableness; however, we
have not conducted an independent verification of the data furnished by HNR Finance. We consider
the factual data used in this report appropriate and sufficient for the purpose of preparing the
estimates of reserves and future net revenues herein.
In summary, we consider the assumptions, data, methods and analytical procedures used in this
report appropriate for the purpose hereof, and we have used all such methods and procedures that we
consider necessary and appropriate to prepare the estimates of reserves herein. The proved,
probable and possible reserves included herein were determined in conformance with the United
States Securities and Exchange Commission (SEC) Modernization of Oil and Gas Reporting; Final Rule,
including all references to Regulation S-X and Regulation S-K, referred to herein collectively as
the SEC Regulations. In our opinion, the proved, probable and possible reserves presented in
this report comply with the definitions, guidelines and disclosure requirements as required by the
SEC regulations.
Future Production Rates
For wells currently on production, our forecasts of future production rates are based on
historical performance data. If no production decline trend has been established, future
production rates were held constant, or adjusted for the effects of curtailment where appropriate,
until a decline in ability to produce was anticipated. An estimated rate of decline was then
applied to depletion of the reserves. If a decline trend has been established, this trend was used
as the basis for estimating future production rates.
Test data and other related information were used to estimate the anticipated initial
production rates for those wells or locations that are not currently producing. For reserves not
yet on production, sales were estimated to commence at an anticipated date furnished by HNR
Finance. Wells or locations that are not currently producing may start producing earlier or later
than anticipated in our estimates due to unforeseen factors causing a change in the timing to
initiate production. Such factors may include delays due to weather, the availability of rigs, the
sequence of drilling, completing and/or recompleting wells and/or constraints set by regulatory
bodies.
The future production rates from wells currently on production or wells or locations that are
not currently producing may be more or less than estimated because of changes including, but not
limited to, reservoir performance, operating conditions related to surface facilities, compression
and artificial lift, pipeline capacity and/or operating conditions, producing market demand and/or
allowables or other constraints set by regulatory bodies.
Hydrocarbon Prices
The hydrocarbon prices used herein are based on SEC price parameters using the average prices
during the 12-month period prior to the ending date of the period covered in this report,
determined as the unweighted arithmetic averages of the prices in effect on the
first-day-of-the-month for each month within such period, unless prices were defined by contractual
arrangements. For hydrocarbon products sold under contract, the contract prices, including fixed
and determinable escalations, exclusive of inflation adjustments, were used until expiration of the
contract. Upon contract expiration, the prices were adjusted to the 12-month unweighted arithmetic
average as previously described.
HNR Finance furnished us with the above mentioned average prices in effect on December 31,
2010. These initial SEC hydrocarbon prices were determined using the 12-month average
first-day-of-the-month benchmark prices appropriate to the geographic area where the hydrocarbons
are sold.
RYDER SCOTT COMPANY PETROLEUM CONSULTANTS TBPE FIRM LIC. NO. F-1580
HNR Finance
February 24, 2011
Page 8
February 24, 2011
Page 8
These benchmark prices are prior to the adjustments for differentials as described herein. The
table below summarizes the benchmark prices and price reference used for the geographic area
included in the report. In certain geographic areas, the price reference and benchmark prices may
be defined by contractual arrangements.
The product prices which were actually used to determine the future gross revenue for each
property reflect adjustments to the benchmark prices for gravity, quality, local conditions,
gathering and transportation fees and/or distance from market, referred to herein as
differentials. The differentials used in the preparation of this report were furnished to us by
HNR Finance. The differentials furnished to us were accepted as factual data and reviewed by us
for their reasonableness; however, we have not conducted an independent verification of the data
used by HNR Finance to determine these differentials.
In addition, the table below summarizes the net volume weighted benchmark prices adjusted for
differentials and referred to herein as the average realized prices. The average realized prices
shown in the table below were determined from the total future gross revenue before production
taxes and the total net reserves by reserve category for the geographic area and presented in
accordance with SEC disclosure requirements for each of the geographic areas included in the
report.
Average | Average | |||||||||||
Average | Proved | Probable | Average Possible | |||||||||
Geographic | Price | Benchmark | Realized | Realized | Realized | |||||||
Area | Product | Reference | Prices | Prices | Prices | Prices | ||||||
Venezuela
|
Oil | WTI Cushing | $79.43 / Bbl | $70.43 / Bbl | $70.43 / Bbl | $70.43 / Bbl | ||||||
Venezuela
|
Gas | Defined Contract | NA | $0.75 / MCF | $1.54 / MCF | $1.54 / MCF |
The yearly average gas sales price is $1.54 / MCF in all categories. The average price
reflected in the proved producing category, and summaries including this category are affected by
fuel gas use which is scheduled using a zero gas price. The effects of derivative instruments
designated as price hedges of oil and gas quantities are not reflected in our individual property
evaluations.
Costs
Operating costs for the leases and wells in this report are based on the operating expense
reports of HNR Finance and include only those costs directly applicable to the leases or wells. The
operating costs include a portion of general and administrative costs allocated directly to the
leases and wells. For operated properties, the operating costs include an appropriate level of
corporate general administrative and overhead costs. The operating costs furnished to us were
accepted as factual data and reviewed by us for their reasonableness; however, we have not
conducted an independent verification of the operating cost data used by HNR Finance. The
operating costs furnished by HNR Finance were reviewed by us for their reasonableness using
information furnished by HNR Finance for this purpose. No deduction was made for loan
repayments, interest expenses, or exploration and development prepayments that were not charged
directly to the leases or wells.
Development costs were furnished to us by HNR Finance and are based on authorizations for
expenditure for the proposed work or actual costs for similar projects. The development costs
furnished to us were accepted as factual data and reviewed by us for their reasonableness; however,
we have not conducted an independent verification of these costs. The estimated net cost of
abandonment after salvage was included for properties where abandonment costs net of salvage were
significant. The estimates of the net abandonment costs furnished by HNR Finance were accepted
RYDER SCOTT COMPANY PETROLEUM CONSULTANTS TBPE FIRM LIC. NO. F-1580
HNR Finance
February 24, 2011
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February 24, 2011
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without independent verification. Ryder Scott has not performed a detailed study of the
abandonment costs or the salvage value and makes no warranty for HNR Finances estimate.
HNR Finance has elected to report a portion of their properties to be developed past a 5 year
window in accordance with the revised development plan for Petrodelta. As a non-controlling
interest shareholder in Petrodelta, HNR Finance has limited ability to control the development
plans that are periodically prepared and or approved by the Venezuelan government. Since this
constraint represents a hindrance to development not experienced by typical operations, inclusion
of a portion of the activities planned for year six and seven represents a fair comparison to
operators with assets covered by more flexible regulatory conditions where increasing rig count can
ameliorate a slow development plan. The fraction of proved reserves (BOE) expected to be drilled
in the 6th year after initial booking is 21% while the fraction drilled in the
7th year is 2%. For oil equivalent terms, six mscf of gas is assumed be equivalent to
one barrel of oil.
Current costs used by HNR Finance were held constant throughout the life of the properties.
Standards of Independence and Professional Qualification
Ryder Scott is an independent petroleum engineering consulting firm that has been providing
petroleum consulting services throughout the world for over seventy years. Ryder Scott is
employee-owned and maintains offices in Houston, Texas; Denver, Colorado; and Calgary, Alberta,
Canada. We have over eighty engineers and geoscientists on our permanent staff. By virtue of the
size of our firm and the large number of clients for which we provide services, no single client or
job represents a material portion of our annual revenue. We do not serve as officers or directors
of any publicly-traded oil and gas company and are separate and independent from the operating and
investment decision-making process of our clients. This allows us to bring the highest level of
independence and objectivity to each engagement for our services.
Ryder Scott actively participates in industry-related professional societies and organizes an
annual public forum focused on the subject of reserves evaluations and SEC regulations. Many of
our staff have authored or co-authored technical papers on the subject of reserves related topics.
We encourage our staff to maintain and enhance their professional skills by actively participating
in ongoing continuing education.
Prior to becoming an officer of the Company, Ryder Scott requires that staff engineers and
geoscientists have received professional accreditation in the form of a registered or certified
professional engineers license or a registered or certified professional geoscientists license,
or the equivalent thereof, from an appropriate governmental authority or a recognized
self-regulating professional organization.
We are independent petroleum engineers with respect to HNR Finance. Neither we nor any of our
employees have any interest in the subject properties and neither the employment to do this work
nor the compensation is contingent on our estimates of reserves for the properties which were
reviewed.
The results of this study, presented herein, are based on technical analysis conducted by
teams of geoscientists and engineers from Ryder Scott. The professional qualifications of the
undersigned, the technical person primarily responsible for overseeing the evaluation of the
reserves information discussed in this report, are included as an attachment to this letter.
RYDER SCOTT COMPANY PETROLEUM CONSULTANTS TBPE FIRM LIC. NO. F-1580
HNR Finance
February 24, 2011
Page 10
February 24, 2011
Page 10
Terms of Usage
The results of our third party study, presented in report form herein, were prepared in
accordance with the disclosure requirements set forth in the SEC regulations and intended for
public disclosure as an exhibit in filings made with the SEC by HNR Finance.
HNR Finance makes periodic filings on Form 10-K with the SEC under the 1934 Exchange Act.
Furthermore, HNR Finance has certain registration statements filed with the SEC under the 1933
Securities Act into which any subsequently filed Form 10-K is incorporated by reference. We have
consented to the incorporation by reference in the registration statements on Form S-8 and Forms
S-3 of HNR Finance of the references to our name as well as to the references to our third party
report for HNR Finance, which appears in the December 31, 2010 annual report on Form 10-K of HNR
Finance. Our written consent for such use is included as a separate exhibit to the filings made
with the SEC by HNR Finance.
We have provided HNR Finance with a digital version of the original signed copy of this report
letter. In the event there are any differences between the digital version included in filings
made by HNR Finance and the original signed report letter, the original signed report letter shall
control and supersede the digital version.
The data and work papers used in the preparation of this report are available for examination
by authorized parties in our offices. Please contact us if we can be of further service.
Very truly yours,
RYDER SCOTT COMPANY, L.P.
TBPE Firm Registration No. F-1580
TBPE Firm Registration No. F-1580
Scott Wilson, P.E., M.B.A.
Senior Vice President
Senior Vice President
RYDER SCOTT COMPANY PETROLEUM CONSULTANTS TBPE FIRM LIC. NO. F-1580
Professional Qualifications of Primary Technical Person
The conclusions presented in this report are the result of technical analysis conducted by teams of
geoscientists and engineers from Ryder Scott Company, L.P. Mr. Scott James Wilson was the primary
technical person responsible for the estimate of the reserves, future production, and income
presented herein.
Mr. Wilson, an employee of Ryder Scott Company L.P. (Ryder Scott) since 2000, is a Senior Vice
President responsible for coordinating and supervising staff and consulting engineers of the
company in ongoing reservoir evaluation studies worldwide. Before joining Ryder Scott, Mr. Wilson
served in a number of engineering positions with Atlantic Richfield Company. For more information
regarding Mr. Wilsons geographic and job specific experience, please refer to the Ryder Scott
Company website at http://www.ryderscott.com/Experience/Employees.php.
Mr. Wilson earned a Bachelor of Science degree in Petroleum Engineering from the Colorado School of
Mines in 1983 and an MBA in Finance from the University of Colorado in 1985, graduating from both
with High Honors. He is a registered Professional Engineer by exam in the States of Alaska,
Colorado, Wyoming, and Texas. He is also an active member of the Society of Petroleum Engineers;
serving as co-Chairman of the SPE Reserves and Economics Technology Interest Group, and Gas
Technology Editor for SPEs Journal of Petroleum Technology. He is a member and past chairman of
the Denver section of the Society of Petroleum Evaluation Engineers. Mr. Wilson has published
several technical papers, one book chapter, and holds two US patents.
In addition to gaining experience and competency through prior work experience, several Boards of
Professional Engineers require continuing education, including at least one hour in the area of
professional ethics, which Mr. Wilson fulfills. As part of his 2009 continuing education hours,
Mr. Wilson attended an internally presented sixteen hours of formalized training as well as a
public forum relating to the definitions and disclosure guidelines contained in the United States
Securities and Exchange Commission Title 17, Code of Federal Regulations, Modernization of Oil and
Gas Reporting, Final Rule released January 14, 2009 in the Federal Register. Mr. Wilson attended
an additional 10 hours of formalized external training during 2010 covering such topics as the
SPE/WPC/AAPG/SPEE Petroleum Resources Management System, reservoir engineering and petroleum
economics evaluation methods, procedures and software and ethics for consultants.
In addition to gaining experience and competency through prior work experience, the Wyoming Board
of Professional Engineers requires a minimum of fifteen hours of continuing education annually,
including at least one hour in the area of professional ethics, which Mr. Wilson fulfills. As part
of his 2009 continuing education hours, Mr. Wilson attended an internally presented sixteen hours
of formalized training as well as a public forum relating to the definitions and disclosure
guidelines contained in the United States Securities and Exchange Commission Title 17, Code of
Federal Regulations, Modernization of Oil and Gas Reporting, Final Rule released January 14, 2009
in the Federal Register. Mr. Wilson attended external presentations and training during 2009-2010
covering such topics as the SPE/WPC/AAPG/SPEE Petroleum Resources Management System, reservoir
engineering and petroleum economics evaluation methods, procedures and software and ethics for
consultants.
Based on his educational background, professional training and more than 25 years of practical
experience in the estimation and evaluation of petroleum reserves, Mr. Wilson has attained the
professional qualifications as a Reserves Estimator and Reserves Auditor set forth in Article III
of the Standards Pertaining to the Estimating and Auditing of Oil and Gas Reserves Information
promulgated by the Society of Petroleum Engineers as of February 19, 2007.
PETROLEUM RESERVES DEFINITIONS
As Adapted From:
RULE 4-10(a) of REGULATION S-X PART 210
UNITED STATES SECURITIES AND EXCHANGE COMMISSION (SEC)
RULE 4-10(a) of REGULATION S-X PART 210
UNITED STATES SECURITIES AND EXCHANGE COMMISSION (SEC)
PREAMBLE
On January 14, 2009, the United States Securities and Exchange Commission (SEC) published the
Modernization of Oil and Gas Reporting; Final Rule in the Federal Register of National Archives
and Records Administration (NARA). The Modernization of Oil and Gas Reporting; Final Rule
includes revisions and additions to the definition section in Rule 4-10 of Regulation S-X,
revisions and additions to the oil and gas reporting requirements in Regulation S-K, and amends and
codifies Industry Guide 2 in Regulation S-K. The Modernization of Oil and Gas Reporting; Final
Rule, including all references to Regulation S-X and Regulation S-K, shall be referred to herein
collectively as the SEC regulations. The SEC regulations take effect for all filings made with
the United States Securities and Exchange Commission as of December 31, 2009, or after January 1,
2010. Reference should be made to the full text under Title 17, Code of Federal Regulations,
Regulation S-X Part 210, Rule 4-10(a) for the complete definitions (direct passages excerpted in
part or wholly from the aforementioned SEC document are denoted in italics herein).
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. All reserve estimates involve an assessment of the uncertainty relating the
likelihood that the actual remaining quantities recovered will be greater or less than the
estimated quantities determined as of the date the estimate is made. The uncertainty depends
chiefly on the amount of reliable geologic and engineering data available at the time of the
estimate and the interpretation of these data. The relative degree of uncertainty may be conveyed
by placing reserves into one of two principal classifications, either proved or unproved. Unproved
reserves are less certain to be recovered than proved reserves and may be further sub-classified as
probable and possible reserves to denote progressively increasing uncertainty in their
recoverability. Under the SEC regulations as of December 31, 2009, or after January 1, 2010, a
company may optionally disclose estimated quantities of probable or possible oil and gas reserves
in documents publicly filed with the SEC. The SEC regulations continue to prohibit disclosure of
estimates of oil and gas resources other than reserves and any estimated values of such resources
in any document publicly filed with the SEC unless such information is required to be disclosed in
the document by foreign or state law as noted in §229.1202 Instruction to Item 1202.
Reserves estimates will generally be revised only as additional geologic or engineering data
become available or as economic conditions change.
Reserves may be attributed to either natural energy or improved recovery methods. Improved
recovery methods include all methods for supplementing natural energy or altering natural forces in
the reservoir to increase ultimate recovery. Examples of such methods are pressure maintenance,
natural gas cycling, waterflooding, thermal methods, chemical flooding, and the use of miscible and
immiscible displacement fluids. Other improved recovery methods may be developed in the future as
petroleum technology continues to evolve.
Reserves may be attributed to either conventional or unconventional petroleum accumulations.
Petroleum accumulations are considered as either conventional or unconventional based on the nature
of their in-place characteristics, extraction method applied, or degree of processing prior to
sale. Examples of unconventional petroleum accumulations include coalbed or coalseam methane
(CBM/CSM), basin-centered gas, shale gas, gas hydrates, natural bitumen and oil shale deposits.
These unconventional accumulations may require specialized extraction technology and/or significant
processing prior to sale.
Reserves do not include quantities of petroleum being held in inventory.
Because of the differences in uncertainty, caution should be exercised when aggregating
quantities of petroleum from different reserves categories.
RESERVES (SEC DEFINITIONS)
Securities and Exchange Commission Regulation S-X §210.4-10(a)(26) defines reserves as
follows:
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).
PROVED RESERVES (SEC DEFINITIONS)
Securities and Exchange Commission Regulation S-X §210.4-10(a)(22) defines proved oil and gas
reserves as follows:
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
(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.
PROVED RESERVES (SEC DEFINITIONS) CONTINUED |
(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.
(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 reservoir, or other evidence using reliable
technology establishes the reasonable certainty of the engineering analysis on which
the project or program was based; and
(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.
PROBABLE RESERVES (SEC DEFINITIONS)
Securities and Exchange Commission Regulation S-X §210.4-10(a)(18) defines probable oil and
gas reserves as follows:
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.
(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.
(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.
(iv) See also guidelines in paragraphs (a)(17)(iv) and (a)(17)(vi) of this section.
POSSIBLE RESERVES (SEC DEFINITIONS)
Securities and Exchange Commission Regulation S-X §210.4-10(a)(17) defines possible oil and
gas reserves as follows:
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.
(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.
(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.
(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.
(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.
(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.
RESERVES STATUS DEFINITIONS AND GUIDELINES
As Adapted From:
RULE 4-10(a) of REGULATION S-X PART 210
UNITED STATES SECURITIES AND EXCHANGE COMMISSION (SEC)
RULE 4-10(a) of REGULATION S-X PART 210
UNITED STATES SECURITIES AND EXCHANGE COMMISSION (SEC)
and
PETROLEUM RESOURCES MANAGEMENT SYSTEM (SPE-PRMS)
Sponsored and Approved by:
SOCIETY OF PETROLEUM ENGINEERS (SPE)
WORLD PETROLEUM COUNCIL (WPC)
AMERICAN ASSOCIATION OF PETROLEUM GEOLOGISTS (AAPG)
SOCIETY OF PETROLEUM EVALUATION ENGINEERS (SPEE)
Sponsored and Approved by:
SOCIETY OF PETROLEUM ENGINEERS (SPE)
WORLD PETROLEUM COUNCIL (WPC)
AMERICAN ASSOCIATION OF PETROLEUM GEOLOGISTS (AAPG)
SOCIETY OF PETROLEUM EVALUATION ENGINEERS (SPEE)
Reserves status categories define the development and producing status of wells and
reservoirs. Reference should be made to Title 17, Code of Federal Regulations, Regulation S-X Part
210, Rule 4-10(a) and the SPE-PRMS as the following reserves status definitions are based on
excerpts from the original documents (direct passages excerpted from the aforementioned SEC and
SPE-PRMS documents are denoted in italics herein).
DEVELOPED RESERVES (SEC DEFINITIONS)
Securities and Exchange Commission Regulation S-X §210.4-10(a)(6) defines developed oil and
gas reserves as follows:
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
(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.
Developed Producing (SPE-PRMS Definitions)
While not a requirement for disclosure under the SEC regulations, developed oil and gas
reserves may be further sub-classified according to the guidance contained in the SPE-PRMS as
Producing or Non-Producing.
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.
Developed Non-Producing
Developed Non-Producing Reserves include shut-in and behind-pipe reserves.
Shut-In
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 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
Behind-pipe Reserves are expected to be recovered from zones in existing wells, which will
require additional completion work or future re-completion 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.
UNDEVELOPED RESERVES (SEC DEFINITIONS)
Securities and Exchange Commission Regulation S-X §210.4-10(a)(31) defines undeveloped oil and
gas reserves as follows:
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.
(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.
(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.