Attached files
| file | filename |
|---|---|
| 10-K - FORM 10-K - Citadel Exploration, Inc. | coil-20151231_10k.htm |
| EX-31.1 - EXHIBIT 31.1 - Citadel Exploration, Inc. | coil-20151231_10kex31z1.htm |
| EX-32.2 - EXHIBIT 32.2 - Citadel Exploration, Inc. | coil-20151231_10kex32z2.htm |
| EX-32.1 - EXHIBIT 32.1 - Citadel Exploration, Inc. | coil-20151231_10kex32z1.htm |
| EX-31.2 - EXHIBIT 31.2 - Citadel Exploration, Inc. | coil-20151231_10kex31z2.htm |
Exhibit 99.3
ESTIMATED RESERVES
AND
FUTURE NET INCOME
AS OF
DECEMBER 31, 2015
ATTRIBUTABLE TO CERTAIN
MINERAL AND LEASEHOLD INTERESTS OF
CITADEL EXPLORATION, INC.
SEC PARAMETERS
PREPARED
MARCH 2016
MHA Petroleum Consultants
4700 Stockdale Highway, Suite 110
Bakersfield, CA 93309
730 17th Street, Suite 410
Denver, CO 80202
March
25, 2016
Citadel Exploration, Inc.
Attention: Mr. Phil McPherson, CFO
417 31st Street, Unit A
Newport Beach, California 92663
Subject: Estimated Proved Reserves and Future Net Income as of December 31, 2015
Dear Mr. McPherson:
MHA Petroleum Consultants, LLC (MHA) prepared an estimate of the proved oil reserves, production and future net income as of December 31, 2015 attributable to certain leasehold interests of Citadel Exploration, Inc. (Citadel) located in the Kern Bluff oil field, Township 29 South, Range 29 East, MDB&M, Kern County, California. A map of the field is shown by FIGURE 1. The primary purpose of our evaluation report is to provide estimates of reserves information in support of Citadel’s year-end reserves reporting requirements under U.S. Securities Regulation S-K and for other internal business and financial needs of Citadel.
The estimated net proved reserves and future net income are shown below.
|
Estimated Proved Reserves as of December 31, 2015 Consolidated Economic Summary – Before Income Tax (BIT) SEC Parameters | |||||||
|
Reserves Category |
Net Reserves | Income Data (Before Taxes) | |||||
| Crude Oil |
Natural Gas |
Future Net Revenue |
Net Operating Expense1 |
Net Capital Expense |
Undiscounted Net Cash Flow |
Discounted Net Cash Flow @ 10% | |
| MBbls | MMscf | M$ | M$ | M$ | M$ | M$ | |
| Proved Dev Producing | 94.8 | 0.0 | 4,229.7 | 2,732.5 | 0.0 | 1,497.2 | 1,209.8 |
| Proved Dev Behind Pipe | 117.0 | 0.0 | 5,218.7 | 2,818.4 | 400.0 | 2,000.3 | 1,622.9 |
| Proved Dev Non-Producing | 146.3 | 0.0 | 6,529.2 | 4,250.8 | 609.5 | 1,668.8 | 1,339.6 |
| Proved Undeveloped | 1,056.3 | 0.0 | 47,133.5 | 24,692.1 | 7,990.0 | 14,451.4 | 8,110.0 |
| Facilities Capital | 0.0 | 0.0 | 0.0 | 0.0 | 4,141.7 | -4,141.7 | -3,508.5 |
| Total Proved | 1,414.4 | 0.0 | 63,111.1 | 34,493.8 | 13,141.2 | 15,476.0 | 8,773.8 |
|
MBbls = Thousand barrels; MMscf = Million standard cubic feet; M$ = Thousand US Dollars 1 Net operating expenses include severance and ad valorem taxes | |||||||
This report has been prepared in accordance with our understanding of 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, 2009 in the Federal Register (SEC regulations). The proved reserves included herein conform to the definitions as set forth in the SEC’s Regulations Part 210.4-10(a) and are referred to as the SEC Parameters Case (SEC Case). The SEC definitions as set forth in the SEC’s Regulations Part 210.4-10(a) are presented in APPENDIX A.
The future net revenue is based on net oil volume sold multiplied by anticipated price under existing economic conditions. Expenses include assessment and ad valorem taxes, and the normal cost of operating the wells. The SEC Case assumes constant oil price and constant (un-escalated) operating costs and expenses.
Certification
Results of this report are certified as independent, reasonable assessments of the oil and natural gas remaining to be produced as of December 31, 2015. MHA and its employees do not have any interest in these properties. MHA’s compensation for this report is not contingent on the estimate of reserves or future income attributable to the properties. This report was completed at the request of Citadel and was prepared for the exclusive use and sole benefit of Citadel. We reviewed Citadel’s Kern Bluff field reserves only in connection with the preparation of this report.
The estimated reserves and valuations presented in this report are based on reservoir engineering work performed by MHA. Citadel furnished MHA all of the accounts, records, and data required for this evaluation. MHA staff conducted a site inspection of the properties presented in this report. The ownership interests and other factual data provided to MHA by Citadel were accepted without independent verification.
Reserves Analysis
The reserves in this report are estimated using guidelines endorsed by the Society of Petroleum Engineers (SPE) and the Society of Petroleum Evaluation Engineers (SPEE) and in our opinion, the reserve estimates conform to the SEC regulations and requirements.
Oil and gas reserves, as considered in this report, are classified as proved reserves. Proved oil and gas reserves are the estimated quantities of crude oil, natural gas, and natural gas liquids which geological and engineering data demonstrate with reasonable certainty to be recoverable in the future years from the known reservoirs under existing economic and operating conditions (i.e., prices and costs as of the date the estimate is made).
Proved developed oil and gas reserves are reserves that can be expected to be recovered through existing wells with existing equipment and operating methods (no major capital investment required). Proved developed reserves may be subcategorized as producing or non-producing. Proved developed producing reserves (PDP) are expected to be recovered from completion intervals that are open and producing at the time of the estimate.
Reserves subcategorized as proved developed non-producing (PDNP) include shut-in and behind-pipe reserves (PDBP). Shut-in reserves are expected to be recovered from completion intervals which are open at the time of the estimate but which have not started producing, or wells not capable of production for mechanical reasons or waiting on stimulation treatments. Behind-pipe reserves are expected to be recovered from zones in existing wells, which will require additional completion work or future recompletion prior to the start of production. The PDNP reserves in this report are assigned to inactive wells which are proposed to be returned-to-production in the Santa Margarita sands. In addition, Citadel proposes to recomplete a number of wells to access PDBP reserves in the Transition sand.
Proved undeveloped (PUD) oil and gas reserves are reserves expected to be recovered from new wells on undrilled acreage, from deepening existing wells to a different reservoir, or from existing wells where a relatively major expenditure is required for new equipment and/or recompletion. In this report, proved undeveloped reserves are assigned to infill drilling locations directly offsetting oil-productive wells. Undrilled locations are classified as having undeveloped reserves if a development plan has been adopted indicating that they are scheduled to be drilled within five years.
Probable and Possible reserves information is not evaluated or provided in this report.
Reserves Estimates
The PDP production (reserves) forecast for each well is based on historical production data provided by Citadel and/or obtained from public records through the last production month available (November 2015) at the time of this report. The wells are evaluated using a decline curve analysis technique to determine the forecast of future oil production. The PDNP and PDBP reserves are assigned to wells which Citadel proposes to return to production (RTP) through a workover, recompletion, or re-entry of an existing shut-in or idle wellbore. Historical well production data were analyzed for the Citadel leases to develop type curves of forecasted oil production for the RTP wells and for new infill wells. The PUD reserves are assigned to new infill oil wells proposed to be drilled on the Needham-Bloemer and Wells-McGregor leases. There are no gas sales or gas reserves for any existing or planned wells at this time of this report.
The historical field production and future decline forecast for the PDP reserves are shown by FIGURE 2. FIGURE 3 presents the stacked plot of the future production forecasts for the PDP, PDNP, PDBP and PUD oil reserves. The individual production plots and forecasts by well are included in APPENDIX B.
Discounted Cash Flow Evaluation
Reserves in this report are determined as of December 31, 2015 to the defined economic limit based on a discounted cash flow analysis using the prices, interests, and operating cost inputs provided by Citadel. The economic summaries by reserves category are given in TABLES 1 through 6. One-line summaries of the individual reserves cases are presented in TABLE 7. The cash flow analyses of the individual cases are presented in APPENDIX C.
Hydrocarbon Prices
The crude oil price parameter for the SEC Case is defined by SEC as the unweighted arithmetic average of the first-of-the-month prices for the 12-month period prior to the “as of” date. For this report the 12-month period is January to December 2015. MHA determined the SEC pricing based on the West Texas Intermediate (WTI) benchmark as traded on the New York Mercantile Exchange (NYMEX) adjusted for quality, local market differentials, and transportation (APPENDIX D). The quality of the Kern Bluff crude oil is 15 degree API gravity.
| Hydrocarbon Product |
Price Benchmark |
12-mo Average Benchmark Price |
Adjusted Price |
| Crude Oil | NYMEX WTI | $48.93/bbl | $44.62/bbl |
Using this methodology, the crude oil price is $44.62/bbl, which is held constant for the life of the SEC reserves.
Costs
Lease operating expense (OPEX) data were provided by Citadel for its Kern Bluff field operations (APPENDIX D). MHA analyzed these costs and calculated fixed and variable cost projections based on the number of active wells for the Santa Margarita and the Transition. The wells are being operated as cold primary production but Citadel’s Plan of Development includes the purchase and installation in April 2016 of a 50 MMBTU/hour steam generator to enable lease-wide cyclic steam stimulation of the wells.
|
Citadel Leases Zone |
Fixed Cost ($/well-month) |
Variable Cost ($/bbl oil) |
Steam Cost ($/bbl steam inj) |
Steam-Oil Ratio Range (bbl/bbl) |
| Transition | 3,500 | 0.00 | 2.50 | 2.0 - 2.5 |
| Santa Margarita (RTP) | 3,000 | 5.40 | 2.50 | 2.0 - 5.0 |
| Santa Margarita (PUD) | 3,000 | 5.40 | 2.50 | 1.0 - 5.0 |
The projected OPEX include only those costs directly applicable to the leases and wells. Headquarters general and administrative overhead expenses are not included. Per SEC guidelines, costs and expenses are un-escalated over the life of the reserves.
Capital Development Plan
The startup capital costs and investment costs were supplied by Citadel and appear reasonable for the proposed program. Well recompletion, new well construction, and facility capital investments are estimated to be 13.1 million dollars (APPENDIX E). Capital costs for a new well are estimated based on typical California well construction costs to drill and complete an oil well to a total depth of approximately 1,500 feet. All capital investments are un-escalated.
The Citadel Plan of Development for the Kern Bluff properties used in this reserves analysis is as follows:
PDNP (Idle wells):
| · | A total of 13 idle vertical wells on the Needham-Bloemer lease will be re-worked and returned to production beginning in Q3 2016, with re-work concluded by Q2 2017 (FIGURE 4). |
| · | Cost for the planned work is between 14.5 M$ and 55.0 M$ per well. |
| · | Steam generation equipment and facilities for cyclic steaming of the idle wells will be implemented with a 50 MMBTU/hour steam generator to be purchased and installed in April 2016. |
PDBP (Idle wells):
| · | A total of ten idle wells will be recompleted and returned to production on the Needham-Bloemer lease beginning in Q3 2016, with recompletion work concluded by Q2 2017 (FIGURE 5). |
| · | Cost for the planned recompletion work is estimated at 40 M$ per well. |
| · | Steam generation for these wells will be provided by the 50 MMBTU/hour steam generator described above. |
PUD (New wells):
| · | A total of 30 locations are identified for infill wells to be constructed as follows: five new wells on the Needham-Bloemer lease in Q3 2016, five new wells on the Needham-Bloemer lease in Q1 2017, five new wells on the Needham-Bloemer lease in Q3 2017, four new wells on the Needham-Bloemer lease and one new well on the Wells-McGregor lease in Q3 2018, five new wells on the Wells-McGregor lease in Q3 2019, and three new wells on the east portion of the Needham-Bloemer lease and two wells on the Wells-McGregor lease in Q3 2020 (FIGURE 6). |
| · | Drilling and completion costs per Citadel’s Authorization for Expenditure are estimated at 250 M$ per well. |
| · | Steam generation for these wells will be provided by the 50 MMBTU/hour steam generator described above. |
Equipment salvage values and future abandonment costs are not included in this analysis. The net income values presented in the economic summary tables include a deduction for estimated ad valorem tax and assessment tax as follows:
|
Assessment and Ad Valorem Taxation Rates Used in Economic Analyses | ||
| State | Assessment | Ad Valorem |
| California - Oil | $0.324/bbl | 2.0% |
Report Qualifications
The reserves and valuations indicated in this report are estimates only and should not be considered as exact quantities. They represent our best judgments, after having utilized generally accepted engineering, geologic, and economic procedures. Moreover, the net revenues indicated herein should not be construed as fair market values.
It is MHA’s opinion that the estimated proved reserves and other reserve information as specified in this report are reasonable and have been prepared in accordance with generally accepted petroleum engineering and evaluation principles, as set forth in the SEC regulations. Notwithstanding the aforementioned opinion, MHA makes no warranties concerning the data and interpretations of such data. In no event shall MHA be liable for any special or consequential damages arising from Citadel’s use of MHA’s interpretation, reports, or services produced as a result of its work for Citadel.
All the information furnished by Citadel was accepted without any attempt at independent verification. MHA carried out such tests as we considered necessary to check the veracity of the oil production data, operating costs, and engineering procedures. In evaluating the information at our disposal, we excluded from our consideration all legal and accounting matters, which may be controlling.
Statement of Risk
The accuracy of reserves and economic evaluations is always subject to uncertainty. The magnitude of this uncertainty is generally proportional to the quantity and quality of data available for analysis. As a well matures and new information becomes available, revisions may be required which may either increase or decrease the previous reserve assignments. Sometimes these revisions may result not only in a significant change to the reserves and value assigned to a property, but also may impact the total company reserve and economic status.
The reserves and forecasts contained in this report were based upon a technical analysis of the available data using accepted engineering principles. However, they must be accepted with the understanding that further information and future reservoir performance subsequent to the date of the estimate may justify their revision.
Consent
We hereby consent to the references to our firm, in the context in which they appear, and to our reserve estimates as of December 31, 2015, included in the Annual Report on Form 10-K of Citadel Exploration Inc. for the fiscal year ended December 31, 2015, as well as in the notes to the financial statements included therein. We also hereby consent to the incorporation by reference of the references to our firm, in the context in which they appear, and to our reserve estimates as of December 31, 2015, to the filing of our report dated March 25, 2016 as an exhibit to the Annual Report on the Form 10-K of Citadel Exploration Inc.
Thank you for the opportunity to prepare this report. All the basic petroleum engineering calculations and supporting data remain in MHA files for future reference by Citadel or its representatives. If you have any questions or wish to discuss something in more detail, please feel free to contact us.
Very truly yours,
MHA PETROLEUM CONSULTANTS, LLC
Alan A. Burzlaff, P.E.
Managing Partner
Professional Petroleum Engineer
Licensed by the California Board for
Professional Engineers and Land Surveyors
License No. P1386
Date Signed: March 25, 2016