DEREK OIL & GAS CORPORATION
FORM 51-101F1 (Revised)
STATEMENT OF RESERVES DATA
AND OTHER OIL AND GAS INFORMATION
TABLE OF CONTENTS
PART 1
DATE OF STATEMENT
Item 1.1
Relevant Dates
PART 2
DISCLOSURE OF RESERVES DATA
Item 2.1
Reserves Data (Constant Prices and Costs)
Item 2.2
Reserve Data (Forecast Prices and Costs)
Item 2.3
Reserves Disclosure Varies with Accounting
Item 2.4
Future Net Revenue Disclosure Varies with Accounting
PART 3
PRICING ASSUMPTIONS
Item 3.1
Constant Prices Used in Estimates
Item 3.2
Forecast Prices Used in Estimates
PART 4
RECONCILLIATIONS OF CHANGES IN RESERVES AND FUTURE NET REVENUE
Item 4.1
Reserves Reconciliation
Item 4.2
Future Net Revenue Reconciliation
PART 5
ADDITIONAL INFORMATION RELATING TO RESERVES DATA
Item 5.1
Undeveloped Reserves
Item 5.2
Significant Factors or Uncertainties
Item 5.3
Future Development Costs
PART 6
OTHER OIL AND GAS INFORMATION
Item 6.1
Oil and Gas Properties and Wells
Item 6.2
Properties with No Attributed Reserves
Item 6.3
Forward Contracts
Item 6.4
Additional Information Concerning Abandonment and Reclamation Costs
Item 6.5
Tax Horizon
Item 6.6
Costs Incurred
Item 6.7
Exploration and Development Activities
Item 6.8
Production Estimates
Item 6.9
Production History
PART 1
DATE OF STATEMENT
Item 1.1
Relevant Dates
1.
Date the statement: October 19, 2004
2. Disclose the effective date of the information being provided:
April 30, 2004
3. Disclose the preparation date of the information being provided: May 1, 2004
PART 2
DISCLOSURE OF RESERVES DATA
Item 2.1
Reserves Data (Constant Prices and Costs)
During the year ending April 30, 2004 and therefore at the effective date of April 30, 2004, Derek Oil & Gas Corporation was involved with a single oil property, the LAK Ranch property, located in Wyoming. The LAK Ranch property had no proved reserves in any proved category during this period. Reserves in the possible category are discussed under Item 2.2.
Item 2.2
Reserve Data (Forecast Prices and Costs)
1.
Breakdown of Reserves – LAK Ranch Property:
Country:United States
This evaluation uses the definition of reserves category from the Canadian Oil and Gas Evaluation Handbook and conforms to NI 51-101 (Standards of Disclosure for Oil & Gas Activities). The net cash flow is calculated atforecast prices and costs andconstant prices and costsfor the possible reserves, to all future time and after deduction of the capital and operating costs, royalties, severance and ad valorem tax but before income tax. All cash flow data is in U. S. dollars. A summary of the Company’s net share of possible reserves and net share of the future net revenue undiscounted and discounted at 5%, 10%, 15% and 20% is presented as follows:
Gross to the Company
Net to the Company
Reserve Category
Oil Oil
Escalated & Constant Cases (Mbbl – Heavy Oil)
(Mbbl – Heavy Oil)
Possible
4,588.9
3,627.6
Reserve Category
Present Worth Net Cash Flow (in $M) Discounted @
0%
5%
10%
15%
20%
Possible(Escalated Case)
49,584.9
33,163.0
23,062.2
16,599.8 12,318.1
After Tax Cash Flow
34,356.7
22,685.4
15,553.8
11,026.9
8,054.5
Possible(Constant Case)
74,574.5
50,673.9
35,764.8 26,092.2 19,595.3
After Tax Cash Flow
52,045.3
35,097.7
24,569.1
17,771.2
13,230.0
The forecast case uses the price forecasts of Gilbert Lausten Jung Associates (www.glja.com) and the constant case uses the oil price of $34.25/barrel on May 1, 2004. The gross reserve is Derek’s share of production before royalties and the net reserve is Derek’s share of production after deduction of royalties.
The estimated cash flow values do not represent a fair market value. Abandonment costs have been included, however facilities and environmental costs have not been included as it is assumed that the salvage value of field equipment will offset the said liabilities.
LAK Ranch Prospect – Economic Parameters
A)
Price Forecast(U.S. Funds)
Gilbert Lausten Jung (2004-04) Pricing.
Oil purchaser – Equiva Trading Company , WTI Posted Price ($34.25/bbl in 2004) + quality adjustment.
Quality Adjustment: the oil gravity produced from LAK Ranch is in the range of 19 degrees and is classified as heavy oil; however, due to the naphthenic base composition of the oil and suitability for use in jet fuels, it receives a positive, quality adjustment to the heavy oil benchmark prices. Based on the actual price received for the oil sold during the first pilot test in January 2002 and information provided by the present operator, Ivanhoe Energy (USA) Inc., the quality adjustment results in a price equal to or slightly above the “Wyoming Sweet” grade, which closely tracks the West Texas Intermediate posting.
B)
Operating Costs (2004 U.S. Dollars)
Fixed Costs:
Producing well:
$ 1,500/well/month
Injection well:
$ 500/well/month (5 injectors per producer)
Facilities:
$ 75,000/year
Variable Costs:
Power Costs (Natural Gas): 2.2 barrels of steam per Mcf priced at Gilbert Lausten Jung (2004-04) Pricing – @ Henry Hub ($5.70/Mcf in 2004)
Water Treating:
$0.10/bbl of steam
Start Up Operating – Steam Cycle ($45,000 per producing well)
2004
1 well - $ 45,000
2005
2 wells - $ 90,000
2006
1 well - $ 45,000
2007
6 wells - $270,000
2008
6 wells - $270,000
2009
6 wells - $270,000
A)
Capital Costs (2004 U.S. Dollars)
Costs:
Drill & Complete HZ Production Well -
$650,000
Drill & Complete Injection Well -
$ 60,000
Drill & Complete Delineation Well -
$ 50,000
Drill & Complete Observation Well -
Pilot and Phase I
$ 50,000
Phase II
$ 55,000
Steam Generator -
$500,000
Water Plant -
$500,000
Gathering/Injection Lines/well -
$ 12,500
Well Workovers/Prod. Well -
$ 35,000
Field Facilities -
Variable
Schedule:
Year
Development Description
Gross Capital Derek’s Share of
Expenditures Capital Expenditures
2004
Drill & Complete 5 Injection wells
$ 300,000
Steam Generator
$ 150,000
Gathering/Injection lines
$ 30,000
Surface Facilities
$ 100,000
3D Seismic
$ 900,000
Total
$ 1,480,000
$0
2005
Drill & Complete 2HZ wells
$ 1,300,000
Drill & Complete 10 Injection wells
$ 600,000
Drill & Complete 2 Observation wells
$ 100,000
Drill & Complete 4 Delineation wells
$ 200,000
Drill & Complete Water Disposal well
$ 170,000
1 Steam Generator
$ 500,000
Water Plant
$ 500,000
Gathering/Injection lines
$ 150,000
Surface Facilities
$ 455,000
Total
$ 3,975,000
$182,100
2006
Drill & Complete 1 HZ well
$ 650,000
Drill & Complete 5 Injection wells
$ 300,000
Drill & Complete 4 Observation wells
$ 200,000
Drill & Complete 2 Delineation wells
$ 100,000
2 Steam Generators
$ 1,000,000
Water Plant
$ 500,000
Gathering/Injection lines
$ 60,000
Surface Facilities
$ 350,000
Total
$ 3,160,000
$1,106,000
2007
Drill & Complete 6 HZ wells
$ 3,900,000
Drill & Complete 30 Injection wells
$ 1,800,000
Drill & Complete 10 Observation wells
$ 550,000
Drill & Complete 12 Delineation wells
$ 600,000
2 Steam Generators
$ 1,000,000
Water Plant
$ 500,000
Gathering/Injection lines
$ 360,000
Surface Facilities
$ 350,000
Total
$ 9,060,000
$3,171,000
2008
Drill & Complete 6 HZ wells
$ 3,900,000
Drill & Complete 30 Injection wells
$ 1,800,000
Drill & Complete 10 Observation wells
$ 550,000
Drill & Complete 12 Delineation wells
$ 600,000
2 Well Workovers
$ 70,000
2 Steam Generators
$ 1,000,000
Gathering/Injection lines
$ 360,000
Surface Facilities
$ 350,000
Total
$ 8,630,000
$3,020,500
2009
Drill & Complete 6 HZ wells
$ 3,900,000
Drill & Complete 30 Injection wells
$ 1,800,000
Drill & Complete 10 Observation wells
$ 550,000
Drill & Complete 12 Delineation wells
$ 600,000
1 Well Workover
$ 35,000
Gathering/Injection lines
$ 360,000
Total
$ 7,245,000
$2,535,750
2010
6 Well Workovers
$ 210,000
2011
8 Well Workovers
$ 280,000
2012
7 Well workovers
$ 245,000
2014
6 Well Workovers
$ 210,000
2015
6 Well Workovers
$ 210,000
2016
6 Well Workovers
$ 210,000
$1,365,000
$477,750
B)
Abandonment Costs (2004 U.S. Dollars)
Well Abandonment Cost:
$10,000/well
Year
Number of Wells
Total Cost
2015
5
$50,000
2016
5
$50,000
2017
25
$250,000
2018
25
$250,000
2019
25
$250,000
2020
20
$200,000
2021
20
$200,000
2022
20
$200,000
2023
18
$180,000
$1,630,000
$570,500
Total Future Capital Costs: $36,545,000
Derek’s Share of Future Capital Costs: $11,063,600
Derek’s Share of Capital Costs Discounted 10%: $7,123,700
Item 2.3
Reserve Disclosure Varies with Accounting
Derek Oil & Gas Corporation files consolidated financial statements. The reserve figures included in this statement are 100 percent of the reserves attributable to Derek Oil & Gas Corporation and 100 percent of the reserves attributable to Derek Resources (U.S.A.) Inc., its wholly-owned consolidated subsidiary.
Item 2.4
Future Net Revenue Disclosure Varies with Accounting
Derek Oil & Gas Corporation files consolidated financial statements. There is no significant portion of the Company’s economic interest in future net revenue that is attributable to a consolidated subsidiary in which there is a significant minority interest.
PART 3
PRICING ASSUMPTIONS
Item 3.1
Constant Prices Used in Estimates
The constant case uses the oil price of US$34.25/barrel on May 1, 2004
Item 3.2
Forecast Prices Used in Estimates
Crude Oil and Natural Gas Price Forecast
The price forecast (effective April 1, 2004) is taken from Gilbert Lausten Jung Associates Ltd.’s website of www.glja.com as provided by John Yu, P.Eng., qualified reserves evaluator as follows:
West Texas Intermediate
U.S. Gulf Coast Gas
@ Cushing, Oklahoma
Price @ Henry Hub
Year
Constant
Then
Constant
Then
2004 $
Current
2004 $
Current
$US/bbl
$US/bbl
$US/Mcf
$US/Mcf
1993
��22.56
18.46
2.58
2.11
1994
20.62
17.18
2.33
1.94
1995
22.03
18.39
2.04
1.70
1996
25.78
21.99
2.95
2.52
1997
23.79
20.61
2.85
2.47
1998
16.38
14.42
2.45
2.16
1999
21.72
19.29
2.61
2.32
2000
33.45
30.22
4.79
4.33
2001
27.99
25.97
4.37
4.05
2002
27.40
26.08
3.53
3.36
2003
31.93
31.07
5.65
5.50
2004
34.25
34.25
5.70
5.70
2005
28.50
29.00
4.75
4.80
2006
26.25
27.00
4.35
4.50
2007
24.00
25.00
4.15
4.35
2008
23.50
25.00
4.10
4.35
2009
23.25
25.00
4.05
4.35
2010
23.25
25.50
4.05
4.40
2011
23.25
25.75
4.05
4.50
2012
23.25
26.25
4.05
4.55
2013
23.25
26.50
4.05
4.60
2014
23.25
27.00
4.05
4.70
+1.5%/yr
+1.5%/yr
PART 4
RECONCILLIATIONS OF CHANGES IN RESERVES AND FUTURE NET REVENUE
Item 4.1
Reserves Reconciliation
During the year ending April 30, 2004 and therefore at the effective date of April 30, 2004, Derek Oil & Gas Corporation was involved with a single oil property, the LAK Ranch property, located in Wyoming. The LAK Ranch property had no proved reserves in any proved category and no probable reserves in any probable category during this period. Reserves in the possible category are delineated in the table below:
Reconciliation of Company Net Reserves by Product Type (Forecast Prices and Costs) as of April 30, 2004 | ||||
Heavy Oil | ||||
Factors | Net Proved (Mbbl) | Net Probable (Mbbl) | Net Possible (Mbbl) | Net Proved Plus Probable (Mbbl) |
April 30, 2003 | - | - | - | - |
Extensions | 0 | 0 | 0 | 0 |
Improved Recovery | 0 | 0 | 0 | 0 |
Technical Revisions | 0 | 0 | 3,627.6 | 0 |
Discoveries | 0 | 0 | 0 | 0 |
Acquisitions | 0 | 0 | 0 | 0 |
Dispositions | 0 | 0 | 0 | 0 |
Economic Factors | 0 | 0 | 0 | 0 |
Production | 0 | 0 | 0 | 0 |
April 30, 2004 | 0 | 0 | 3,627.6 | 0 |
Item 4.2
Future Net Revenue Reconciliation
Not applicable; it should be noted that the reserve estimates discussed in this statement are initial reserve estimates made by a qualified independent reserve evaluator on behalf of the Company. The Company had not commissioned any reserve estimates in prior years.
PART 5
ADDITIONAL INFORMATION RELATING TO RESERVES DATA
Item 5.1
Undeveloped Reserves
Year Ending | Product Type | Net Possible Undeveloped Reserves (Mbbl) |
Before April 30, 2000 | Heavy Oil | 0 |
April 30, 2000 | Heavy Oil | 0 |
April 30, 2001 | Heavy Oil | 0 |
April 30, 2002 | Heavy Oil | 0 |
April 30, 2003 | Heavy Oil | 0 |
April 30, 2004 | Heavy Oil | 3,627.6 |
Item 5.2
Significant Factors or Uncertainties
The market prices of oil have historically fluctuated widely and are affected by numerous global factors beyond the control of the Company. A decline in such market prices may have an adverse effect on revenues received by the Company from the sale of oil. A decline in prices will also reduce the Company’s exploration efforts and make it more difficult to raise capital.
The Company’s oil operation is subject to various United States federal, state and local governmental regulations. Matters subject to regulation include discharge permits for drilling operations, drilling and abandonment bonds, reports concerning operations, the spacing of wells, and pooling of properties and taxation. From time to time, regulatory agencies have imposed price controls and limitations on production by restricting the rate of flow of oil wells below actual production capacity in order to conserve supplies of oil. The production, handling, storage, transportation and disposal of oil, by-products thereof, and other substances and materials produced or used in connection with oil operations are also subject to regulation under federal, state, provincial and local laws and regulations relating primarily to the protection of human health and the environment. To date, expen ditures related to complying with these laws, and for remediation of existing environmental contamination, have not been significant in relation to the results of operations of the Company. The requirements imposed by such laws and regulations are frequently changed and subject to interpretation, and the Company is unable to predict the ultimate cost of compliance with these requirements or their effect on our operations.
Item 5.3
Future Development Costs
Future development costs are described under Item 2.2. Under a farm-in/joint operating agreement with Ivanhoe Energy (USA) Inc., Ivanhoe Energy is responsible for the first US$5 million in capital expenditures on the LAK Ranch project. The Company will finance their share of the LAK Ranch project beyond US$5 million with revenue generated from oil production and with equity financing, as required. The Company may also consider the future use of debt financing when the Company has an oil reserve base of sufficient size and certainty to be able to acquire this type of financing.
PART 6
OTHER OIL AND GAS INFORMATION
Item 6.1
Oil and Gas Properties and Wells
Derek Oil & Gas Corporation is involved in a single property, the LAK Ranch property located onshore in northeastern Wyoming, USA. The LAK Ranch property has been operated by Ivanhoe Energy (USA) Inc.under a farm-in/joint operating agreement since January of 2004. As of year-end, April 30, 2004, the existing pilot plant operation was being restarted by Ivanhoe Energy. The LAK Ranch property is close to an all-weather highway and about five miles from Wyoming Refinery, in Newcastle, Wyoming. Oil production from previous pilot operations on the property has been trucked to this facility.
Derek Oil & Gas Corporation has entered into a farm-in and joint operating agreement with Ivanhoe Energy (USA) Inc. (Ivanhoe) of Bakersfield, California dated January 20, 2004. Under the terms of the agreement Ivanhoe will initially earn a 30% working interest by financing the re-activation of the LAK Ranch enhanced oil recovery (EOR) project and continuing study of the geology, reservoir and production methods necessary to implement a commercial EOR heavy oil project. Ivanhoe will have the option to increase interest in the project on an incremental basis; for each $1,000,000US invested in the project, Ivanhoe will earn an additional 6% working interest to a maximum 60% working interest upon a total capital investment of $5,000,000. In addition to the Ivanhoe agreement, Derek has an agreement with SEC Oil & Gas Partnership (SEC) wherein, subject to certain conditions, SEC will hold a 5% working interest in the project. In the event that each party meets the agreed to conditions, the property ownership will be Ivanhoe, 60%; SEC, 5% and Derek 35%. Furthermore to the working interest scenario described above, Derek owns a 6.0462% royalty interest in certain tracts within the project area. The total landowner and overriding royalty burdens are approximately 21%.
The LAK Ranch property includes one producing oil well and approximately 32 non-producing wells.
Item 6.2
Properties with No Attributed Reserves
Not Applicable
Item 6.3
Forward Contracts
The Company is not bound by an agreement, directly or through LAK Ranch project operator Ivanhoe Energy, under which it may be precluded from fully realizing, or may be protected from the full effect of future market prices for oil.
Item 6.4
Additional Information Concerning Abandonment and Reclamation Costs
Abandonment costs have been estimated by the independent qualified reserves evaluator and are included in 2.2 of this statement.
Item 6.5
Tax Horizon
Derek Oil & Gas Corporation is not required to pay income taxes for its most recently completed financial year and has sufficient loss carry forwards to avoid tax payments for the foreseeable future.
Item 6.6
Costs Incurred
2004
2003
$ �� $
LAK Ranch Project(unproven)
Opening balance
36,588
32,646
Acquisition costs
(130,635)
3,942
Closing balance
(94,047)
36,588
Exploration and development costs
Opening balance
14,180,428
13,881,398
Surface preparation and construction
22,236
9,317
Field house, water and power
113,713
-
Professional engineering
58,430
-
General repairs and maintenance
10,035
-
Travel and vehicle
(8,453)
-
Field site insurance
27,018
-
Direct administration
5,939
10,400
Deferred costs
109,554
250,563
Direct wages
51,686
28,752
14,570,586
14,180,430
Less: SEC Oil and Gas Partnership
contribution
(661,601)
-
Closing balance
13,908,985
14,180,430
Total13,814,938
14,217,018
The overall decrease in capitalized expenditures results from the contributions of SEC Limited Partnership and Ivanhoe Energy to the project. The result of these two farm out deals lead to an overall reduction of costs incurred by Derek The costs incurred in 2004 reflect the restarting of the pilot phase of the project, so costs such as water and power, engineering and insurance are greater than in 2003 when the project was inactive. The negative cost reflected in travel and vehicles reflects the sale of one of Derek’s two vehicles on site. With Ivanhoe now operating the vehicle was redundant and therefore was sold.
Item 6.7
Exploration and Development Activities
During the year ending April 30, 2004 and therefore at the effective date of April 30, 2004, Derek Oil & Gas Corporation did not complete any wells.
During this period, the Company’s most important development activities were centred on the LAK Ranch property, northeastern Wyoming.
Derek Oil & Gas Corporation holds certain petroleum and natural gas interests in approximately 7,400 gross acres in the LAK Ranch Field, Weston County, Wyoming. It is situated on Highway 16, approximately 4.5 miles southeast of the town of Newcastle, Wyoming just west of the South Dakota Border. The interest acreage covers portions of Township 44N, Ranges 60-61W and includes fee and federal leases (see Reserve Report entitled “Evaluation of the Interests of Derek Oil & Gas Corporation in the LAK Ranch Field, Weston County, Wyoming”, SEDAR filed on May 5, 2004). LAK Ranch is a cattle ranching area of generally flat terrain, covered by grasses and other vegetation typical of a mid continent climate.
The LAK Ranch Field is situated on the eastern edge of the Powder River Basin and is prospective of heavy napthenic oil production from the Cretaceous age Newcastle Sandstone formation. The Newcastle sand is similar to the Muddy Sand reservoirs of the producing Skull Creek and Mush Creek oil fields located about 9 miles west of LAK Ranch. The Muddy Sand reservoirs produce 30 to 32oAPI napthenic crude but lie structurally deeper within the Powder River Basin. The Newcastle sands at LAK Ranch outcrop at the surface along the northern and eastern edge of the field and dips into the basin in a synclinal form to a depth of approximately 2,500 feet+ at the southern end of the property. The absence of a reservoir seal has allowed the crude to biodegrade to a 19oAPI gravity oil with a high viscosity at reservoir conditions.
Commercial production of the LAK Ranch will require application of one or more non-traditional oil recovery methods. The combination of complex geology, reservoir heterogeneity, and oil quality present unique recovery challenges. As many as 33 exploratory/production wells have been drilled in the field and three separate enhanced oil recovery (EOR) pilot schemes were carried out from the 1950’s to 1980’s, none of which for a variety of reasons, resulted in commercial operation. Derek acquired certain interests in the LAK Ranch field in 1997 with the objective of using horizontal wells and SAGD (Steam Assisted Gravity Drainage) technology to develop the field based on successful application of the technique in heavy oil producing areas of Alberta and California. Work began on the project with the drilling of four delineation wells in November, 1997. Further delineation dri lling, geological study and thermal simulation modeling culminated with the drilling of two horizontal wells in 2000. Steam generation and injection facilities were then constructed and steam injection was initiated in March 2001. Two separate steam/production cycles were carried out by the end of 2001 recovering approximately 5,000 barrels of oil, demonstrating the economic potential for development. The pilot operation identified areas requiring further technical and geological study necessary to proceed to commercial operation; therefore, in 2004 Derek established a partnership with Ivanhoe Energy, Inc., a company with extensive experience in heavy oil operations, to design, operate and develop the LAK Ranch property.
The terms of the agreement between Ivanhoe and Derek is structured such that upon an expenditure of $5,000,000U.S, Ivanhoe will have earned a 60% working interest and Derek will hold a 35% working interest in the property. Initially, Ivanhoe will hold a 30% working interest and increase participation by 6% for each $1,000,0000U.S. invested in the project. Additionally, Derek holds mineral and overriding royalty interests totaling 6.0462%.
Item 6.8
Production Estimates
The volume of oil production estimated for the LAK Ranch property, Wyoming, USA for the first year reflected in the estimates of future net revenue disclosed under Items 2.1 and 2.2 is 260 barrels per day.
Item 6.9
Production History
During the year ending April 30, 2004 and therefore at the effective date of April 30, 2004, Derek Oil & Gas Corporation did not have any production.
