FORREST A.GARB& ASSOCIATES,INC.
INTERNATIONAL PETROLEUMCONSULTANTS
5310 HARVESTHILL ROAD,SUITE 275,LB 152
DALLAS, TEXAS75230 •5805
(972)788-1110Telefax (972)991-3160(EMAIL)forgarb@forgarb.com
February 20, 2013
Mr. Floyd Smith
Petron Energy II, Inc.
12850 Preston Road, Suite 960
Dallas, TX 75252
Dear Mr.Smith:
At yourrequest,Forrest A.Garb&Associates,Inc.(FGA) hasestimatedthe proved and probablereservesand futurenetrevenue,asof January1,2013,attributable to interests owned by Petron Energy II, Inc. (Petron) in certain oil and gas properties located in Oklahoma and Texas. It is our understandingthat the reserves in this report constitute 100percent of the reserves ownedby Petron.
This reporthas beenpreparedusingthedefinitionsandguidelinesoftheU.S.Securities andExchangeCommission(SEC),andwiththeexception ofthe exclusionof future income taxes,conforms totheFASB Accounting StandardsCodification Topic932, Extractive Industries- Oil andGas.These guidelinesspecify the useof a 12-monthfirst-day-of-the-month average benchmark price,a tenpercent discount factor, and constant oil and gasprices and costs.
The followingtablesummarizestheestimatedtotalnetreservesandfuture netrevenue, asof January 1, 2013:
ENGINEERING
Proved oilandgasreservesarethose quantitiesof oilandgaswhich,by analysisof engineering andgeosciencedata, can be estimated with reasonable certainty tobe economically produciblefrom a given date forward.Thebasis for estimating the provedproducing reserves was the extrapolation of historical production having an established decline trend. Volumetrics and/or analogy were used forforecastingpropertieswhere insufficient data werepresent for production decline extrapolation.Production histories were obtainedfrom published production data and state reporting records purchased from a third party provider, HPDI, LLC, and supplemented with data provided by Petron. The reserves for other reserve categorieswere estimated by analogy to adjacentcomparable wells. Petron provided the available geologic and engineeringdata for FGA'sreview. FGA has accepted Petron'sintent torecomplete the proved developed non-producing property and to drill the probable locations.Probablereserves are those additionalreserves that areless certain to be recovered thanproved reserves but which, together with proved reserves, are as likely asnot to be recovered.
The analysisand findingspresentedin thisreport, representFGA's informed judgments basedonacceptedstandardsofprofessional engineering practice, but are subject to the generally recognized and unforeseen risksassociated with the interpretation of geological, geophysical, and engineering data. Estimates of reserves were prepared by the useof appropriate geologic, petroleum engineering, andevaluation principles and techniques which are in accordance with practices generally recognized bythe petroleum industry.Futurechangesin federal, state, or local regulations may adversely impact the ability to recover the future oil and gas volumes expected. Changes in economic and market conditions from the assumptions and parameters used in this study may causethe total quantity offutureoil or gasrecovered, actual production rates, prices received,operatingexpenses and capital costs to vary from theresults presented in this report.
Gas volumesare expressedin millions ofcubic feet(MMcf) atstandardtemperature and pressure.Gas salesimbalances have not been taken intoaccount in the reserve estimates.The oilreserves shown in this study include crude oil and/or condensate.Oil volumes areexpressed in thousands of barrels(MBbl), with onebarrel equivalent to 42 United Statesgallons.
ECONOMIC CONSIDERATIONS
The benchmarkoil andgaspricesusedin thisstudy arethe averageofthefirstdayof the monthspotprices postedfortheWest Texas Intermediate (WTI) oil and Henry Hub naturalgas, per SECguidelines.Oil prices are based on a benchmark price of $94.68 per barreland have been adjustedby lease for gravity, transportation fees, and regional price differentials. Gas prices per thousand cubicfeet (MCF) are based on a benchmarkprice of$2.76 per million British thermal units (MMBtu) and have beenadjusted by lease for Btucontent, transportation fees, and regional price differentials. The oiland gas prices are held constant for the economic life of the propertiesas specifiedby theSEC.
Lease operatingcosts andcapitalexpenditures, asrequired forworkovers, future development ofnew wells, and for productionequipment, were provided by Petronfor FGA's review. All costs have been held constant in this evaluation. Existing or potential liabilities stemming fromenvironmental conditions caused by currentor pastoperating practices have not been considered inthis report. No costsare included inthe projections of future netrevenue or in our economic analyses to restore,repair,or improve the environmental conditions ofthe properties studied to meet existingor futurelocal, state, or federalregulations.
Grand totalsummaryeconomicprojectionsbyreservecategoryandcategorysummaries(including one-linesummariesfortheindividual properties) arepresentedin Attachment A.
Attachment Bpresentsthedefinitions ofproved oilandgasreservesinaccordancewith theSEC.General comments regarding this report andthe estimationof future reserves and revenue are presentedin Attachment C. Attachment D contains the consulting firm profile.
The estimatedfuturenetrevenuesshownarethosewhichshouldberealizedfromthesale ofestimatedoilandgas reserves afterthededuction of severance taxes, ad valorem taxes, direct operating costs, and future capital expenditures. No deductions have been made foroverhead, federal income taxes, orotherindirectcosts, such as interest expense and loan repayments. Surfaceandwell equipment salvagevalueshave not been considered inthe revenue projections. The estimated reserves included in the cash flow projections have not been adjusted for risk. The reserves included in thisstudyareestimatesonlyandshould not be construed as exact quantities. Future conditions may affect recoveryofestimated reserves and revenue, andall categoriesof reserves maybe subject to revision as moreperformance data becomeavailable.
Petron providedownershipinterestsintheproperties, andFGA acceptedtheextentand characterof ownership (working interestandnet revenue interest) as represented. Our staff conductedno independentwell tests, property inspections,or auditsof completion and operating expenses as part of this study.
FGA isanindependentfirmofgeologistsandpetroleumengineers.Neither thefirmnor its employeesownanyinterest in theproperties studied, nor have webeen employed on a contingencybasis. FGAhasused all necessarymethods andproceduresin the preparation of this report for the evaluationof theseproperties.
We appreciatetheopportunitytosubmitthisevaluation.Shouldyouhaveanyquestions, please donothesitatetocall.
ThisreportwaspreparedunderthesupervisionofW.D.HarrisIII,Registered
Professional EngineerNo. 75222,State ofTexas.
ATTACHMENTS
A.CATEGORY ANDONE-LINESUMMARIES
B.DEFINITIONS FOROILANDGASRESERVES
C.GENERALCOMMENTS
D.CONSULTINGFIRMPROFILE
ATTACHMENT A
CATEGORY ANDONE-LINESUMMARIES
PROVED
FORREST A. HARB & ASSOCIATES, INC.
PROVED DEVELOPED PRODUCING
FORREST A. GARB & ASSOCIATES, INC.
PROVED DEVELOPED NON-PRODUCING
FORREST A . GARB & ASSOCIATES, INC.
PROBABLE
FORREST A. GARB & ASSOCIATES, INC.
ATTACHMENT B
DEFINITIONS FOR OIL AND GAS RESERVES
DEFINITIONS FOROILANDGASRESERVES*
(I)Acquisitionof properties.Costs incurredtopurchase, leaseor otherwiseacquire aproperty, includingcosts of lease bonuses andoptionstopurchase or lease properties,the portion of costs applicable tomineralswhen landincluding mineral rightsis purchased infee, brokers'fees, recordingfees, legalcosts, andother costs incurred inacquiring properties.
(2)Analogousreservoir.Analogousreservoirs, asused in resources assessments,havesimilar rockand fluidproperties, reservoirconditions (depth, temperature, andpressure) and drive mechanisms,but aretypically at amore advanced stageof development than the reservoirof interest and thusmay provideconcepts to assist in the interpretation of more limiteddataand estimationof recovery. When usedto support proved reserves, an "analogous reservoir" refers to areservoir that shares the following characteristics withthereservoir ofinterest:
(i) Samegeological formation(but notnecessarily inpress urecommunication withthe reservoir ofinterest);
(ii) Sameenvironment ofdeposition;
(iii) Similar geologicalstructure;and
(iv) Samedrive mechanism.
(3)Bitumen.Bitumen,sometimes referred toasnaturalbitumen,ispetroleum ina solidor semi solidstate in natural deposits with a viscosity greaterthan 10,000 centipoise measured at original temperature in thedepositand atmospheric pressure, on a gas free basis. Inits natural state it usually contains sulfur, metals, and other non-hydrocarbons.
(4)Condensate.Condensateis amixtureof hydrocarbonsthatexistsinthegaseous phaseat originalreservoir temperatureandpressure, but that, when produced, isin the liquid phase at surface pressure and temperature.
(5)Deterministic estimate.Themethodof estimatingreservesorresourcesiscalled detenninistic whenasingle value for each parameter(from thegeoscience, engineering, oreconomic data) in the reservescalculationis used in the reserves estimation procedure.
(6)Developed oiland gasreserves.Developed oilandgas reservesare reservesofany category that can beexpected tobe recovered:
(i) Throughexisting wells with existingequipment and operating methodsorinwhichthe costofthe requiredequipmentisrelatively minor compared to thecost of a newwell; and
(ii) Throughinstalled extractionequipment andinfrastructure operationalatthe timeof thereserves estimate if theextractionis by means notinvolvinga well.
*TheseReservesDefinitionsarethoseincludedi ntheSecuritiesandExchangeCommissionRegulation S-Xas of January1, 2010.
(7)Developmentcosts.Costsincurred toobtainaccesstoprovedreserves andto providefacilities forextracting, treating, gatheringand storing the oil andgas. More specifically, development costs, including depreciation and applicable operatingcosts of support equipment andfacilities and other costs of development activities, are costs incurred to:
(i) Gainaccess toand prepare welllocations fordrilling, includingsurveying well locationsfor thepurpose of determining specific development drilling sites, clearing ground, draining, road building, and relocating public roads, gas lines, and powerlines, to the extent necessaryin developing the proved reserves.
(ii) Drilland equipdevelopment wells, development-type stratigraphictestwells,and servicewells,includingthe costsof platformsandofwell equipment such ascasing, tubing, pumping equipment, and thewellhead assembly.
(iii) Acquire,construct, andinstallproductionfacilitiessuchas lease flowlines, separators, treaters, heaters, manifolds, measuringdevices, and productionstorage tanks, natural gas cycling and processing plants,andcentral utility and waste disposal systems.
(iv) Provideimproved recoverysystems.
(8)Developmentproject.A development project isthemeans bywhich petroleumresources are broughttothestatus ofeconomically producible.As examples, the development ofa single reservoir or field, an incremental development ina producingfield, or the integrateddevelopment of a group of several fields and associated facilitieswith acommon ownership mayconstitute a development project.
(9)Developmentwell.A welldrilledwithintheprovedareaofanoilorgas reservoirto the depth ofa stratigraphic horizon knownto be productive.
(10)Economicallyproducible.Theterm economicallyproducible,asitrelates toaresource, meansaresourcewhichgeneratesrevenue thatexceeds, or isreasonably expected to exceed, the costs of the operation. The value ofthe productsthat generate revenueshallbe determined at the terminal point of oiland gasproducing activitiesas definedin paragraph (a)(16) of thissection.
(11)Estimatedultimaterecovery(EUR).Estimated ultimate recoveryis thesum ofreserves remainingas ofa given dateandcumulative production as of that date.
(12)Explorationcosts.Costs incurred in identifyingareasthat maywarrant examinationandin examining specificareas thatare considered to have prospects of containing oilandgasreserves, includingcosts of drilling exploratorywellsand exploratory-typestratigraphic test wells. Explorationcosts may be incurred both before acquiringtherelated property(sometimes referred to in partasprospecting costs) andafter acquiring theproperty.Principal types of exploration costs, which include depreciation andapplicable operatingcosts of support equipment and facilities and othercosts of exploration activities,are:
(i) Costsoftopographical, geographical andgeophysical studies, rights ofaccess to propertiestoconduct thosestudies, and salariesand otherexpenses of geologists, geophysical crews,andothers conducting thosestudies. Collectively,these are sometimes referred toasgeological and geophysical orG&Gcosts.
(ii) Costsofcarryingandretaining undevelopedproperties,such asdelay rentals, ad valoremtaxes onproperties, legal costs fortitle defense, andthe maintenance of land and lease records.
(iii) Dryhole contributionsandbottom holecontributions.
(iv) Costs of drillingand equipping exploratorywells.
(v) Costsof drillingexploratory-typestratigraphic testwells.
(13)Exploratorywell.An exploratory wellis awell drilledto findanewfieldor to find a new reservoir in a field previously found to be productive of oil orgas in another reservoir. Generally, anexploratory well is any wellthat is not adevelopment well,an extensionwell, aservice well, or astratigraphic testwell as those items are defined in thissection.
(14)Extension well.An extension well is a well drilled to extend the limits of a known reservoir.
(15)Field. An area consisting of a single reservoir or multiple reservoirs all grouped on or related to the same individual geological structural feature and/or stratigraphic condition. There may be two or more reservoirs in a field that are separated vertically by intervening impervious, strata, or laterally by local geologic barriers, or by both. Reservoirs that are associated by being in overlapping or adjacent fields may be treated as a single or common operational field. The geological terms structural feature and stratigraphic condition are intended to identify localized geological features as opposed to the broader terms of basins, trends, provinces, plays, areas-of interest, etc.
(16)Oilandgasproducingactivities.(i)Oiland gasproducing activities include:
(A) Thesearchforcrudeoil,incl uding condensateandnatural gasliquids, ornatural gas
("oil andgas")intheirnatural statesand original locations;
(B) Theacquisitionofpropertyrightsorproperties forthepurpose offurther exploration orforthepurposeofremovingthe oilor gasfrom such properties;
(C) Theconstruction,drilling, andproduction activities necessary to retrieveoil andgas from their natural reservoirs,including the acquisition, construction, installation, and maintenance of field gatheringand storage systems,such as:
(1) Liftingthe oiland gasto thesurface; and
(2)Gathering, treating,and field processing(as inthe caseof processinggas to extract liquid hydrocarbons); and
(D) Extractionof saleablehydrocarbons, in the solid, liquid,or gaseousstate, fromoil sands, shale, coalbeds, or other nonrenewable naturalresources which are intended tobe upgraded intosynthetic oilorgas, and activities undertaken witha view to such extraction.
(17)Possiblereserves.Possible reservesarethoseadditionalreservesthatarelesscertaintobe recoveredthan probablereserves.
(i) Whendeterministicmethodsareused,thetotalquantitiesultimatelyrecovered froma projecthave alow probabilityof exceeding proved plusprobable plus possible reserves. Whenprobabilistic methodsare used,there should beat least a 10%probability thatthe total quantitiesultimately recovered willequalor exceed theproved plus probable plus possible reserves estimates.
(ii) Possiblereservesmaybeassignedtoareasofareservoiradjacenttoprobablereserves wheredata control and interpretations of available data areprogressively less certain. Frequently, this will be in areas where geoscience and engineering dataare unable to define clearly the area and verticallimits of commercial productionfrom the reservoir by adefined project.
(iii) Possiblereservesalsoincludeincrementalquantities associatedwithagreater percentagerecoveryofthehydrocarbons in placethan the recovery quantities assumed forprobable reserves.
(iv) Theprovedplusprobableandprovedplusprobableplus possiblereserves estimates must bebased onreasonable alternative technicaland commercial interpretations within the reservoir or subject project that areclearly documented, including comparisons to results in successfulsimilar projects.
(v) Possiblereservesmay beassignedwheregeoscienceandengineeringdataidentify directlyadjacent portionsof a reservoirwithinthesameaccumulationthatmaybe separatedfrom proved areas byfaults with displacement less than formation thickness or othergeological discontinuities and thathave not been penetratedby a wellbore, and the registrantbelievesthatsuchadjacentportions areincommunicationwith the known (proved) reservoir. Possiblereservesmay beassigned toareas that are structurally higher or lower than the proved area if these areas areincommunication with the proved reservoir.
(vi) Pursuanttoparagraph(a)(22)(iii)ofthissection,wheredirectobservationhas defined a highest knownoil (HKO) elevationand the potential exists for anassociated gas cap, proved oil reserves should beassignedin the structurally higherportions ofthe reservoir abovethe HKO onlyif the higher contactcan be established with reasonable certainty through reliable technology. Portions ofthe reservoir that donot meetthis reasonablecertainty criterion maybeassignedas probable and possible oil or gas based on reservoir fluid properties and pressure gradient interpretations.
(18)Probablereserves.Probable reservesarethoseadditionalreservesthat areless certainto be recoveredthan proved reserves but which, together with provedreserves, are as likely as notto be recovered.
(i) Whendeterministicmethodsareused, itis aslikelyasnotthatactualremaining quantities recoveredwillexceedthesumof estimated proved plusprobable reserves. When probabilistic methods are used, there shouldbe at least a 50% probability thatthe actual quantities recovered will equal orexceed the provedplus probable reserves estimates.
(ii) Probablereservesmaybeassignedtoareasof areservoiradjacenttoprovedreserves wheredatacontrolor interpretationsofavailable data are lesscertain, even if the interpreted reservoir continuity ofstructure or productivitydoes not meet thereasonable certaintycriterion.Probable reserves may beassigned toareas that are structurallyhigher than the proved areaif these areas are incommunicationwith the proved reservoir.
(iii) Probablereservesestimatesalsoincludepotentialincrementalquantitiesassociated withagreaterpercentagerecoveryofthehydrocarbonsinplacethanassumed forproved reserves.
(iv) Seealsoguidelinesinparagraphs(a)(17)(iv)and(a)(17)(vi)ofthissection.
(19)Probabilisticestimate.The method of estimation of reserves or resources is called probabilistic whenthefullrangeofvaluesthatcouldreasonablyoccurforeachunknown parameter(fromthe geoscience andengineering data) isusedtogenerate afull range of possible outcomes and their associated probabilities of occurrence.
(20)Productioncosts.(i)Costs incurred tooperateandmaintainwellsandrelatedequipmentand facilities, includingdepreciation andapplicableoperatingcosts of support equipmentand facilities andother costsof operating and maintaining those wellsand related equipment and facilities.Theybecome part of the costof oilandgasproduced. Examples of production costs (sometimes called liftingcosts) are:
(A) Costsoflabortooperatethewellsandrelatedequipmentandfacilities.
(B)Repairsandmaintenance.
(C) Materials,supplies, andfuelconsumedandsuppliesutilizedinoperatingthewells andrelatedequipmentandfacilities.
(D) Propertytaxesandinsuranceapplicabletoprovedpropertiesand wellsand related equipmentandfacilities.
(E) Severancetaxes.
(ii) Somesupportequipmentorfacilitiesmayservetwoormoreoilandgasproducingactivities andmay alsoservetransportation, refining, andmarketing activities. To the extent that the support equipmentandfacilities areused in oiland gasproducingactivities, their depreciation andapplicable operatingcosts become exploration, developmentor production costs,as appropriate. Depreciation,depletion, and amortization ofcapitalized acquisition, exploration, and developmentcosts arenot production costs but also becomepart ofthe cost ofoil and gas produced alongwithproduction (lifting) costs identified above.
(21)Provedarea.Thepartof apropertytowhichprovedreserveshavebeenspecifically attributed.
(22)Provedoil and gas reserves.Proved oil andgasreservesarethosequantitiesofoiland gas, which, by analysis ofgeoscience and engineering data, can beestimated with reasonable certainty to beeconomically producible-from a givendate forward, from known reservoirs, and under existing economic conditions,operating methods, and government regulations-prior to thetime at which contractsproviding the rightto operate expire, unless evidence indicatesthat renewalis reasonably certain,regardless of whether deterministic orprobabilistic methods are usedfor the estimation.The project toextract the hydrocarbonsmusthave commenced or the operator must
be reasonablycertainthatit will commencetheprojectwithinareasonabletime.
(i) Thearea ofthereservoirconsideredasprovedincludes:
(A) Theareaidentifiedbydrillingand limitedby fluidcontacts, if any, and
(B) Adjacentundrilledportionsofthereservoirthatcan, withreasonable certainty, bejudged tobe continuous with it andto containeconomically producibleoil or gas on the basis of availablegeoscience and engineering data.
(ii) Inthe absenceofdataonfluidcontacts,provedquantitiesinareservoirarelimitedby thelowestknown hydrocarbons(LKH) as seen ina well penetrationunless geoscience, engineering, or performancedata and reliable technology establishes a lower contact with reasonablecertainty.
(iii) Wheredirectobservationfromwellpenetrationshasdefineda highestknown oil (HKO)elevationand thepotentialexistsforanassociatedgascap,proved oil reserves may beassigned in the structurally higherportions ofthereservoironly if geoscience, engineering, orperformance data andreliable technology establish the higher contact with reasonable certainty.
(iv) Reserveswhich canbeproducedeconomicallythroughapplicationofimproved recovery techniques(including,butnotlimited to,fluid injection) areincluded in the provedclassification when:
(A) Successfultestingbyapilotprojectinanareaofthereservoirwithproperties nomorefavorablethaninthereservoiras a whole, the operation ofan installed programin the reservoir or an analogousreservoir, or other evidence using reliable technology establishes thereasonable certainty ofthe engineering analysis on whichthe project or program was based;and
(B) Theproject hasbeenapprovedfordevelopmentby allnecessarypartiesand entities, includinggovernmental entities.
(v) Existingeconomicconditionsincludepricesandcostsatwhicheconomic producibilityfromareservoiristo bedetermined. Theprice shall be the average price duringthe12-monthperiodprior to the endingdate ofthe period covered bythe report, determined asan unweighted arithmetic average of the first-day-of-the-month pricefor each month within such period, unless prices aredefined by contractual arrangements, excluding escalationsbased upon futureconditions.
(23)Provedproperties.Propertieswithprovedreserves.
(24)Reasonable certainty.Ifdeterministic methodsareused,reasonablecertaintymeansahigh degreeofconfidencethatthe quantities will berecovered, Ifprobabilistic methods are used, there shouldbe at least a90%probability that thequantitiesactually recoveredwill equal orexceed the estimate. Ahigh degree of confidence exists if thequantity ismuchmore likelyto be achieved thannot, and, as changes due to increasedavailability of geoscience(geological, geophysical, and geochemical), engineering, andeconomicdata are made to estimated ultimate recovery (EUR) with time,reasonablycertain EUR is much more likely to increase orremain constant thanto decrease.
(25)Reliabletechnology.Reliable technologyisagroupingof oneormoretechnologies (includingcomputational methods)thathasbeen field tested and has beendemonstrated to provide reasonably certainresultswithconsistencyand repeatability in theformation being evaluated or in an analogous formation.
(26)Reserves.Reservesare estimated remainingquantitiesofoilandgasandrelatedsubstances anticipated to beeconomically producible, as of agiven date, by application of development projects to known accumulations. In addition, there mustexist,orthere must be areasonable expectation that there will exist,thelegal right toproduce or a revenueinterest in the production, installed means of delivering oilandgas orrelatedsubstancesto market, and allpermits and financingrequiredtoimplement the project.
Note toparagraph(a)(26):Reservesshouldnotbeassignedtoadjacentreservoirsisolatedby major,potentiallysealing, faults until thosereservoirs arepenetrated and evaluatedas economically producible.Reserves should notbeassignedtoareasthat areclearly separated from a knownaccumulation by a non-productive reservoir(i.e., absence of reservoir, structurally low reservoir, or negativetestresults). Suchareas may contain prospective resources(i.e.,
potentially recoverableresourcesfromundiscoveredaccumulations).
(27)Reservoir.Aporous andpermeableunderground formationcontaininganatural accumulationofproducible oiland/or gasthatisconfinedby impermeablerock orwater barriers and is individual and separate from other reservoirs.
(28)Resources.Resourcesarequantitiesof oilandgasestimatedtoexistinnaturallyoccurring accumulations.A portionof the resources may be estimated to berecoverable, andanother portion may be considered tobeunrecoverable. Resources include bothdiscovered and undiscoveredaccumulations.
(29)Service well.Awell drilledorcompletedforthepurposeofsupportingproductioninan existing field. Specific purposes ofservice wells includegas injection, waterinjection, steam injection,airinjection, salt-water disposal,water supply forinjection, observation, or injection for in-situ combustion.
(30)Stratigraphictestwell.Astratigraphic testwellisadrillingeffort,geologicallydirected,to obtain informationpertaining to a specific geologic condition. Such wells customarily are drilled without the intent of being completed forhydrocarbon production. The classification also includestests identified ascore tests and alltypes ofexpendable holesrelatedtohydrocarbon exploration. Stratigraphic tests areclassified as "exploratorytype" if not drilled ina knownarea or "development type" ifdrilled in a known area.
(31)Undevelopedoilandgasreserves.Undevelopedoilandgasreservesarereservesof any categorythatareexpected tobe recovered from newwells on undrilled acreage, or from existing wells where a relatively major expenditureis required for recompletion.
(i) Reservesonundrilledacreageshallbelimitedtothose directlyoffsettingdevelopment spacing areasthatarereasonably certain of production when drilled, unless evidence
using reliabletechnologyexiststhatestablishesreasonablecertaintyofeconomic producibility atgreaterdistances.
(ii) Undrilledlocationscanbeclassifiedashavingundevelopedreserves onlyif a developmentplanhasbeenadoptedindicatingthatthey are scheduled to bedrilled within five years, unless the specific circumstances, justify a longer time.
(iii) Undernocircumstancesshallestimatesforundevelopedreservesbeattributableto anyacreageforwhichanapplication of fluid injection or other improved recovery techniqueis contemplated, unless such techniques have been proved effective by actual projects inthe same reservoir oran analogous reservoir,as defined in paragraph (a)(2) of thissection,orbyother evidence using reliable technology establishing reasonable certainty.
(32)Unproved properties.Properties withnoprovedreserves.
FORREST A. GARB & ASSOCIATES, INC.
ATTACHMENT C
GENERAL COMMENTS
GENERAL COMMENTS
(1)The reserveestimatespresentedinthisreporthavebeencalculatedusingdeterministic procedures.The reservesshowninthisreport arethose estimated to berecoverable under the new guidelinesof the Securities and Exchange Commission (SEC). The definitionsfor oil and gas reserves inaccordancewith SECRegulation S-X are setforth in this report.
(2)Theestimatedfuturenetrevenueshowninthecashflowprojectionsisthatrevenuewhich shouldbe realized from the sale of theestimatednet reserves. Surfaceandwellequipment salvage valueshave not been considered in the revenueprojections. Future netrevenue as stated in thisreport is before thededuction of federal income tax.
(3)Thediscountedfuturenetrevenueisnotrepresentedtobethefairmarketvalueofthese reserves.The estimated reservesincluded inthe cash flow projectionshave not been adjusted forrisk.
(4)Thereserves includedinthisstudyareestimatesonlyandshouldnotbeconstruedasexact quantities.Future conditions may affect recovery of estimatedreservesandrevenue, and all categories ofreserves maybe subject to revision asmore performancedata become available.
(5)Extentandcharacterofownership,oilandgasprices,productiondata,directoperating costs,requiredcapitalexpenditures, and other data furnished have been accepted as represented. Noindependentwell tests, property inspections,oraudits of operating expenses wereconducted by ourstaff in conjunction withthisstudy.
(6)Ifinvestments orbusinessdecisionsareto bemadeinrelianceontheseestimatesbyanyone other than our client, such a person, with the approvalof our client, is invited to visit our offices at his own expense sothat hecan evaluatethe assumptions madeandthe completeness andextent of the data availableonwhich our estimatesare based.
(7)Gascontractdifferences,includingtakeorpayclaims,arenotconsideredinthisreport.
(8)Gassalesimbalanceshavenotbeen takenintoaccount in the reserve estimates.
(9)Unlessotherwisestatedinthetext,existingorpotentialliabilitiesstemmingfrom environmentalconditionscausedby current or past operating practices have notbeen considered in thisreport. No costs are included in the projections of future net revenue or in our economic analyses to restore, repair, or improve the environmental conditions of the properties studied to meet existing or future local, state, or federal regulations.
(10) Anydistributionofthisreportoranypartthereofmustincludethesegeneralcommentsand the cover letterin their entirety.
(11) Thisreport waspreparedunderthesupervisionofW.D. HarrisIII,RegisteredProfessional EngineerNo. 75222,StateofTexas.
FORREST A. GARB & ASSOCIATES, INC
ATTACHMENT D
CONSULTING FIRM PROFILE
FORREST A.GARB& ASSOCIATES,INC.
INTERNATIONALPETROLEUMCONSULTANTS
5310 HARVESTHILLROAD,SUITE275,LB152
DALLAS,TEXAS75230 -5805(972)788-1110Fax (972)991-3160
E-Mail:forgarb@forgarb.com
Web Site:www.forqarb.com
We arepleasedtopresentthisprofileofForrestA.Garb&Associates,Inc.(FGA).FGAisan international petroleumengineering andgeologic consulting firm staffed by experienced engineersandgeologists. Collectively ourstaffhas more than a century of world-wide experience. FGA has no outside ownership. And the firmhas no director contingent participationinoil or gasventures. Thereare noconflicts of interestor concerns about maintainingthe confidentiality of our client's data. The company is dedicated to providing the highest levelofintegrity,technology, and service.
FGA expertiseincludes:
ExplorationandProspect Evaluations ReserveEstimationandEvaluation Studies FairMarketValueAnalyses
Economic andMarketAnalyses
Forensic EngineeringandExpertWitnessTestimony
Reservoir Engineering
Regional andDetailedGeologicalStudies
Numeric SimulationStudies
Special ComputerApplications
Pressure TransientTest Design,Supervision,andEvaluation
Reservoir Characterization
Geostatistical Studies
Oil &GasProductionEnvironmentalStudies
Minerals Evaluations
Petrophysical Analyses
OUR SENIORSTAFF
Mr. ForrestA.Garb,Founder,Chairman oftheBoardandChiefEngineerEmeritus, withmorethan 50 years of practicalpetroleum industry experience, was astaffmember and then a principal of amajor consulting firm for over 30years, servingas presidentand chief operating officer of this firmfor the last14 of those years.During his tenure, hesupervisedorprepared over 12,500 assignmentsvaryingfrom simple evaluations tocomplex reservoirsimulations.Using this experience as a base,he assembled the best work system offered to theoil andgas industry. The use ofstateofthe art computers and office equipment, together with an experiencedstaff,ensures economicservice to the client.
Mr. WilliamD.HarrisIII,P.E.,joinedFGAin August1998,andisnow theChief ExecutiveOfficer.Previously, hewas a VicePresidentwithDeGolyerandMacNaughtonwhereheprepared and supervisedengineeringstudies andreserve and appraisal reportsfor fieldsinmany countries.Mr. Harris holdsaB.S.inPetroleumEngineeringfrom TexasA&M University andaM.B.A. from Southern MethodistUniversity.He is a memberof theSocietyofPetroleumEngineers andis aregistered professionalengineerinthe stateof Texas.
Mr. JohnCooper,SeniorGeologist,joinedForrestA. Garb&Associates,Inc.in 2007.Mr.CooperreceivedhisBachelor'sdegreein Geologyfrom the UniversityofLouisiana-Lafayette(formerlythe UniversityofSouthwestern Louisiana) andholds anMBAfromTulaneUniversity.Hewas employed atGreatSouthern OilandGas, Innex Energy,andHunt Petroleuminvarious geologicaland technicalpositions, andisexperiencedinloganalysis,geological interpretations,andreservesevaluationsusing the latesttechnologies.Mr. Cooper isamemberoftheAmerican Association ofPetroleum Geologists, theSocietyofEconomic Geophysicists,andthe DallasGeological&Geophysical Society.
Mr. GeraldK.Ebanks, SeniorGeologist,receivedhis M.A.degreeingeologyfromtheUniversityofTexasatAustin andhas more than35 years ofexperiencein petroleumgeology.HewasemployedwithMobil OilCorporation, and subsequently withRayHolifieldandAssociates,andPXI, Incorporated, invarious geologicalpositions.Mr.Ebanks isamemberof the American Association ofPetroleum Geologists, DallasGeological Society,Houston GeologicalSociety, and isacertified petroleumgeologist.
Ms. StacyM.Light,P.E.,SeniorVicePresidentPetroleumEngineering,joinedForrestAGarb&Associates, Inc.in May2010 as a reservoir engineer.Ms.Lightpreviouslyworked for ARCOOilandGasasareservoir/operationsengineerandcrude oil riskmanagementdirector. Sheperformed detailedproduction, reservoir and economic analyses forboth onshoreand offshoreproperties, andsupervised engineersin thesame capacity. She alsoperformedriskmanagement duties, trading crude oilfuturesand optionsonthe NewYorkMercantileExchange. Areasworked include onshoreandoffshore Gulf Coast andthe mid-continentarea.Ms.Lightreceived aB.S.inPetroleum Engineeringfrom Texas A&MUniversity and isa registered professionalengineerin thestate ofTexasand amemberofthe SocietyofPetroleumEngineers (SPE).
Mr. ClaudeM.(Mike)Rightmire,SeniorVicePresidentPetroleumEngineering,joined ForrestAGarb& Associates,Inc.in December2007, asareservoirengineer.Mr. Rightmirepreviously workedfor ARCO AlaskaandARCOExploration& ProductionTechnologies as a reservoir andoperationsengineerand most recentlyforPinnacle Technologiesas a senior engineer andproject manager. Hiswork experienceincludes over25years of operationsand reservoir engineeringassignments,reservoirengineeringresearch andapplications development work,and fracturestimulationengineering.Mr. Rightmire holdsaB.S.inPetroleumEngineering fromTexas A&MUniversity,aB.S.inBiologicalSciencefromtheUniversityof Alaska Anchorage,andisamemberof theSocietyofPetroleum Engineers(SPE).
Ms.SandraW. Wall,SeniorVicePresidentPetroleumEngineering,joined ForrestA.Garb&Associates, Inc. inAugust 2006. Ms. Wall previously worked forTexasEasternCorp., Exploration andProduction Division,andTranswestern PipelineCompanyasareservoirengineer andproject manager. She performed detailedreservoir and economicanalyses forbothonshoreandoffshoreproperties, ran3D computer simulation studies formassivehydraulicfracturing,waterfloods,andC02 floods,andcoordinatedthedevelopment ofexplorationprojects.Areas workedincludeonshoreand offshore Gulf Coast, Alaska North Slope, RockyMountains,offshoreCalifornia,offshoreAustralia,Indonesia, and NorthSea.Ms. Wall holds aB.S.inPetroleumEngineering from Texas A&M University, a M.B.A.fromHoustonBaptistUniversity, andisamemberof theSocietyofPetroleumEngineers(SPE).
THE COMPANY
ForrestA.Garb&Associates,Inc.(FGA)isa consultingfirmcomprisedofprofessional petroleum engineers,geologists,andtechnical supportpersonnelwithdiversified backgrounds in allphasesof thepetroleum andenergyindustries.Thegrouppridesitself in offeringthehighestlevelof ethics,stateofthearttechnology,andprompt dedicatedserviceto our clients.
FGA professionals have extensive experience in the world'simportanthydrocarbonproducingareas, including NorthandSouthAmerica,the MiddleEast, Australia,New Zealand,Indonesia, Turkey,North Africa, Russia,China,Thailand, Myanmar, WestAfrica,India, theNorthSea,Alaska, and Mexico.
The firmoffersacompleterangeofgeological andengineeringservices-fromscreeningexplorationprospectsand designingdevelopmentdrilling projects toestimatingreserves,forecastingfutureproduction,andpresentingeconomic analyses. Major financialinstitutions acceptthevalidityofour studies,particularly in theareas of reserve estimation and appraisal.Thefairmarketvalueanalysis techniquedeveloped by FGA isbeing applied bysomeofindustry'slargestplayers.
Majorintegratedandindependentoilandgascompanieshaveusedour estimatesof futureproductionrates andavailablehydrocarbonresources to designfacilities,andto establish contract terms.
FGAis aleaderinthedevelopmentandapplicationofcomputerstothedaily requirementsofpetroleumengineering.Mainframe programs,hand-heldcomputer programs,and personalcomputersystemsdesigned by Mr. Garb have been installed inmanymajorintegratedoil companyofficesaroundtheworld.
Associationswithfacilitiesdesign,seismicinterpretation,petrology,andenvironmentalfirms,renownedin theirownright,enablethe FGAorganization to offer acompleteservice toitsclients underonemastercontract.
Because thecompanyhasnohydrocarbonproductionandbecauseit hasno outside ownershiptodictateopinions,the determinationsof the firm are independent.Itsstudies arewithoutbias andarebasedonthe bestinterpretation of all availabledataafter processingwith"state oftheart"methodsand equipment.
FGA restrictsitsactivitiesexclusivelytoconsultation;it doesnot acceptcontingentfees nordoes itownoperating interests inanyoil,gas,or mineral properties.Thefirm subscribestoa code ofprofessionalconduct,anditsemployees actively supporttheir related technicaland professionalsocieties.
The entireFGAstaffisdedicatedtoprovidingeachclient withapersonalizedand costefficient approachto serve theirindividualneeds.