Exhibit 10.24
ESTIMATEDPROVED RESERVES ANDFUTURENETREVENUE AS OF
DECEMBER 31,2013
ATTRIBUTABLETOINTERESTSOWNEDBY
PETRONENERGY II,INC. INCERTAIN PROPERTIESLOCATEDIN
OKLAHOMA ANDTEXAS
(SEC CASE)
FORREST A.GARB& ASSOCIATES,INC.
INTERNATIONALPETROLEUM CONSULTANTS
FORREST A. GARB & ASSOCIATES, INC.
INTERNATIONALPETROLEUMCONSULTANTS
5310HARVESTHILLROAD,SUITE 275,LB 152
DALLAS, TEXAS 75230-5805
(972)788-1110Telefax(972)991-3160(EMAIL)forgarb@forgarb.com
March 18,2014
Mr.FloydSmith
Petron EnergyII,Inc.
12850PrestonRoad,Suite 960
Dallas, TX75252
DearMr.Smith:
Atyour request,Forrest A.Garb&Associates,Inc.(FGA) hasestimatedtheprovedreservesandfuture netrevenue,asofDecember 31,2013,attributabletointerests ownedbyPetron EnergyII,Inc.(Petron)incertain oiland gas propertieslocatedinOklahomaand Texas.Itis our understandingthatthereservesinthisreportconstitute 100percentofthereserves ownedbyPetron.The purposeofthisreportistofurnish datatoPetronregardingtheirreservesforinclusionintheir U.S.Securitiesand ExchangeCommission(SEC)filings.
Thisreport hasbeenprepared usingthedefinitionsandguidelines oftheSEC,andwiththeexception oftheexclusion offutureincometaxes,conformstotheFASBAccountingStandardsCodification Topic 932,ExtractiveIndustries –OilandGas.Theseguidelines specifytheuseof a 12-monthfirst-day-of-the-monthaveragebenchmark price, aten percent discountfactor,andconstantoiland gas pricesandcosts. Theassumptions, data,methods,and procedures usedinthisreportareappropriateforthepurposed ofthisreportasdescribedabove.
Thefollowingtable summarizestheestimatedtotal netreservesandfuture netrevenue,asofDecember31,2013:
Estimated Net Reserves1 | Estimated Future Net Revenue
| |||||
Oil |
Gas |
Undiscounted | Discounted at10%Per Year3 | |||
Reserve Category | (MBbl)2 | (MMcf)2 | (M$)2 | (M$)2 | ||
Proved Developed | ||||||
Producing | 25.520 | 193.611 | 1,838.544 | 1,246.813 | ||
Non-producing | 10.158 | 0.000 | 679.690 | 546.010 | ||
TotalProved4 | 35.678 | 193.611 | 2,518.234 | 1,792.823 |
1Thedefinitionsfor allreserves incorporatedinthis studyhavebeen setforth inthisreport.
2MBbl=thousandsofbarrels,MMcf =millionsofcubicfeet,M$ =thousandsofdollars.
3Thediscountedfuturenet revenue is notrepresented tobethefairmarketvalueofthese reserves.
4The reservesandrevenues inthe summary tablewereestimatedusing theArieseconomicsprogram. Duetotheroundingproceduresusedinthisprogram,theremaybeslightdifferences inthe calculatedandsummedvalues.
ENGINEERING
Proved oilandgasreservesarethosequantities ofoilandgas which,byanalysis ofengineeringandgeosciencedata,canbeestimated withreasonablecertaintytobeeconomically produciblefromagiven dateforward.Thebasisforestimatingtheproved producingreserves wastheextrapolation ofhistorical production havinganestablished declinetrend. Volumetricsand/oranalogywere usedforforecastingproperties whereinsufficient datawerepresentforproduction declineextrapolation.Production histories wereobtainedfrompublished productiondataandstatereportingrecordspurchasedfrom athirdparty provider,HPDI, LLC,and supplemented withdata providedbyPetron.Thereservesforotherreservecategories wereestimatedbyanalogytoadjacentcomparable wells.Petron providedtheavailablegeologicandengineering dataforFGA'sreview.FGAhasacceptedPetron’sintenttorecompletetheproved developed non-producing properties.
Theanalysisandfindings presentedinthisreport,representFGA’sinformedjudgments based onaccepted standardsofprofessionalengineering practice, butare subjecttothegenerallyrecognizedandunforeseenrisks associated withthe interpretation ofgeological, geophysical,andengineering data.Estimates ofreserves werepreparedbytheuseofappropriate geologic, petroleumengineering,andevaluation principlesandtechniques whichareinaccordance withpracticesgenerallyrecognized bythe petroleumindustry.Futurechangesinfederal, state, orlocalregulationsmayadverselyimpacttheabilitytorecoverthefuture oiland gas volumesexpected.Changesineconomicandmarketconditionsfromtheassumptionsandparameters usedinthisstudymaycausethetotal quantity offuture oilorgasrecovered,actual productionrates, pricesreceived, operatingexpensesandcapitalcoststovaryfromtheresultspresentedinthisreport.
Gas volumesareexpressedinmillions ofcubicfeet(MMcf)atstandardtemperatureandpressure.Gassalesimbalances havenotbeentakenintoaccountinthereserveestimates.Theoilreserves showninthisstudyincludecrudeoiland/orcondensate. Oilvolumesareexpressedinthousands ofbarrels(MBbl), withonebarrelequivalentto42UnitedStates gallons.
ECONOMIC CONSIDERATIONS
The benchmark oilandgasprices usedinthisstudyaretheaverage ofthefirst- day-of-the-month spotprices postedfortheWestTexasIntermediate(WTI) oiland Henry Hub naturalgas,perSECguidelines. Oilpricesarebased onabenchmark priceof
$96.90 perbarrelandhavebeenadjustedbyleaseforgravity,transportationfees,andregional price differentials.Gasprices perthousandcubicfeet(MCF)are based on a
benchmark price of$3.67permillionBritishthermal units(MMBtu)andhave beenadjustedbyleaseforBtucontent,transportationfees,andregionalprice differentials. Theaveragerealized prices were$96.90 perbarrelforoiland$3.67perMMBtuforgas. The oilandgas prices are heldconstantfortheeconomiclife ofthepropertiesas specifiedbytheSEC.
Lease operatingcostsandcapitalexpenditures,asrequiredforworkovers,future development ofnewwells,andfor productionequipment, wereprovidedby PetronforFGA’sreview.Allcosts have beenheldconstantinthisevaluation. Existing or potentialliabilities stemmingfromenvironmentalconditionscausedbycurrent orpastoperating practiceshavenotbeenconsideredinthisreport.Nocosts wereincludedforabandonment,asthesenotconsideredmaterial. Nocostsareincludedinthe projections
offuturenetrevenueorin oureconomicanalysestorestore,repair, orimprovetheenvironmentalconditionsoftheproperties studiedtomeetexisting orfuturelocal, state, orfederalregulations.
Petron provided ownershipinterestsinthe properties,andFGAacceptedtheextentandcharacter ofownership(workinginterestandnetrevenueinterest)asrepresented. Our staffconducted noindependent welltests, propertyinspections, oraudits ofcompletionandoperatingexpensesaspart ofthis study.
Theestimatedfuturenetrevenues shownarethosewhichshould berealizedfromthesaleofestimated oilandgasreservesafterthededuction ofseverancetaxes,ad valoremtaxes, directoperatingcosts,andfuturecapitalexpenditures.Nodeductions have beenmadefor overhead,federalincometaxes, or otherindirectcosts, suchasinterestexpenseandloanrepayments.Surfaceandwellequipment salvagevalues have notbeenconsideredintherevenue projections. Theestimatedreservesincludedinthecashflow projections havenotbeenadjustedforrisk.Thereservesincludedinthis studyareestimates onlyand should notbeconstruedasexact quantities.Futureconditionsmayaffectrecovery ofestimatedreservesandrevenue,andallcategories ofreservesmay besubjectto revisionasmore performance databecomeavailable.
Grandtotal summaryeconomic projectionsbyreservecategoryandcategory summaries(including one-line summariesfortheindividual properties)arepresentedin Attachment A.
AttachmentBpresents thedefinitions ofprovedoilandgasreservesinaccordance withtheSEC.Generalcommentsregardingthisreportandtheestimation offuturereservesandrevenuearepresentedinAttachmentC.Attachment Dcontainstheconsultingfirm profile.
FGAisanindependentfirm ofgeologistsandpetroleumengineers.Neitherthefirm noritsemployees ownanyinterestinthe properties studied, norhavewebeenemployed on acontingency basis.FGA hasusedall necessarymethodsandproceduresinthe preparation ofthisreportfortheevaluation ofthese properties.
Weappreciatetheopportunitytosubmitthisevaluation.Shouldyouhaveany questions, pleasedonothesitateto call.
Thisreportwasprepared underthe supervision ofW.D.HarrisIII,Registered
Professional EngineerNo.75222,State ofTexasandcompleted onMarch 18,2014.
Yourstruly,
Forrest A.Garb&Associates,Inc.
TexasRegistered EngineeringFirmF-629
W. D.HarrisIII
Chief Executive Officer
Forrest A.Garb&Associates,Inc.
ATTACHMENTS
A. CATEGORY AND ONE-LINE SUMMARIES
B. DEFINITIONS FOR OIL AND GAS RESERVES C.GENERAL COMMENTS
D. CONSULTINGFIRM PROFILE
ATTACHMENT A
CATEGORY AND ONE-LINESUMMARIES
PROVED
ATTACHMENT A-1
ATTACHMENT A-2
FORREST A. GARB & ASSOCIATES,INC.
PROVED DEVELOPED PRODUCING
FORREST A. GARB & ASSOCIATES,INC.
PROVEDDEVELOPED NON-PRODUCING
ATTACHMENT B
DEFINITIONS FOR OIL AND GAS RESERVES
DEFINITIONS FOR OIL AND GAS RESERVES*
(1)Acquisitionofproperties.Costsincurredtopurchase,lease orotherwiseacquire a property, includingcostsoflease bonusesandoptions topurchaseorlease properties,theportionofcosts applicabletomineralswhenlandincludingmineral rightsispurchasedinfee,brokers'fees, recordingfees,legal costs,andothercosts incurredinacquiringproperties.
(2)Analogousreservoir.Analogousreservoirs,asusedinresourcesassessments,havesimilar rockandfluid properties,reservoirconditions(depth,temperature, andpressure)anddrive mechanisms,butaretypicallyat amoreadvancedstageofdevelopmentthanthereservoirof interestandthusmayprovideconceptstoassistintheinterpretationof more limiteddataand estimationofrecovery.Whenusedtosupportprovedreserves,an“analogousreservoir” refersto a reservoirthat sharesthefollowingcharacteristicswith thereservoirofinterest:
(i)Samegeologicalformation (butnotnecessarily inpressurecommunication withthe reservoirofinterest);
(ii) Sameenvironment ofdeposition;
(iii) Similargeologicalstructure;and
(iv) Samedrivemechanism.
(3)Bitumen.Bitumen,sometimes referredtoasnaturalbitumen,ispetroleumin a solidorsemi- solidstate innaturaldepositswitha viscositygreaterthan10,000centipoisemeasured at original temperaturein thedepositandatmospheric pressure,ona gasfreebasis.Inits naturalstate it usuallycontains sulfur,metals, andothernon-hydrocarbons.
(4)Condensate.Condensate isamixture ofhydrocarbonsthat exists inthegaseousphaseat originalreservoirtemperature andpressure,butthat,whenproduced,isintheliquidphaseat surfacepressureandtemperature.
(5)Deterministicestimate.Themethodofestimatingreservesorresourcesiscalled deterministic whena singlevalueforeachparameter(fromthegeoscience,engineering,oreconomicdata)in thereservescalculationisusedinthereservesestimation procedure.
(6)Developedoil andgasreserves.Developedoil andgasreservesarereservesofanycategory that canbeexpectedtoberecovered:
(i)Throughexisting wellswithexistingequipmentandoperatingmethodsorinwhichthe costoftherequiredequipmentisrelativelyminor comparedtothecostofa newwell; and
(ii)Throughinstalledextractionequipmentandinfrastructureoperationalat thetime of thereservesestimate iftheextractionisbymeansnotinvolvingawell.
*TheseReservesDefinitionsarethoseincludedintheSecuritiesandExchangeCommission Regulation S-XasofJanuary1,2010.
ATTACHMENT B-1
(7)Developmentcosts.Costsincurredtoobtainaccesstoprovedreservesandtoprovidefacilities forextracting,treating,gathering andstoringtheoilandgas.Morespecifically, development costs, includingdepreciationandapplicableoperatingcostsofsupportequipment andfacilitiesand othercostsofdevelopmentactivities, are costsincurredto:
(i)Gainaccesstoandpreparewelllocationsfordrilling,includingsurveying well locations forthe purposeofdetermining specificdevelopment drillingsites,clearing ground, draining,roadbuilding,andrelocating publicroads,gaslines,andpowerlines,to theextentnecessaryindevelopingtheprovedreserves.
(ii)Drillandequipdevelopmentwells,development-type stratigraphictest wells,and servicewells,includingthecostsofplatformsandofwellequipment suchascasing, tubing,pumpingequipment,andthewellheadassembly.
(iii) Acquire,construct,andinstall production facilities suchaslease flowlines, separators,treaters,heaters,manifolds,measuring devices,andproductionstoragetanks, naturalgascyclingandprocessingplants,andcentral utilityandwastedisposalsystems.
(iv)Provideimproved recoverysystems.
(8)Developmentproject.Adevelopmentprojectisthemeansby whichpetroleumresourcesare brought tothestatusofeconomically producible.Asexamples,thedevelopmentofa single reservoirorfield,anincrementaldevelopmentina producingfield,orthe integrateddevelopment ofa groupofseveralfieldsandassociatedfacilitieswitha commonownershipmayconstitutea developmentproject.
(9)Developmentwell.Awelldrilledwithintheproved areaofanoil orgasreservoir tothedepth ofa stratigraphichorizonknowntobeproductive.
(10)Economicallyproducible.Thetermeconomically producible,asit relates toa resource, meansa resourcewhichgeneratesrevenue that exceeds,orisreasonablyexpectedtoexceed,the costsoftheoperation. Thevalueoftheproductsthatgenerate revenueshallbedetermined at the terminalpointofoil andgasproducingactivities asdefinedinparagraph(a)(16)ofthissection.
(11)Estimatedultimaterecovery (EUR).Estimated ultimaterecoveryisthesumofreserves remainingas ofa givendate andcumulative productionasofthatdate.
(12)Explorationcosts.Costsincurredinidentifyingareasthatmay warrantexamination andin examining specificareasthatareconsideredtohaveprospectsofcontainingoiland gasreserves, includingcostsofdrillingexploratorywellsand exploratory-typestratigraphictest wells. Explorationcostsmaybeincurred bothbeforeacquiringtherelated property(sometimesreferred toinpartasprospectingcosts)andafteracquiringtheproperty. Principaltypesofexploration costs,whichincludedepreciationandapplicableoperatingcostsofsupportequipment and facilities andothercostsofexplorationactivities, are:
(i)Costsoftopographical,geographicalandgeophysical studies,rightsofaccessto propertiestoconductthosestudies,andsalaries andotherexpensesofgeologists, geophysicalcrews,andothersconductingthosestudies.Collectively,theseare sometimes referredtoasgeologicalandgeophysicalorG&Gcosts.
ATTACHMENT B-2
(ii)Costsofcarrying andretainingundevelopedproperties,suchasdelayrentals,ad valoremtaxesonproperties, legal costsfortitledefense,andthemaintenanceoflandand leaserecords.
(iii) Dryholecontributionsandbottom holecontributions.
(iv)Costsofdrilling andequippingexploratory wells.
(v)Costsofdrillingexploratory-type stratigraphictest wells.
(13)Exploratorywell.Anexploratorywell isa welldrilled tofinda newfieldortofinda new reservoirina fieldpreviouslyfoundtobeproductiveofoil orgasinanotherreservoir.Generally, anexploratorywellisanywellthat isnota developmentwell,an extensionwell,a servicewell,or a stratigraphictest wellasthoseitems aredefinedinthissection.
(14)Extensionwell.Anextension wellisa welldrilledtoextendthelimits ofa knownreservoir.
(15)Field. An area consisting of a single reservoir or mutiple reservoirs all grouped on or related tothesameindividualgeologicalstructuralfeatureand/or stratigraphiccondition. Theremaybe twoor morereservoirsina fieldthat areseparatedverticallybyinterveningimpervious,strata,or laterallybylocal geologicbarriers,orbyboth.Reservoirsthat areassociated bybeingin overlappingoradjacentfields maybetreated asa singleorcommonoperationalfield.The geologicaltermsstructural featureandstratigraphicconditionareintendedtoidentifylocalized geological featuresasopposedtothebroader termsofbasins,trends,provinces,plays,areas-of- interest,etc.
(16)Oilandgasproducing activities.(i)Oilandgasproducingactivities include:
(A)Thesearchforcrudeoil, includingcondensate andnaturalgasliquids,ornatural gas (“oilandgas”)intheirnaturalstatesandoriginallocations;
(B)Theacquisitionofpropertyrightsorpropertiesforthepurposeoffurtherexploration orforthepurpose ofremovingtheoilorgasfromsuchproperties;
(C)Theconstruction,drilling,andproductionactivities necessary toretrieveoil andgas fromtheirnatural reservoirs,includingtheacquisition,construction,installation, and maintenanceoffieldgatheringandstoragesystems,suchas:
(1)Liftingtheoil andgastothesurface;and
(2)Gathering,treating,andfieldprocessing(asinthecaseofprocessing gasto extract liquidhydrocarbons); and
(D)Extractionofsaleablehydrocarbons, inthesolid, liquid,orgaseous state, fromoil sands,shale,coalbeds,orothernonrenewablenaturalresourceswhichareintendedtobe upgradedintosynthetic oilorgas,andactivities undertakenwitha viewtosuch extraction.
ATTACHMENT B-3
(17)Possiblereserves.Possiblereservesarethoseadditionalreservesthat arelesscertain tobe recoveredthanprobablereserves.
(i)Whendeterministicmethodsareused,thetotal quantitiesultimatelyrecoveredfroma projecthavea lowprobabilityofexceedingprovedplusprobablepluspossiblereserves. Whenprobabilisticmethodsareused,thereshouldbeat least a 10%probabilitythat the total quantitiesultimatelyrecoveredwillequalorexceedtheprovedplusprobableplus possiblereserves estimates.
(ii)Possiblereservesmaybeassignedtoareasofareservoiradjacenttoprobablereserves wheredatacontrolandinterpretationsofavailable dataareprogressively lesscertain. Frequently, thiswill beinareaswheregeoscience andengineeringdataareunableto define clearlytheareaandvertical limitsofcommercialproductionfromthereservoirby
a definedproject.
(iii) Possiblereservesalsoincludeincrementalquantitiesassociated witha greater percentagerecoveryofthehydrocarbons inplace thantherecoveryquantitiesassumed for probablereserves.
(iv)Theprovedplusprobableandprovedplusprobablepluspossiblereservesestimatesmust bebasedonreasonablealternativetechnicalandcommercialinterpretations within thereservoirorsubjectprojectthat areclearlydocumented,includingcomparisons to resultsinsuccessfulsimilarprojects.
(v)Possiblereservesmaybeassignedwheregeoscience andengineeringdataidentify directlyadjacentportionsofa reservoirwithinthesameaccumulation thatmaybe separatedfromprovedareasby faultswithdisplacement lessthanformationthicknessor othergeological discontinuitiesandthat havenotbeenpenetratedbya wellbore,andthe registrantbelievesthat suchadjacentportionsareincommunicationwiththeknown (proved)reservoir. Possiblereservesmaybeassignedtoareasthat arestructurallyhigher orlowerthantheprovedareaiftheseareas areincommunication withtheproved reservoir.
(vi)Pursuanttoparagraph(a)(22)(iii)ofthissection,wheredirectobservationhas defineda highest knownoil (HKO)elevation andthepotentialexistsforanassociated gascap,provedoil reservesshouldbe assignedinthestructurallyhigherportions ofthe reservoirabovetheHKOonly ifthehighercontactcanbeestablishedwithreasonable certainty throughreliabletechnology. Portionsofthe reservoirthat donotmeetthis reasonablecertaintycriterionmaybeassignedasprobableandpossible oil orgasbased onreservoirfluidpropertiesandpressure gradientinterpretations.
(18)Probablereserves.Probablereservesarethoseadditionalreservesthat arelesscertain tobe recoveredthanprovedreservesbutwhich,togetherwith provedreserves,areaslikely asnottobe recovered.
(i)Whendeterministicmethodsareused,itisaslikelyasnotthatactual remaining quantities recoveredwill exceedthesumofestimated provedplusprobablereserves. Whenprobabilisticmethods areused,thereshouldbeat least a 50%probabilitythat the actual quantitiesrecoveredwill equalorexceed theprovedplusprobablereserves estimates.
ATTACHMENT B-4
(ii)Probablereservesmaybeassignedtoareasofareservoiradjacenttoprovedreserves wheredatacontrolorinterpretations ofavailabledataarelesscertain,evenifthe interpretedreservoircontinuityofstructureorproductivitydoesnotmeet thereasonable certaintycriterion.Probablereservesmay beassignedtoareasthat arestructurally higher thantheprovedareaifthese areasareincommunication withtheprovedreservoir.
(iii) Probablereservesestimates alsoincludepotentialincrementalquantitiesassociated witha greaterpercentagerecoveryofthehydrocarbonsinplace thanassumed forproved reserves.
(iv) Seealsoguidelinesinparagraphs(a)(17)(iv)and(a)(17)(vi)ofthissection.
(19)Probabilistic estimate. The method of estimation of reserves or resources is called probabilisticwhen thefullrangeofvaluesthat couldreasonablyoccur foreachunknown parameter (fromthegeoscienceandengineeringdata) isusedtogenerate a fullrangeofpossible outcomes andtheirassociated probabilitiesofoccurrence.
(20)Productioncosts.(i)Costsincurredtooperateandmaintainwellsandrelated equipment and facilities, includingdepreciationand applicableoperatingcostsof supportequipmentand facilities andother costsofoperatingandmaintaining thosewellsandrelated equipmentand facilities. Theybecomepartofthecostofoil andgasproduced.Examples ofproductioncosts (sometimescalled liftingcosts) are:
(A)Costsoflabortooperatethewellsandrelated equipmentandfacilities.
(B)Repairsand maintenance.
(C)Materials,supplies,andfuelconsumedandsuppliesutilized inoperatingthewells andrelated equipmentandfacilities.
(D)Propertytaxesandinsuranceapplicabletoprovedpropertiesandwellsandrelated equipmentand facilities.
(E)Severancetaxes.
(ii) Somesupportequipmentorfacilities mayservetwoor more oil andgasproducingactivities andmay alsoservetransportation,refining,andmarketingactivities. Totheextentthat the supportequipmentandfacilities are usedinoil andgasproducingactivities, theirdepreciation andapplicable operatingcostsbecome exploration,development orproductioncosts,as appropriate.Depreciation, depletion,andamortization ofcapitalized acquisition,exploration, and developmentcostsarenotproduction costsbutalsobecome partofthecostofoil andgas producedalong withproduction (lifting)costsidentifiedabove.
(21)Provedarea.Thepartofa propertytowhichprovedreserveshavebeenspecifically attributed.
ATTACHMENT B-5
(22)Provedoil andgasreserves.Provedoil andgasreservesarethosequantitiesofoil andgas, which,by analysis ofgeoscienceandengineeringdata,canbeestimatedwithreasonablecertainty tobeeconomicallyproducible—from agivendate forward,fromknownreservoirs,andunder existingeconomic conditions,operatingmethods,andgovernment regulations—priortothe timeat whichcontractsprovidingtherighttooperateexpire,unlessevidenceindicatesthat renewalis reasonablycertain,regardless ofwhetherdeterministic orprobabilisticmethodsareusedforthe estimation.Theprojecttoextract thehydrocarbons musthavecommenced ortheoperatormust be reasonablycertain that it will commence theproject withina reasonabletime.
(i)Theareaofthereservoirconsideredasprovedincludes:
(A)Theareaidentifiedbydrillingandlimitedbyfluidcontacts,ifany,and
(B) Adjacentundrilledportions ofthereservoir that can,withreasonable certainty, bejudgedto becontinuous withit andto containeconomically producibleoilor gasonthe basisofavailable geoscience andengineering data.
(ii)Intheabsenceofdataonfluidcontacts,provedquantitiesina reservoirarelimitedby thelowestknownhydrocarbons(LKH)asseenina wellpenetrationunlessgeoscience, engineering,or performancedataandreliable technology establishesa lowercontactwith reasonablecertainty.
(iii) Wheredirectobservationfromwellpenetrations hasdefineda highestknownoil (HKO)elevation andthepotentialexistsforanassociatedgascap,provedoil reserves maybeassignedinthestructurallyhigherportionsofthereservoironlyifgeoscience, engineering,or performancedataandreliable technology establishthehighercontact withreasonablecertainty.
(iv) Reserveswhichcanbeproducedeconomically throughapplicationofimproved recoverytechniques(including, butnotlimited to,fluidinjection)areincludedinthe provedclassificationwhen:
(A) Successfultestingbya pilotprojectinanareaofthereservoirwithproperties no morefavorablethaninthereservoirasa whole,theoperationofan installedprograminthereservoiroran analogous reservoir,orother evidenceusingreliable technologyestablishesthereasonablecertaintyofthe engineeringanalysisonwhich theprojectorprogramwasbased;and
(B) Theprojecthasbeenapprovedfordevelopmentbyall necessarypartiesand entities, includinggovernmental entities.
(v)Existingeconomic conditionsincludepricesandcostsat whicheconomic producibilityfroma reservoiristobedetermined. Thepriceshallbetheaverageprice duringthe12-month periodpriorto theendingdateoftheperiodcoveredbythe report, determinedasanunweightedarithmeticaverageofthefirst-day-of-the-month pricefor eachmonthwithinsuchperiod,unlesspricesaredefined by contractualarrangements, excludingescalationsbaseduponfuture conditions.
ATTACHMENT B-6
(23)Provedproperties.Properties withprovedreserves.
(24)Reasonablecertainty.If deterministicmethodsare used,reasonablecertaintymeans a high degreeofconfidencethat thequantitieswill berecovered.Ifprobabilistic methodsareused,there shouldbeat least a 90% probabilitythatthequantitiesactuallyrecoveredwill equalorexceedthe estimate.Ahighdegreeofconfidenceexistsifthequantityismuchmorelikelyto beachieved than not,and,aschangesduetoincreasedavailabilityofgeoscience(geological,geophysical, and geochemical),engineering,andeconomicdataaremadetoestimated ultimate recovery (EUR) with time, reasonablycertain EUR ismuchmorelikelytoincreaseorremain constantthanto decrease.
(25)Reliabletechnology.Reliable technologyisa groupingofoneormoretechnologies (includingcomputationalmethods)that hasbeenfieldtestedandhasbeendemonstratedto providereasonablycertain resultswithconsistency andrepeatabilityintheformation being evaluatedorinananalogousformation.
(26)Reserves.Reservesareestimated remainingquantitiesofoil andgasandrelated substances anticipated tobeeconomically producible,asofa givendate,by application ofdevelopment projectstoknownaccumulations. Inaddition,theremustexist,ortheremust bea reasonable expectationthat there will exist,thelegal righttoproduceora revenueinterestintheproduction, installedmeans ofdeliveringoil andgasorrelated substancestomarket,andall permits and financing requiredtoimplement theproject.
Notetoparagraph(a)(26):Reservesshouldnotbeassignedtoadjacent reservoirsisolatedby major,potentiallysealing, faultsuntilthosereservoirsarepenetratedandevaluatedas economically producible.Reservesshouldnotbeassignedtoareasthat areclearly separatedfrom a knownaccumulation by anon-productive reservoir(i.e.,absenceofreservoir,structurallylow reservoir, ornegativetest results).Suchareasmaycontainprospectiveresources(i.e.,
potentially recoverableresourcesfromundiscoveredaccumulations).
(27)Reservoir.Aporousandpermeableunderground formationcontaininga natural accumulation ofproducibleoil and/orgasthat isconfinedby impermeablerockorwaterbarriers andisindividualandseparatefrom otherreservoirs.
(28)Resources.Resourcesare quantitiesofoil andgasestimatedto existinnaturallyoccurring accumulations. Aportionoftheresourcesmaybeestimated toberecoverable,andanother portionmaybeconsideredtobeunrecoverable.Resourcesincludebothdiscoveredand undiscoveredaccumulations.
(29)Servicewell.Awelldrilledorcompleted forthepurposeofsupportingproductioninan existingfield.Specificpurposesofservicewellsincludegasinjection,waterinjection,steam injection,airinjection,salt-waterdisposal,watersupplyforinjection, observation,orinjectionfor in-situcombustion.
(30)Stratigraphictest well.Astratigraphictest wellis a drillingeffort,geologicallydirected,to obtaininformation pertainingtoa specificgeologiccondition.Such wellscustomarilyaredrilled withouttheintent ofbeingcompleted forhydrocarbonproduction.The classificationalso includes testsidentifiedas coretestsandall typesofexpendableholesrelated tohydrocarbon exploration.Stratigraphictestsareclassifiedas“exploratorytype” ifnotdrilledin a knownarea or “developmenttype” ifdrilledina knownarea.
ATTACHMENT B-7
(31)Undevelopedoilandgasreserves.Undevelopedoil andgasreservesarereservesofany categorythatareexpectedtoberecoveredfromnewwellsonundrilledacreage,orfromexisting wellswherea relativelymajor expenditureisrequiredforrecompletion.
(i)Reservesonundrilledacreageshallbelimitedtothosedirectlyoffsettingdevelopment spacing areasthat arereasonably certainofproductionwhendrilled,unlessevidenceusing reliable technologyexists that establishesreasonable certaintyofeconomic producibilityat greaterdistances.
(ii)Undrilledlocationscanbeclassifiedashavingundevelopedreservesonlyifa developmentplanhasbeenadoptedindicatingthatthey arescheduledtobedrilledwithin fiveyears,unlessthespecific circumstances,justifyalongertime.
(iii) Undernocircumstances shallestimatesforundevelopedreservesbeattributableto anyacreageforwhichanapplicationoffluidinjectionorotherimprovedrecovery techniqueiscontemplated,unlesssuchtechniqueshavebeenprovedeffectivebyactual projectsinthesamereservoirorananalogousreservoir,asdefinedinparagraph(a)(2)of thissection,orby otherevidenceusingreliable technologyestablishingreasonable certainty.
(32)Unprovedproperties.Properties withnoprovedreserves.
ATTACHMENT B-8
ATTACHMENT C
GENERALCOMMENTS
GENERAL COMMENTS
(1) Thereserveestimates presentedinthisreporthavebeencalculated usingdeterministic procedures.Thereservesshowninthisreportarethose estimatedtoberecoverableunder thenew guidelinesof theSecurities andExchangeCommission (SEC).Thedefinitionsfor oil and gas reserves inaccordance with SEC Regulation S-X are setforth inthis report.
(2)Theestimated futurenetrevenueshowninthecashflowprojections isthatrevenuewhich shouldberealizedfromthesaleoftheestimatednetreserves.Surface andwellequipment salvagevalueshavenotbeenconsidered intherevenueprojections.Futurenetrevenueas statedinthis reportisbefore thededuction offederal income tax.
(3)Thediscounted futurenetrevenueisnotrepresented tobethefairmarketvalueofthese reserves. Theestimatedreservesincludedinthecashflowprojectionshavenotbeen adjustedforrisk.
(4)Thereserves included inthisstudyareestimatesonlyandshouldnotbeconstrued asexact quantities.Futureconditionsmayaffect recovery ofestimatedreservesandrevenue,andall categoriesofreservesmaybesubjecttorevisionasmoreperformance databecome available.
(5)Extentandcharacterofownership,oilandgasprices, productiondata,direct operating costs,requiredcapitalexpenditures, andother datafurnished havebeenacceptedas represented. No independent well tests, property inspections, or audits of operating expenses were conducted byour staff in conjunction with this study.
(6)Ifinvestments orbusiness decisionsare tobemade inrelianceontheseestimates byanyone otherthanour client,suchaperson,withtheapprovalofourclient,isinvited tovisitour officesathisownexpensesothathecanevaluatetheassumptionsmade andthe completeness andextentofthedata availableonwhichourestimatesarebased.
(7)Gascontractdifferences,includingtakeorpayclaims,arenotconsideredinthisreport. (8)Gassalesimbalances havenotbeentakenintoaccountinthereserveestimates.
(9) Unlessotherwise stated inthetext,existingorpotentialliabilitiesstemming from environmental conditionscausedbycurrentorpastoperatingpractices havenotbeen consideredinthisreport.Nocostsareincluded intheprojectionsoffuturenetrevenueorin oureconomic analysesto restore,repair,or improve theenvironmental conditionsof the properties studied to meetexisting orfuture local, state, orfederal regulations.
(10) Anydistribution ofthisreportoranypartthereofmustincludethesegeneralcomments and thecoverletter intheirentirety.
(11)ThisreportwaspreparedunderthesupervisionofW.D.HarrisIII,RegisteredProfessional
EngineerNo.75222,StateofTexas.
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ATTACHMENT D
CONSULTING FIRM PROFILE
FORREST A.GARB&ASSOCIATES,INC.
INTERNATIONALPETROLEUM CONSULTANTS
5310 HARVEST HILLROAD,SUITE275,LB 152
DALLAS,TEXAS 75230–5805(972)788-1110Fax(972)991-3160
E-Mail:forgarb@forgarb.com
WebSite:www.forgarb.com
WearepleasedtopresentthisprofileofForrestA. Garb&Associates,Inc.(FGA).FGAisaninternational petroleumengineeringandgeologicconsulting firm staffedbyexperiencedengineersandgeologists.Collectively ourstaff hasmorethanacentury ofworld-wideexperience.FGAhasnooutsideownership. Andthefirmhasnodirectorcontingent participationinoil orgasventures.Therearenoconflicts ofinterest orconcernsaboutmaintainingtheconfidentiality ofourclient’s data. Thecompanyisdedicatedto providingthe highestlevelofintegrity,technology,andservice.
FGAexpertiseincludes:
•ExplorationandProspectEvaluations
•ReserveEstimationandEvaluationStudies
•FairMarketValueAnalyses
•EconomicandMarket Analyses
•ForensicEngineeringandExpertWitnessTestimony
•ReservoirEngineering
•RegionalandDetailed GeologicalStudies
•NumericSimulationStudies
•Special Computer Applications
•PressureTransientTestDesign,Supervision,andEvaluation
•Reservoir Characterization
•GeostatisticalStudies
•Oil&GasProductionEnvironmentalStudies
•MineralsEvaluations
•Petrophysical Analyses
OURSENIORSTAFF
Mr.Forrest A.Garb,Founder,Chairman oftheBoardandChief Engineer Emeritus, withmorethan50years of practical petroleumindustryexperience, wasastaffmemberand then aprincipal ofamajorconsulting firmforover30years, servingaspresidentandchief operating officer ofthis firm forthelast 14 ofthoseyears. During histenure, hesupervised or prepared over 12,500assignments varyingfrom simpleevaluationstocomplex reservoir simulations. Usingthisexperienceasabase,heassembledthebestwork system offeredtothe oilandgasindustry. Theuseofstateoftheartcomputersandofficeequipment,togetherwithanexperienced staff,ensureseconomic servicetotheclient.
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Mr. William D.Harris III,P.E.,joinedFGAin August1998,andis nowtheChief Executive Officer.Previously, hewasaVicePresident withDeGolyerandMacNaughton where hepreparedandsupervisedengineering studiesandreserveandappraisal reportsforfieldsinmanycountries.Mr.Harrisholds aB.S.inPetroleum Engineering fromTexas A&MUniversityandaM.B.A.fromSouthernMethodist University.Heis amemberoftheSociety ofPetroleum Engineersandis aregistered professionalengineerinthe state ofTexas.
Mr. JohnCooper,Senior Geologist,joinedForrest A.Garb&Associates,Inc.in2007.Mr.Cooperreceived hisBachelor's degreeinGeologyfromthe University ofLouisiana -Lafayette (formerlytheUniversityofSouthwesternLouisiana)andholdsanMBA fromTulane University. HewasemployedatGreatSouthern Oiland Gas, InnexEnergy,andHuntPetroleumin variousgeologicalandtechnical positions,andisexperiencedinloganalysis,geologicalinterpretations,andreservesevaluations usingthelatesttechnologies.Mr.Cooperis amember ofthe American Association ofPetroleum Geologists,theSocietyof Economic Geophysicists,andthe DallasGeological & GeophysicalSociety.
Mr.GeraldK.Ebanks,Senior Geologist, received hisM.A. degreeingeology fromthe University ofTexasatAustinandhasmorethan 35years ofexperiencein petroleumgeology. Hewasemployed withMobil OilCorporation,andsubsequently withRay Holifieldand Associates,andPXI,Incorporated,in various geological positions.Mr.Ebanksis amember oftheAmerican Association ofPetroleum Geologists, Dallas GeologicalSociety, Houston GeologicalSociety,andis a certifiedpetroleumgeologist.
Ms.StacyM.Light,P.E.,Senior VicePresidentPetroleum Engineering,joinedForrest A.Garb&Associates, Inc.inMay2010asareservoirengineer.Ms.Light previously worked for ARCO OilandGasasareservoir/operationsengineerandcrudeoilrisk management director.Sheperformed detailed production,reservoirandeconomicanalyses for both onshoreand offshore properties,and supervisedengineersinthe samecapacity.Shealso performed riskmanagement duties,tradingcrudeoil futuresandoptions ontheNewYorkMercantile Exchange. Areasworkedinclude onshoreand offshore GulfCoastandthemid-continentarea.Ms. Light received aB.S.inPetroleum Engineering from Texas A&M Universityandis aregistered professionalengineerinthe state of Texasand amember oftheSocietyofPetroleum Engineers (SPE).
Mr. ClaudeM.(Mike) Rightmire,Senior VicePresidentPetroleum Engineering,joinedForrest A.Garb&Associates,Inc.inDecember 2007,asareservoirengineer.Mr.Rightmire previously worked forARCOAlaskaand ARCOExploration &Production Technologiesas a reservoirand operationsengineerandmost recently forPinnacle Technologiesasaseniorengineerandprojectmanager. His workexperienceincludes over25years of operationsand reservoirengineeringassignments, reservoirengineering researchandapplications development work,andfracture stimulationengineering.Mr.Rightmire holdsaB.S.inPetroleum Engineering from Texas A&M University, aB.S.inBiologicalScience fromtheUniversity of Alaska Anchorage,andis amember oftheSociety ofPetroleum Engineers (SPE).
Ms.Sandra W.Wall,Senior VicePresidentPetroleum Engineering,joinedForrest A. Garb&Associates,Inc.inAugust 2006.Ms.Wall previously workedforTexas EasternCorp., ExplorationandProductionDivision,andTranswesternPipelineCompanyasareservoirengineerand projectmanager.Sheperformed detailed reservoirandeconomicanalyses forboth onshoreand offshoreproperties, ran 3Dcomputer simulation studies formassivehydraulic
ATTACHMENT D-2
fracturing,water floods,andCO2floods,andcoordinatedthedevelopment ofexploration projects. Areasworkedinclude onshoreandoffshore GulfCoast, AlaskaNorthSlope,RockyMountains, offshore California, offshoreAustralia,Indonesia,andNorthSea.Ms.Wall holdsaB.S.inPetroleum Engineering fromTexas A&MUniversity, aM.B.A. fromHoustonBaptist University,andis amember oftheSociety ofPetroleum Engineers (SPE).
THE COMPANY
Forrest A.Garb &Associates,Inc.(FGA)isaconsulting firmcomprised ofprofessional petroleumengineers, geologists,andtechnical supportpersonnel withdiversified backgroundsinall phasesofthe petroleumandenergyindustries. Thegrouppridesitselfinofferingthehighestlevel ofethics, stateofthearttechnology,andprompt dedicated servicetoourclients.
FGAprofessionals haveextensiveexperienceinthe world'simportanthydrocarbon producingareas,including NorthandSouthAmerica,theMiddleEast, Australia, NewZealand,Indonesia, Turkey, North Africa,Russia,China, Thailand,Myanmar,WestAfrica,India,theNorthSea,Alaska,andMexico.
The firmoffers acomplete rangeofgeologicalandengineering services -fromscreeningexploration prospectsanddesigningdevelopment drillingprojectstoestimatingreserves, forecasting futureproduction,andpresentingeconomicanalyses.Major financialinstitutionsacceptthe validity of our studies, particularlyintheareas of reserveestimationandappraisal. The fairmarket valueanalysistechnique developedbyFGAisbeingappliedby some ofindustry’slargest players.
Majorintegratedandindependent oilandgascompanies haveused ourestimates of futureproductionratesandavailablehydrocarbon resourcesto designfacilities,andtoestablishcontractterms.
FGAisaleaderinthedevelopmentandapplicationofcomputerstothedaily requirements ofpetroleumengineering.Mainframe programs, hand-heldcomputer programs,andpersonalcomputersystems designedbyMr.Garbhavebeeninstalled inmanymajorintegrated oilcompanyofficesaroundtheworld.
Associations withfacilities design, seismicinterpretation, petrology,andenvironmental firms,renownedintheir ownright,enabletheFGA organizationtooffer acomplete servicetoitsclients underonemastercontract.
Becausethecompanyhasnohydrocarbon productionandbecauseithas nooutside ownershiptodictate opinions,thedeterminations ofthefirmareindependent.Itsstudiesare withoutbiasandare based onthe bestinterpretation ofallavailable dataafter processing with"state oftheart"methodsandequipment.
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FGArestrictsitsactivitiesexclusivelytoconsultation;itdoes notacceptcontingent fees nordoesitownoperatinginterestsin any oil,gas, ormineral properties.Thefirm subscribestoacode ofprofessionalconduct,anditsemployeesactively support their relatedtechnicaland professional societies.
TheentireFGAstaffisdedicatedtoprovidingeachclient withapersonalizedandcost-efficientapproachtoservetheirindividual needs.
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