February 28, 2014
New Source Energy Partners Limited Partnership
914 N. Broadway
Suite 230
Oklahoma City, Oklahoma 73102
Attn: Mr. Kristian Kos
Re: Oil, Natural Gas and Natural Gas Liquids
Non-Escalated Analysis, Reserves and Revenues
As of December 31, 2013
Gentlemen:
At the request of New Source Energy Partners Limited Partnership (New Source LP), the firm of Ralph E. Davis Associates Inc. (Davis) has prepared an evaluation of the oil, natural gas and natural gas liquid reserves on leaseholds in which New Source LP has certain interests. The purpose of this report is to present a summary of the Proved Developed Producing, Non-Producing, Shut In and Undeveloped reserves that in our opinion meet the criteria for proved reserve volumes in keeping with the directives of the Securities and Exchange Commission as detailed later in this report.
Davis has evaluated 100% of New Source LP’s proved developed producing, proved developed non-producing, shut in and undeveloped properties, all of which are located in the State of Oklahoma in the United States. We have prepared these estimates of the reserves, future production and income attributable to the subject interests with an effective date of December 31, 2013.
The reserves associated with this review have been classified in accordance with the definitions of the Securities and Exchange Commission as found in Part 210-Form and Content of and Requirements for Financial Statements, Securities Act of 1933, Securities Exchange Act of 1934, Public Utility Holding Company Act of 1935, Investment Company Act of 1940, Investment Advisers Act of 1940, and Energy Policy and Conservation Act of 1975, under Rules of General Application § 210.4-10 Financial accounting and reporting for oil and gas producing activities pursuant to the Federal securities laws and the Energy Policy and Conservation Act of 1975. A summation of these definitions is included as a portion of this letter.
We have also estimated the future net revenue and discounted present value associated with these reserves as of January 1, 2014, utilizing a non-escalated product price scenario and non-escalated costs of operations, i.e., prices and expenses were not escalated above current values as detailed later in this report. The present value is presented for your information and should not be construed as an estimate of the fair market value.
The results of our study related to our estimate of the Total Proved Reserves attributable to New Source LP and remaining to be produced as of December 31, 2013 are as follows:
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Oil, Natural Gas and Natural Gas Liquids February 28, 2014
SEC Non-Escalated Price Analysis Page 2
As of December 31, 2013
Non-Escalated SEC Pricing Scenario
Estimated Reserves and Future Net Income Net to
New Source Energy Partners LP
As of December 31, 2013
| Estimated Net Reserves | Estimated Future Net Income | ||||||||||||||||
| Reserve Category | Oil MBbls | NGL MBbls | Sales Gas MMCF | Undiscounted $1,000's | Discounted at 10% $1,000's | ||||||||||||
| TOTAL PROVED RESERVES | |||||||||||||||||
| Producing | 913.9 | 7,936.4 | 18,482.6 | $ | 261,800.9 | $ | 158,334.7 | ||||||||||
| Non-producing | 8.1 | 279.9 | 996.9 | $ | 9,971.2 | $ | 6,663.1 | ||||||||||
| Undeveloped | 517.4 | 4,866.7 | 16,625.3 | $ | 124,750.5 | $ | 46,763.8 | ||||||||||
| Shut-In | 0.2 | 74.2 | 145.6 | $ | 1,354.2 | $ | 963.2 | ||||||||||
| TOTAL PROVED | 1,439.6 | 13,157.2 | 36,250.4 | $ | 397,876.8 | $ | 212,724.8 | ||||||||||
Note: Any errors in addition are due to rounding
Liquid volumes are expressed in thousands of barrels (MBbls) of stock tank oil. Gas volumes are expressed in millions of standard cubic feet (MMSCF) at the official temperature and pressure bases of the areas wherein the gas reserves are located.
A summary presentation for the proved reserves by specific reserve category is included in the tables following this letter.
DISCUSSION
The scope of this study was to review basic information compiled by New Source LP and prepare estimates of the proved reserves attributable to the interests of New Source LP. Reserve estimates were prepared by Davis using acceptable evaluation principles for each source and were based in large part on the basic information supplied by New Source LP.
The quantities presented herein are estimated reserves of oil, natural gas and natural gas liquids that geologic and engineering data demonstrate can be recovered from known reservoirs under current economic conditions with reasonable certainty. Proved undeveloped locations are scheduled to be drilled such that the investment cost will be fully recovered prior to expiration of the term of the subject concession in which the undeveloped reserves have been identified.
This evaluation has been prepared in accordance with the Standards Pertaining to the Estimating and Auditing of Oil and Gas Reserves Information as proclaimed by the Society of Petroleum Engineers, the SPE Standards.
DATA SOURCE
Basic well and field data used in the preparation of this report were furnished by New Source LP or were obtained from commercial sources or from Davis’ own database of information. Records as they pertain to factual matters such as acreage controlled, the number and depths of wells, reservoir pressure and/or
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As of December 31, 2013
Oil, Natural Gas and Natural Gas Liquids February 28, 2014 SEC Non-Escalated Price Analysis Page 3 As of December 31, 2013 Texas Registered Engineering Firm F-1529 production history, the existence of contractual obligations to others and similar matters were accepted as presented.
Additionally, the analyses of these properties utilized not only the basic data on the subject wells but also data on analogous properties as provided. Well logs, ownership interest, revenues received from the sale of products and operating costs were furnished by New Source LP. No physical inspection of the properties was made nor any well tests conducted.
Operating cost data were provided by New Source LP and were utilized to estimate the direct cost of operation for each property or producing unit. New Source LP costs of operation are charged against a producing unit or group of wells in addition to those individual well costs that may be scheduled for an area. Development costs for new wells to be drilled, wells to be worked over to return intervals to production, and anticipated costs to provide for significant field operation and facility changes were provided by New Source LP and are reported to be based upon recent field activity.
RESERVE ESTIMATES
The estimate of reserves included in this report is based primarily upon production history or analogy with wells in the area producing from the same or similar formations. In addition to individual well production history, geological and well test information, when available, were utilized in the evaluation. Individual well production histories were evaluated utilizing decline curve analysis on the individual producing properties and forecast until a calculated economic limit.
Estimates of reserves to be recovered from undrilled locations are based upon not only the ultimate reserve of existing New Source LP wells, but also completions by other operators in the area of interest. In certain situations studies by Davis of analogous completions have resulted in the development of an average completion than can be anticipated for a specific area, as well as a production profile that recovers the estimated ultimate reserve. This methodology has been utilized in this evaluation.
Additional development potential in general was based upon ultimate recoverable reserve estimates for those wells located in the area of interest. Well spacing was based upon historical activity in the same reservoirs. In all cases, proved undeveloped locations were limited to a direct offset to a proved developed producing well or successful well test in the same reservoir.
The accuracy of reserve estimates is dependent upon the quality of available data and upon the independent geological and engineering interpretation of that data. It should be noted that all reserve estimates involve an assessment of the uncertainty relating to the likelihood that the actual remaining quantities recovered will be greater or less than the estimated quantities determined as of the date the estimate is made. The uncertainty depends primarily on the amount of reliable geological and engineering data available at the time of the estimate and the interpretation of these data. The reserves have been determined using methods and procedures widely accepted within the industry and are believed to be appropriate for the purposes of this report. In our opinion, we used all methods and procedures necessary under the circumstances to prepare this report.
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As of December 31, 2013
PRODUCING RATES
For the purpose of this report, estimated reserves are scheduled for recovery primarily on the basis of actual producing rates or appropriate well test information. They were prepared giving consideration to engineering and geological data such as reservoir pressure, anticipated producing mechanisms, the number and types of completions, as well as past performance of analogous reservoirs.
These and other future rates may be subject to regulation by various agencies, changes in market demand or other factors; consequently, reserves recovered and the actual rates of recovery may vary from the estimates included herein. Scheduled dates of future well completions may vary from that provided by New Source LP due to changes in market demand or the availability of materials and/or capital; however, the timing of the wells and their estimated rates of production are reasonable and consistent with established performance to date.
PRICING PROVISIONS
Prices utilized in the evaluation results presented in the letter portion of this report and summarized in the various tables included in this evaluation are the average of the posted price for the first trading day of each month of WTI Cushing for oil and Henry Hub for gas, for 2013. Prices received for products sold, adjustments due to the BTU content of the gas, shrinkage for transportation, measuring or the removal of liquids, the liquid yield from gas processed, etc., were accepted as presented.
Crude Oil, Condensate and/or Natural Gas Liquids - Oil price used for the report was held constant at $96.78 per barrel before a pricing differential was applied. A pricing differential of -3.17% from this price was utilized to account for location and grade of crude based upon historical sales information. This scheduled price was held flat throughout the producing life of the properties. Prices for the liquid reserves scheduled for initial production at some future date were estimated using this same price. Natural Gas Liquids were priced at thirty-eight percent (38.0%) of the existing oil and condensate price for all properties in the evaluation.
Natural Gas - A base gas price of $3.67 per MMBTU was used and held constant for the life of the properties. A -3.147% pricing adjustment was applied to this posted price to account for variations in the location and heating value of the gas based on historical sales information. Prices for natural gas reserves scheduled for initial production at some future date were estimated using this same price scenario.
FUTURE NET INCOME
Future net income is based upon gross income from future production, less direct operating expenses and applicable production taxes. Estimated future capital for development was also deducted from gross income at the time it will be expended. No allowance was made for depletion, depreciation, income taxes or administrative expense.
Direct lease operating expense includes direct cost of operations of each lease or an estimated value for future operations based upon analogous properties. Lease operating expenses were held flat throughout the producing life of the properties. Neither the cost to abandon onshore properties nor the salvage value of equipment was considered in this report.
Future net income has been discounted for present worth at values ranging from 0 to 100 percent using continuous discounting. In this report the future net income is discounted at a primary rate of ten (10.0) percent.
Texas Registered Engineering Firm F-1529
Oil, Natural Gas and Natural Gas Liquids February 28, 2014
SEC Non-Escalated Price Analysis Page 5
As of December 31, 2013
GENERAL
New Source LP has provided access to all of its accounts, records, geological and engineering data, reports and other information as required for this audit. The ownership interests, product classifications relating to prices and other factual data were accepted as furnished without verification.
No consideration was given in this report to potential environmental liabilities which may exist, nor were any costs included for potential liability to restore and clean up damages, if any, caused by past operating practices.
Neither Ralph E. Davis Associates, Inc. nor any of its employees have any interest in New Source LP or the properties reported herein. The employment and compensation to make this study are not contingent on our estimate of reserves. The technical persons responsible for preparing the estimates presented herein meet the requirements regarding qualifications, independence, objectivity and confidentiality set forth in the SPE standards.
This report has been prepared for public disclosure by New Source Energy Partners LP in filings made with the SEC in accordance with the disclosure requirements set forth in the SEC regulations.
The data and work papers used in the preparation of this report are available for examination by authorized parties in our offices. Please feel free to contact us if we can be of further service.
We appreciate the opportunity to be of service to you in this matter and will be glad to address any questions or inquiries you may have.
Very truly yours,
RALPH E. DAVIS ASSOCIATES, INC.
/s/ David G. Cole
David G. Cole
Senior Reservoir Engineer
/s/ Allen C. Barron, P.E.
Allen C. Barron, P. E.
President
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Oil, Natural Gas and Natural Gas Liquids February 28, 2014
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As of December 31, 2013
SECURITIES AND EXCHANGE COMMISSION
DEFINITIONS OF RESERVES
The following information is taken from the United States Securities and Exchange Commission:
PART 210-FORM AND CONTENT OF AND REQUIREMENTS FOR FINANCIAL STATEMENTS, SECURITIES ACT OF 1933, SECURITIES EXCHANGE ACT OF 1934, PUBLIC UTILITY HOLDING COMPANY ACT OF 1935, INVESTMENT COMPANY ACT OF 1940, INVESTMENT ADVISERS ACT OF 1940, AND ENERGY POLICY AND CONSERVATION ACT OF 1975
Rules of General Application
§ 210.4-10 Financial accounting and reporting for oil and gas producing activities pursuant to the Federal securities laws and the Energy Policy and Conservation Act of 1975.
Reserves
Reserves are estimated remaining quantities of oil and gas and related substances anticipated to be economically producible, as of a given date, by application of development projects to known accumulations. In addition, there must exist, or there must be a reasonable expectation that there will exist, the legal right to produce or a revenue interest in the production, installed means of delivering oil and gas or related substances to market, and all permits and financing required to implement the project.
Reserves should not be assigned to adjacent reservoirs isolated by major, potentially sealing, faults until those reservoirs are penetrated and evaluated as economically producible. Reserves should not be assigned to areas that are clearly separated from a known accumulation by a non-productive reservoir (i.e., absence of reservoir, structurally low reservoir, or negative test results). Such areas may contain prospective resources (i.e., potentially recoverable resources from undiscovered accumulations).
Proved Oil and Gas Reserves
Proved oil and gas reserves are those quantities of oil and gas, which, by analysis of geoscience and engineering data, can be estimated with reasonable certainty to be economically producible-from a given date forward, from known reservoirs, and under existing economic conditions, operating methods, and government regulations prior to the time at which contracts providing the right to operate expire, unless evidence indicates that renewal is reasonably certain, regardless of whether deterministic or probabilistic methods are used for the estimation. The project to extract the hydrocarbons must have commenced or the operator must be reasonably certain that it will commence the project within a reasonable time.
(i) The area of the reservoir considered as proved includes:
(A) | The area identified by drilling and limited by fluid contacts, if any, and |
(B) | Adjacent undrilled portions of the reservoir that can, with reasonable certainty, be judged to be continuous with it and to contain economically producible oil or gas on the basis of available geoscience and engineering data. |
(ii) In the absence of data on fluid contacts, proved quantities in a reservoir are limited by the lowest known hydrocarbons (LKH) as seen in a well penetration unless geoscience, engineering, or performance data and reliable technology establishes a lower contact with reasonable certainty.
(iii) Where direct observation from well penetrations has defined a highest known oil (HKO) elevation and the
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As of December 31, 2013
potential exists for an associated gas cap, proved oil reserves may be assigned in the structurally higher portions of the reservoir only if geoscience, engineering, or performance data and reliable technology establish the higher contact with reasonable certainty.
(iv) Reserves which can be produced economically through application of improved recovery techniques (including, but not limited to, fluid injection) are included in the proved classification when:
(A) | Successful testing by a pilot project in an area of the reservoir with properties no more favorable than in the reservoir as a whole, the operation of an installed program in the reservoir or an analogous reservoir, or other evidence using reliable technology establishes the reasonable certainty of the engineering analysis on which the project or program was based; and |
(B) | The project has been approved for development by all necessary parties and entities, including governmental entities. |
(v) Existing economic conditions include prices and costs at which economic producibility from a reservoir is to be determined. The price shall be the average price during the 12-month period prior to the ending date of the period covered by the report, determined as an unweighted arithmetic average of the first-day-of-the-month price for each month within such period, unless prices are defined by contractual arrangements, excluding escalations based upon future conditions.
Reasonable certainty. If deterministic methods are used, reasonable certainty means a high degree of confidence that the quantities will be recovered. If probabilistic methods are used, there should be at least a 90% probability that the quantities actually recovered will equal or exceed the estimate. A high degree of confidence exists if the quantity is much more likely to be achieved than not, and, as changes due to increased availability of geoscience (geological, geophysical, and geochemical), engineering, and economic data are made to estimated ultimate recovery (EUR) with time, reasonably certain EUR is much more likely to increase or remain constant than to decrease.
Reliable technology. Reliable technology is a grouping of one or more technologies (including computational methods) that has been field tested and has been demonstrated to provide reasonably certain results with consistency and repeatability in the formation being evaluated or in an analogous formation.
Probable Reserves
Probable reserves are those additional reserves that are less certain to be recovered than proved reserves but which, together with proved reserves, are as likely as not to be recovered.
(i) When deterministic methods are used, it is as likely as not that actual remaining quantities recovered will exceed the sum of estimated proved plus probable reserves. When probabilistic methods are used, there should be at least a 50% probability that the actual quantities recovered will equal or exceed the proved plus probable reserves estimates.
(ii) Probable reserves may be assigned to areas of a reservoir adjacent to proved reserves where data control or interpretations of available data are less certain, even if the interpreted reservoir continuity of structure or productivity does not meet the reasonable certainty criterion. Probable reserves may be assigned to areas that are structurally higher than the proved area if these areas are in communication with the proved reservoir.
(iii) Probable reserves estimates also include potential incremental quantities associated with a greater percentage recovery of the hydrocarbons in place than assumed for proved reserves.
Possible Reserves
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Possible reserves are those additional reserves that are less certain to be recovered than probable reserves.
(i) When deterministic methods are used, the total quantities ultimately recovered from a project have a low probability of exceeding proved plus probable plus possible reserves. When probabilistic methods are used, there should be at least a 10% probability that the total quantities ultimately recovered will equal or exceed the proved plus probable
plus possible reserves estimates.
(ii) Possible reserves may be assigned to areas of a reservoir adjacent to probable reserves where data control and interpretations of available data are progressively less certain. Frequently, this will be in areas where geoscience and engineering data are unable to define clearly the area and vertical limits of commercial production from the reservoir by a defined project.
(iii) Possible reserves also include incremental quantities associated with a greater percentage recovery of the hydrocarbons in place than the recovery quantities assumed for probable reserves.
(iv) The proved plus probable and proved plus probable plus possible reserves estimates must be based on reasonable alternative technical and commercial interpretations within the reservoir or subject project that are clearly documented, including comparisons to results in successful similar projects.
(v) Possible reserves may be assigned where geoscience and engineering data identify directly adjacent portions of a reservoir within the same accumulation that may be separated from proved areas by faults with displacement less than formation thickness or other geological discontinuities and that have not been penetrated by a wellbore, and the registrant believes that such adjacent portions are in communication with the known (proved) reservoir. Possible reserves may be assigned to areas that are structurally higher or lower than the proved area if these areas are in communication with the proved reservoir.
(vi) Pursuant to paragraph (a)(22)(iii) of this section, where direct observation has defined a highest known oil (HKO) elevation and the potential exists for an associated gas cap, proved oil reserves should be assigned in the structurally higher portions of the reservoir above the HKO only if the higher contact can be established with reasonable certainty through reliable technology. Portions of the reservoir that do not meet this reasonable certainty criterion may be assigned as probable and possible oil or gas based on reservoir fluid properties and pressure gradient interpretations.
Developed Oil and Gas Reserves
Developed oil and gas reserves are reserves of any category that can be expected to be recovered:
(i) Through existing wells with existing equipment and operating methods or in which the cost of the required equipment is relatively minor compared to the cost of a new well; and
(ii) Through installed extraction equipment and infrastructure operational at the time of the reserves estimate if the extraction is by means not involving a well.
Undeveloped Oil and Gas Reserves
Undeveloped oil and gas reserves are reserves of any category that are expected to be recovered from new wells on undrilled acreage, or from existing wells where a relatively major expenditure is required for recompletion.
(i) Reserves on undrilled acreage shall be limited to those directly offsetting development spacing areas that are reasonably certain of production when drilled, unless evidence using reliable technology exists that establishes reasonable certainty of economic producibility at greater distances.
(ii) Undrilled locations can be classified as having undeveloped reserves only if a development plan has been adopted indicating that they are scheduled to be drilled within five years, unless the specific circumstances, justify a longer time.
(iii) Under no circumstances shall estimates for undeveloped reserves be attributable to any acreage for which an application of fluid injection or other improved recovery technique is contemplated, unless such techniques have been proved effective by actual projects in the same reservoir or an analogous reservoir, as defined in paragraph (a)(2) of this section, or by other evidence using reliable technology establishing reasonable certainty.
Additional Definitions:
Deterministic Estimate
The method of estimating reserves or resources is called deterministic when a single value for each parameter (from the geoscience, engineering, or economic data) in the reserves calculation is used in the reserves estimation procedure.
Probabilistic Estimate
The method of estimation of reserves or resources is called probabilistic when the full range of values that could reasonably occur for each unknown parameter (from the geoscience and engineering data) is used to generate a full range of possible outcomes and their associated probabilities of occurrence.
Reasonable Certainty
If deterministic methods are used, reasonable certainty means a high degree of confidence that the quantities will be recovered. If probabilistic methods are used, there should be at least a 90% probability that the quantities actually recovered will equal or exceed the estimate. A high degree of confidence exists if the quantity is much more likely to be achieved than not, and, as changes due to increased availability of geoscience (geological, geophysical, and geochemical), engineering, and economic data are made to estimated ultimate recovery (EUR) with time, reasonably certain EUR is much more likely to increase or remain constant than to decrease.
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