estimates are within the recommended 10 percent tolerance threshold set forth in the SPE Standards. We are satisfied with the methods and procedures used by Talos in preparing the December 31, 2017, estimates of reserves and future revenue, and we saw nothing of an unusual nature that would cause us to take exception with the estimates, in the aggregate, as prepared by Talos.
Reserves categorization conveys the relative degree of certainty; reserves subcategorization is based on development and production status. The estimates of reserves and future revenue included herein have not been adjusted for risk. Talos’s estimates do not include possible reserves that may exist for these properties, nor do they include any value for undeveloped acreage beyond those tracts for which undeveloped reserves have been estimated.
Prices used by Talos are based on the12-month unweighted arithmetic average of thefirst-day-of-the-month price for each month in the period January through December 2017. For oil and NGL volumes, the average West Texas Intermediate spot price of $51.34 per barrel is adjusted by field for quality, transportation fees, and market differentials. For gas volumes, the average Henry Hub spot price of $2.98 per MMBTU is adjusted by field for energy content, transportation fees, and market differentials. All prices are held constant throughout the lives of the properties. Average adjusted product prices weighted by production over the remaining lives of the properties are shown for each category in the following table:
| | | | | | | | | | | | |
| | | Average Adjusted Prices | |
| | | Oil | | | NGL | | | Gas | |
Category | | ($/Barrel) | | | ($/Barrel) | | | ($/MCF) | |
Proved | | | 51.36 | | | | 24.64 | | | | 3.20 | |
Probable | | | 51.40 | | | | 24.64 | | | | 3.20 | |
Operating costs used by Talos are based on historical operating expense records. These costs include theper-well overhead expenses allowed under joint operating agreements along with estimates of costs to be incurred at and below the district and field levels. Operating costs have been divided into field-level costs,per-well costs, andper-unit-of-production costs. The field-level costs are allocated by month among the proved reserves categories based on the proportionate share of the total proved future net revenue. Talos’s estimates of proved developed producing reserves and revenue are consequently dependent on completion of the proved drilling and workover programs. Headquarters general and administrative overhead expenses of Talos are included to the extent that they are covered under joint operating agreements for the operated properties. Capital costs used by Talos are based on authorizations for expenditure and actual costs from recent activity. Capital costs are included as required for workovers, new development wells, and production equipment. Abandonment costs used are Talos’s estimates of the costs to abandon the wells, platforms, and production facilities; these estimates do not include any salvage value for the lease and well equipment. Operating, capital, and abandonment costs are not escalated for inflation.
The reserves shown in this report are estimates only and should not be construed as exact quantities. Proved reserves are those quantities of oil and gas which, by analysis of engineering and geoscience data, can be estimated with reasonable certainty to be economically producible; probable and possible reserves are those additional reserves which are sequentially less certain to be recovered than proved reserves. Estimates of reserves may increase or decrease as a result of market conditions, future operations, changes in regulations, or actual reservoir performance. In addition to the primary economic assumptions discussed herein, estimates of Talos and NSAI are based on certain assumptions including, but not limited to, that the properties will be developed consistent with current development plans as provided to us by Talos, that the properties will be operated in a prudent manner, that no governmental regulations or controls will be put in place that would impact the ability of the interest owner to recover the reserves, and that projections of future production will prove consistent with actual performance. If the reserves are recovered, the revenues therefrom and the costs related thereto could be more or less than the estimated amounts. Because of governmental policies and uncertainties of supply and demand, the sales rates, prices received for the reserves, and costs incurred in recovering such reserves may vary from assumptions made while preparing these estimates.
