Exhibit 99.1
NS •II NETHERLAND, SEWELL t::i& ASSOCIATES, INC WORLDWIDE PETROLEUM CONSULTANTS ENGINEERING • GEOLOGY • GEOPHYSICS • PETROPHYSICS | CHAIRMAN & CEO EXECUTIVE COMMITTEE C.H. (SCOTT) REES Ill P. SCOTT FROST- DALLAS PRESIDENT & COO J. CARTER HENSON, JR.- HOUSTON DANNY D. SIMMONS DAN PAUL SMITH- DALLAS EXECUTIVE VP JOSEPH J. SPELLMAN- DALLAS G LANCE BINDER THOMAS J. TELLA II -DALLAS |
February 22, 2012
Mr. Stephen Hosmer
Royale Energy, Inc.
7676 Hazard Center Drive, Suite 1500
San Diego, California 92108
Dear Mr. Hosmer:
In accordance with your request, we have estimated the proved reserves and future revenue, as of December 31, 2011, to the Royale Energy, Inc. (Royale) interest in certain oil and gas properties located in California, Louisiana, Oklahoma, and Texas, as listed in the accompanying tabulations. We completed our evaluation on or about the date of this letter. It is our understanding that the proved reserves estimated in this report constitute all of the proved reserves owned by Royale. The estimates in this report have been prepared in accordance with the definitions and regulations of the U.S. Securities and Exchange Commission (SEC) and, with the exception of the exclusion of future income taxes, conform to the FASB Accounting Standards Codification Topic 932, Extractive Activities-Oil and Gas. Definitions are presented immediately following this letter.
As presented in the accompanying summary projections, Tables I through IV, we estimate the net reserves and future net revenue to the Royale interest in these properties, as of December 31, 2011, to be:
| | | Net Reserves | | | Future Net Revenue (M$) | |
| | | Oil | | | Gas | | | | | | Present Worth | |
| Category | | (MBBL) | | | (MMCF) | | | Total | | | at 10% | |
| | | | | | | | | | | | | |
| Proved Developed Producing | | | 5.0 | | | | 1,287.0 | | | | 2,435.8 | | | | 1,959.1 | |
| Proved Developed Non-Producing | | | 0.0 | | | | 2,298.1 | | | | 5,550.8 | | | | 3,250.3 | |
| Proved Undeveloped | | | 0.0 | | | | 395.8 | | | | 501.4 | | | | 253.9 | |
| | | | | | | | | | | | | | | | | |
| Total Proved | | | 5.0 | | | | 3,980.8 | | | | 8,488.0 | | | | 5,463.3 | |
Totals may not add because of rounding.
The oil reserves shown include crude oil and condensate. Oil volumes are expressed in thousands of barrels (MBBL); a barrel is equivalent to 42 United States gallons. Gas volumes are expressed in millions of cubic feet (MMCF) at standard temperature and pressure bases.
The estimates shown in this report are for proved reserves. No study was made to determine whether probable or possible reserves fnight be established for these properties. This report does not include any value that could be attributed to interests in undeveloped acreage beyond those tracts for which undeveloped reserves have been estimated. 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. As shown in the Table of Contents, this report includes reserves and economics data for each reserves category; these data include a summary projection of reserves and revenue along with one-line summaries of basic data, reserves, and economics by lease.
4500 THANKSGIVING TOWER·1601 ELM STREET·DALLAS, TEXAS 75201-4754 • PH: 214-969-5401 • FAX: 214-969-5411 1221 LAMAR STREET, SUITE 1200 ·HOUSTON, TEXAS 77010-3072 • PH: 713-654-4950 • FAX: 713-654-4951 | nsai@nsai-petro.com nethertandsewell.com |
 | II NETHERLAND, SEWELL il!i & ASSOCIATES, INC. |
Gross revenue shown in this report is Royale's share of the gross (100 percent) revenue from the properties prior to any deductions. Future net revenue is after deductions for Royale's share of production taxes and ad valorem taxes, capital costs, and operating expenses but before consideration of any income taxes. The future net revenue has been discounted at an annual rate of 10 percent to determine its present worth, which is shown to indicate the effect of time on the value of money. Future net revenue presented in this report, whether discounted or undiscounted, should not be construed as being the fair market value of the properties.
Prices used in this report are based on the 12-month unweighted arithmetic average of the first-day-of-the-month price for each month in the period January through December 2011. For oil volumes, the average West Texas Intermediate posted price of $92.71 per barrel is adjusted by lease for quality, transportation fees, and regional price differentials. For gas volumes, the average PG&E city-gate spot price of $4.345 per MMBTU is used for the California properties and the average Henry Hub spot price of $4.118 per MMBTU is used for all other properties. Gas prices are adjusted by lease for energy content, transportation fees, and regional price differentials. All prices are held constant throughout the lives of the properties. The average adjusted product prices weighted by production over the remaining lives of the properties are $103.26 per barrel of oil and $4.101 per MCF of gas.
Operating costs used in this report are based on operating expense records of Royale. For nonoperated properties, these costs include the per-well overhead expenses allowed under joint operating agreements along with estimates of costs to be incurred at and below the district and field levels. As requested, operating costs for the operated properties include only direct lease- and field-level costs and Royale's estimate of the portion of its headquarters general and administrative overhead expenses necessary to operate the properties. Operating costs are held constant throughout the lives of the properties.
Capital costs used in this report were provided by Royale and 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. Based on our understanding of Royale's future development plans, a review of the records provided to us, and our knowledge of similar properties, we regard these estimated capital costs to be reasonable. Our estimates do not include any salvage value for the lease and well equipment or the cost of abandoning the properties. It is our understanding that Royale has fully prefunded accounts that meet or exceed its estimates of abandonment costs for the properties, net of any salvage value.
For the purposes of this report, we did not perform any field inspection of the properties, nor did we examine the mechanical operation or condition of the wells and facilities. We have not investigated possible environmental liability related to the properties; therefore, our estimates do not include any costs due to such possible liability.
We have made no investigation of potential gas volume and value imbalances resulting from overdelivery or underdelivery to the Royale interest. Therefore, our estimates of reserves and future revenue do not include adjustments for the settlement of any such imbalances; our projections are based on Royale receiving its net revenue interest share of estimated future gross gas production.
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, our estimates are based on certain assumptions including, but not limited to, that the properties will be developed consistent with current development plans, 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 our 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 this report.
| II NETHERLAND, SEWELL il!i & ASSOCIATES, INC. |
For the purposes of this report, we used technical and economic data including, but not limited to, well logs, geologic maps, seismic data, well test data, production data, historical price and cost information, and property ownership interests. The reserves in this report have been estimated using deterministic methods; these estimates have been prepared in accordance with the Standards Pertaining to the Estimating and Auditing of Oil and Gas Reserves Information promulgated by the Society of Petroleum Engineers (SPE Standards). We used standard engineering and geoscience methods, or a combination of methods, including performance analysis, volumetric analysis, and analogy, that we considered to be appropriate and necessary to categorize and estimate reserves in accordance with SEC definitions and regulations. As in all aspects of oil and gas evaluation, there are uncertainties inherent in the interpretation of engineering and geoscience data; therefore, our conclusions necessarily represent only informed professional judgment.
The data used in our estimates were obtained from Royale, other interest owners, various operators of the properties, public data sources, and the nonconfidential files of Netherland, Sewell & Associates, Inc. (NSAI) and were accepted as accurate. Supporting geoscience, performance, and work data are on file in our office. The titles to the properties have not been examined by NSAI, nor has the actual degree or type of interest owned been independently confirmed. 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. We are independent petroleum engineers, geologists, geophysicists, and petrophysicists; we do not own an interest in these properties nor are we employed on a contingent basis.
Sincerely,
NETHERLAND, SEWELL & ASSOCIATES, INC.
Texas Registered Engineering Firm F-2699
By: /s/ C.H. (Scott) Rees III
C.H. (Scott) Rees III, P.E.
Chairman and Chief Executive Officer
| By: /s/ J. Carter Henson, Jr. | By: /s/ Mike K. Norton | By: /s/ David T. Miller |
| J. Carter Henson, Jr. | Mike K. Norton | David T. Miller |
| Texas P.E. 73964 | Texas P.G. 441 | Louisiana P.E. 22695 |
| Senior Vice President | Senior Vice President | Vice President |
| | | |
| Date Signed: February 22, 2012 | Date Signed: February 22, 2012 | Date Signed: February 22, 2012 |
JMG:MSS
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