H.J. GRUY AND ASSOCIATES, INC.
- -----------------------------------------------------------------
1200 Smith Street, Suite 3040, Houston, Texas 77002 o FAX (713)
739-6112 o (713) 739-1000
April 6, 1999
XCL, Ltd.
110 Rue Jean Laffitte
Lafayette, Louisiana 70508
Re: Proved Reserves
Zhao Dong Block
98-202-108
Gentlemen:
At your request, we estimated the reserves and future net cash
flow as of January 1, 1999, attributable to interests owned by
XCL, Ltd. (XCL) in the Zhao Dong Block, Bohai Bay, Offshore
Peoples Republic of China. The estimated net reserves, future
net cash flow, and discounted future net cash flow are summarized
by reserve category as follows:
Estimated Estimated
Net Reserves Future Net Cash Flow
_____________ ______________________
Discounted
Oil at 10%
(Barrels) Nondiscounted Per Year
___________ ____________ ___________
Proved Undeveloped 12,837,000 $ 67,683,935 $ 34,679,634
Apache Payment 0 $ 17,583,567 $ 15,189,347
___________ ____________ ___________
Total Proved 12,837,000 $ 85,267,503 $ 49,868,980
The Apache Payment reflects an agreement by Apache China
Corporation LDC to pay XCL China Ltd. sixteen and two-thirds
percent (16 2/3%) of the value of the Foreign contractor's share
of the proved reserves in the Producing Unit(s) located in C
Block (C field) in the Minghuazhen formation.
The discounted future net cash flow is not represented to be the
fair market value of these reserves, and the estimated reserves
included in this report have not been adjusted for uncertainty.
Future net cash flow as presented herein is defined as the future
cash inflow attributable to the evaluated interest in accordance
with the production sharing agreement with the Chinese National
Oil and Gas Exploration and Development Corporation (CNODC).
Future costs of abandoning the facilities and wells, and the
restoration of producing properties to satisfy environmental
standards are not deducted from the cash flow. Future net cash
flow as stated in this report is after consideration of Chinese
National Corporate Income Tax.
In the economic projections, prices, operating costs, and
development costs remain constant for the projected life of each
lease.
Reserves have been estimated from volumetric calculations. The
reserves included in this study are estimates only and should not
be construed as exact quantities. Future conditions may affect
recovery of estimated reserves and cash flow, and all categories
of reserves may be subject to revision as more performance data
become available. The proved reserves in this report conform to
the applicable definitions contained in the Securities and
Exchange Commission Regulation S-X, Rule 4-10(a). The
definitions are included in part as Attachment I.
Extent and character of ownership, oil prices, production data,
direct operating costs, capital expenditure estimates, and other
data provided by XCL have been accepted as represented. No
independent well tests, property inspections, or audits of
operating expenses were conducted by our staff in conjunction
with this study. We did not verify or determine the extent,
character, status, or liabilities, if any, of any current or
possible future detrimental environmental site conditions.
In order to estimate the reserves, costs, and future cash flows
shown in this report, we have relied in part on geological,
engineering, and economic data furnished by our client. Although
we have made a best efforts attempt to acquire all pertinent data
and to analyze it carefully with methods accepted by the
petroleum industry, there is no guarantee that the volumes of oil
or gas or the cash flows projected will be realized.
Production rates may be subject to regulation and contract
provisions and may fluctuate according to market demand or other
factors beyond the control of the operator. The reserve and cash
flow projections presented in this report may require revision as
additional data become available.
We are unrelated to XCL and we have no interest in the properties
included in the information reviewed by us. In particular:
1. We do not own a financial interest in XCL or its oil and
gas properties.
2. Our fee is not contingent on the outcome of our work or
report.
3. We have not performed other services for or have any
other relationship with XCL that would affect our
independence.
If investments or business decisions are to be made in reliance
on these estimates by anyone other than our client, such person
with the approval of our client is invited to visit our offices
at his expense so that he can evaluate the assumptions made and
the completeness and extent of the data available on which our
estimates are based.
Any distribution or publication of this report or any part
thereof must include this letter in its entirety.
Yours very truly,
H.J. GRUY AND ASSOCIATES, INC.
/s/ James H. Hartsock
by: ______________________________
James H. Hartsock, PhD, PE
Executive Vice President
/s/ James F. Vincelette
by: ______________________________
James F. Vincelette
Executive Vice President
Manager of Geology
/s/ Tommy Elkins
by: ______________________________
Tommy Elkins
Petroleum Consultant
Attachment
ATTACHMENT I
DEFINITIONS OF PROVED OIL AND GAS RESERVES1
PROVED OIL AND GAS RESERVES
Proved oil and gas reserves are the estimated quantities of crude
oil, natural gas, and natural gas liquid which geological and
engineering data demonstrate with reasonable certainty to be
recoverable in future years from known reservoirs under existing
economic and operating conditions, i.e., prices and costs as of
the date the estimate is made. Prices include consideration of
changes in existing prices provided only by contractual
arrangements, but not on escalations based upon future
conditions.
Reservoirs are considered proved if economic producibility is
supported by either actual production or conclusive formation
test. The area of a reservoir considered proved includes (A)
that portion delineated by drilling and defined by gas-oil and/or
oil-water contacts, if any, and (B) the immediately adjoining
portions not yet drilled, but which can be reasonably judged as
economically productive on the basis of available geological and
engineering data. In the absence of information on fluid
contacts, the lowest known structural occurrence of hydrocarbons
controls the lower proved limit of the reservoir.
Reserves which can be produced economically through application
of improved recovery techniques (such as fluid injection) are
included in the "proved" classification when successful testing
by a pilot project, or the operation of an installed program in
the reservoir, provides support for the engineering analysis on
which the project or program was based.
Estimates of proved reserves do not include the following: (A)
oil that may become available from known reservoirs but is
classified separately as "indicated additional reserves"; (B)
crude oil, natural gas, and natural gas liquids, the recovery of
which is subject to reasonable doubt because of uncertainty as to
geology, reservoir characteristics, or economic factors; (C)
crude oil, natural gas, and natural gas liquids, that may occur
in undrilled prospects; and (D) crude oil, natural gas, and
natural gas liquids, that may be recovered from oil shales, coal,
gilsonite and other such sources.
PROVED DEVELOPED OIL AND GAS RESERVES
Proved developed oil and gas reserves are reserves that can be
expected to be recovered through existing wells with existing
equipment and operating methods. Additional oil and gas expected
to be obtained through the application of fluid injection or
other improved recovery techniques for supplementing the natural
forces and mechanisms of primary recovery should be included as
"proved developed reserves" only after testing by a pilot project
or after the operation of an installed program has confirmed
through production response that increased recovery will be
achieved.
PROVED UNDEVELOPED RESERVES
Proved undeveloped oil and gas reserves are reserves 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. Reserves on undrilled acreage shall
be limited to those drilling units offsetting productive units
that are reasonably certain of production when drilled. Proved
reserves for other undrilled units can be claimed only where it
can be demonstrated with certainty that there is continuity of
production from the existing productive formation. Under no
circumstances should estimates for proved 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 tests
in the area and in the same reservoir.
________________________
1 Contained in Securities and Exchange Commission Regulation S-X,
Rule 4-10 (a)