SUMMARY REPORT
dated
FEBRUARY 28, 1996
on
RESERVES and REVENUE
as of
DECEMBER 31, 1995
from
CERTAIN PROPERTIES
owned by
MESA OPERATING CO.
MESA HOLDING CO.
and
HUGOTON MANAGEMENT CO.
MESA Inc. has prepared estimates, as of December 31, 1995, of the extent
and value of the proved crude oil, condensate, natural gas liquids, natural
gas, helium, and carbon dioxide reserves of certain properties owned by
Mesa Operating Co. (MOC), Mesa Holding Co. (MHC) and Hugoton Management Co.
(HMC). MESA Inc., a Texas corporation, is the sole owner of three
subsidiary corporations as of the date hereof. These three subsidiaries
are:
1. MOC, which holds title to most of the appraised properties and a
98.6 percent interest in Hugoton Capital Limited Partnership
(HCLP);
2. MHC, which holds .9 percent of HCLP; and
3. HMC, which holds .5 percent of HCLP.
Together, MOC, MHC and HMC own 100 percent of HCLP, which owns most of the
appraised properties in the Hugoton and Panoma fields. Tabulations of
reserves and revenue from the Texas Panhandle properties, all minor
properties, and Mesa Offshore Trust properties included in this report show
the interest of MESA Inc. while tabulations of reserves and revenue from
the Hugoton Area and the Mesa Royalty Trust properties show the collective
interests of Hugoton Capital Limited Partnership hereinafter referred to as
"HCLP". The properties appraised are in the property groups listed below.
The HCLP Hugoton Area - Kansas Hugoton and Panoma Fields
HCLP Share - Mesa Royalty Trust Properties
The Hugoton Area (non-HCLP Royalties)
The Texas Panhandle - Contract "B" and Royalty
The Texas Panhandle - Other
Remaining MESA interests in the Mesa Offshore Trust Properties.
The Gulf Coast Area
The Rocky Mountain Area
The HCLP share - Mesa Royalty Trust Properties are located in the Hugoton
and Panoma fields in Kansas. These properties are burdened by a 10.29282
percent net royalty interest owned by the Mesa Royalty Trust and a .0057
percent overriding royalty interest owned by others. The remaining MESA
Inc. interests in the Mesa Offshore Trust Properties consist of the
remaining interests of MESA Inc. after the transfer (effective December 1,
1982) to the Mesa Offshore Royalty Partnership, a partnership owned 99.99
percent by the Mesa Offshore Trust, of a 90 percent net profits interest in
10 MESA Inc. leases located in the Gulf of Mexico offshore from Louisiana
and Texas.
The reserve estimates are based on a detailed study of MESA Inc.'s
properties. The method or combination of methods utilized in the analysis
of each reservoir was tempered by experience in the area, stage of
development quality and completeness of basic data, and production history.
Reserves in this report are expressed as net reserves. Gross reserves are
defined as the total estimated petroleum hydrocarbons including helium
remaining to be produced after December 31, 1995. Net reserves are defined
as that portion of the gross reserves attributable to the interest owned by
MESA Inc. after deducting royalties and other interests owned by others.
In making these reserve estimates, all interest reversions were taken into
account.
Values shown herein are expressed in terms of future gross revenue, future
net revenue, and present worth. Future gross revenue is that revenue which
will accrue to the appraised interests from the production and sale of the
estimated net reserves. Future net revenue is calculated by deducting
estimated production taxes, ad valorem taxes, operating expenses, and
capital costs from the future gross revenue. Future income tax expenses
were not taken into account in the preparation of these estimates. Present
worth is defined as future net revenue discounted at a specified arbitrary
discount rate compounded monthly over the expected period of realization.
In this report, present worth values using a discount rate of 10 percent
are reported.
Estimates of reserves and future net revenue should be regarded only as
estimates that may change as further production history and additional
information become available. Not only are such reserve and revenue
estimates based on that information which is currently available, but such
estimates are also subject to the uncertainties inherent in the application
of judgmental factors in interpreting such information.
Data used in the preparation of MESA Inc.'s portion of this report were
obtained from MESA Inc.'s records and from reports filed with the
regulatory agencies of the states or areas in which the properties are
located.
The development status shown herein represents the status applicable on
December 31, 1995. In the preparation of the study, data available from
wells drilled on the appraised properties through December 31, 1995 were
used in estimating gross ultimate recovery. Gross production estimated to
December 31, 1995, was deducted from gross ultimate recovery to arrive at
the estimates of gross reserves. In some fields, this required that the
production rates be estimated for up to seven months since production data
for certain properties were available only through May 1995.
Reserves and revenue values shown in this report for the HCLP Share - Mesa
Royalty Trust Properties and the Remaining MESA Inc. interests in the Mesa
Offshore Trust Properties were estimated from projections of reserves and
revenue attributable to the combined HCLP Share and Mesa Royalty Trust
interests or the combined Remaining MESA Inc. and Mesa Offshore Royalty
Partnership interests. Reserves attributable to the trust interests in
each of the royalty trusts were estimated by allocating a portion of the
estimated combined net reserves of each of the property groups based on
future net revenue. The estimated reserves for each of the trusts were
subtracted from the combined net reserves for each trust to arrive at the
estimated reserves of MESA Inc. and HCLP in the trust properties.
Since the reserve volumes attributable to the MESA Inc. interests in the
trust properties are estimated using an allocation of reserves based on
estimates of future revenue, a change in prices or costs will result in
changes in the estimated reserves of MESA Inc. and HCLP.
Petroleum reserves included in this report are classified as proved and are
judged to be economically producible in future years from known reservoirs
under existing economic and operating conditions and assuming continuation
of current regulatory practices using conventional production methods and
equipment. In the analyses, reserves were estimated only to the limit of
economic rates of production under existing economic and operating
conditions using prices and costs as of the date the estimate is made,
including consideration of changes in existing prices provided only by
contractual arrangements but not including escalations based upon future
conditions. The petroleum reserves are classified as follows:
Proved - Reserves that have been proved to a high degree of
certainty by analysis of the producing history of a reservoir
and/or by volumetric analysis of adequate geological and
engineering data. Commercial productivity has been established
by actual production, successful testing, or in certain cases by
favorable core analyses and electrical-log interpretation when
the producing characteristics of the formation are known from
nearby fields. Volumetrically, the structure, areal extent,
volume, and characteristics of the reservoir are well defined by
a reasonable interpretation of adequate subsurface well control
and by known continuity of hydrocarbon-saturated material above
known fluid contacts, if any, or above the lowest known structural
occurrence of hydrocarbons.
Developed - Reserves that are recoverable from existing
wells with current operating methods and expenses.
Developed reserves include both producing and nonproducing
reserves. Estimates of producing reserves assume recovery by
existing wells producing from present completion intervals with
normal operating methods and expenses. Developed nonproducing
reserves are in reservoirs behind the casing or at minor depths
below the producing zone and are considered proved by production
from other wells in the field, by successful drill-stem tests,
or by core analyses from the particular zones. Nonproducing
reserves require only moderate expense to be brought into
production.
Undeveloped - Reserves that are recoverable from additional wells
yet to be drilled.
Undeveloped reserves are those considered proved for production
by reasonable geological interpretation of adequate subsurface
control in reservoirs that are producing or proved by other wells
but are not recoverable from existing wells. This classification
of reserves requires drilling of additional wells, major deepening
of existing wells, or installation of enhanced recovery or other
facilities.
Reserves recoverable by enhanced recovery methods, such as injection of
external fluids to provide energy not inherent in the reservoirs, may be
classified as proved developed or proved undeveloped reserves depending
upon the extent to which such enhanced recovery methods are in operation.
These reserves are considered to be proved only in cases where a successful
fluid-injection program is in operation, a pilot program indicates
successful fluid injection, or information is available concerning the
successful application of such methods in the same reservoir and it is
reasonably certain that the program will be implemented.
Nonhydrocarbon helium and carbon dioxide reserves were classified using the
same standards as those described in the foregoing definitions of petroleum
reserves. Because these two gases are mixed in and produced with the
natural gas reserves, the term gas as used herein applies to all three
gases, where appropriate, and the term natural gas is used to refer to
hydrocarbon gas.
Estimates of the net proved reserves of MESA Inc, as of December 31, 1995,
are as follows:
TOTAL PROVED RESERVES
Natural Gas (MMcf)............ 1,218,029
Oil and Condensate (Mbbl)..... 9,521
Natural Gas Liquids (Mbbl).... 101,897
Helium (Mmcf)................. 3,670
Carbon Dioxide (Mmcf)......... 46,459
PROVED DEVELOPED RESERVES
Natural Gas (MMcf)............ 1,160,751
Oil and Condensate (Mbbl)..... 8,138
Natural Gas Liquids (Mbbl).... 97,060
Helium (MMcf)................. 3,630
Carbon Dioxide (MMcf) 16,308
Significant proved natural gas liquids reserves and helium reserves are
included herein for the Satanta plant in the Hugoton field in Kansas.
Proved helium reserves also are included for a helium recovery unit at the
Fain gas processing plant in the Panhandle field in Texas. Changes in
Hugoton field reserves reflect MESA's practice of recovering ethane at the
Satanta Plant. In previous years Hugoton proved reserve estimates were
prepared assuming that MESA would not recover ethane which resulted in
slightly higher natural gas volumes and lower natural gas liquids volumes.
The decision as to whether or not to recover ethane is economic and based
on the relative value of ethane as a liquid versus the energy-equivalent
value of such ethane if left in the residue natural gas. In the future, if
economic conditions warrant, MESA may revise proved reserves to reflect any
changes in such relative values.
The KCC held hearings from August 1992 to September 1993 to consider
changes to the methods in which fieldwide allowables are allocated among
individual wells within the Hugoton field. Specifically, the KCC
considered proposals from various producers to amend calculations of well
deliverability, the allocation of allowables for infilled units, and the
make up of underages from prior periods. On February 2, 1994, the KCC
issued an order, effective as of April 1, 1994, establishing new field
rules which modify the formulas and calculations used to allocate
allowables among wells in the field. The standard pressure used in each
wells' calculated deliverability was reduced by 35%, greatly benefitting
MESA Inc. high deliverability wells. Also, the new rules assign a 30%
greater allowable to 640-acre units with infill wells than similar units
without infill wells. Essentially all of MESA Inc. Hugoton infill wells
have been drilled, resulting in an increase to MESA Inc. in assigned
allowables beginning in April, 1994. The new field rules also allow
Hugoton producers to make up pre-1994 canceled underages over a 10-year
period.
MESA Inc. is continuing to upgrade the well-gathering system, which
improves deliverability of the wells. This increase in deliverability and
the associated costs have been incorporated in the estimates included
herein.
With the exception of a few properties in this report known as the "Texas
Panhandle - Other," the West Panhandle field properties are subject to an
operating agreement with Colorado Interstate Gas Company, hereinafter
referred to as "CIG." The properties subject to this agreement are
collectively referred to as the "B" Contract area. MESA Inc.'s share of
the "B" Contract area gas is processed through MESA Inc.'s Fain gasoline
plant in Potter County, Texas, and is subject to special royalty payments.
An agreement effective January 1, 1991, allocates 77 percent of the
remaining production from the "B" Contract properties to MESA Inc. and the
remaining 23 percent to CIG. CIG receives a 20-percent overriding royalty
interest on MESA Inc.'s share of the helium produced at this plant.
Agreements reached by MESA Inc. and CIG during 1993 provide that MESA Inc.
is entitled to a maximum of 32 Bcf at the Fain plant inlet for each of the
years 1994, 1995, and 1996, with CIG having the rights to the remainder of
the "B" Contract production in these years. CIG is entitled to a maximum
of 8.5 Bcf for each of the years 1997, 1998, and 1999, with MESA Inc. being
entitled to take the rest of the "B" Contract production in these years.
CIG's maximum take for the year 2000 is 7.56 Bcf, with a maximum of 7.0 Bcf
in years thereafter, until it has produced the full 23 percent of the
January 1, 1991, reserves to which it is entitled. In addition to its gas
take limitations, CIG has the right to take gas for use as field fuel until
July 2000. The projected volumes in this report assume that MESA Inc. will
take the maximum volume to which it is entitled under the contract, for as
long as the projection of allowables and deliverability will permit, after
which the projected deliverability is used. MESA Inc. can sell its share
of the "B" Contract gas to markets anywhere, whether inside or outside of
the City of Amarillo or inside or outside of the State of Texas. MESA
actual takes were 31 Bcf in 1994, and 29 Bcf in 1995. Takes were lower in
1995 due to weather related demand.
Since January 1, 1991, CIG has overproduced its 23 percent share of the
gas. This overproduction of gas by CIG and the subsequent gas balancing
has been accounted for in this report by adjusting MESA Inc.'s gas
interests in the "B" Contract Area over time. For accounting purposes, the
CIG gas imbalance discussed above is treated as production
income to MESA Inc. at the time CIG produced the gas; this revenue is then
recorded as an account receivable from CIG. This difference in treatment
must be considered when using this report with the accounting records. The
cumulative gas imbalance as of December 31, 1995 is tabulated below. These
amounts have not been deducted from this report.
Net Salable Gas, Mcf.............. 15,887,261
Net Natural Gas Liquids, Bbl...... 2,275,114
Net Condensate, Bbl............... 30,138
Net Helium, Mcf................... 75,069
Under a workover plan in the "B" Contract Area, approximately 357 wells
were worked over, deepened, or redrilled during the past six years. The
workover plan, a continuing project, is reevaluated each year to determine
the following year's work. This report includes proved reserves to be
developed over the next three years from zones below current completions in
66 wells. Also, MESA has added 10 development field extension wells in the
shallower West Panhandle (Red Cave) field which will be developed during
1996. MESA Inc. expects that numerous compressors will be installed on the
gathering system for this field near the wellheads to improve gas
deliverability. Approximately 155 compressors are currently installed and
we have assumed that 150 compressors will be installed during the next
three years.
The expected acceleration of production from these programs has been
incorporated in the estimated production rates. The expense of these
programs initially will be paid by CIG but will be repaid by MESA Inc. As
provided by the operating agreement between MESA Inc. and CIG, this
repayment has been amortized herein over the remaining lives of the
properties on a unit-of-production basis.
Future oil and gas producing rates estimated for this report are based on
production rates considering the most recent figures available. The rates
used for future production are rates that are believed to be within the
capacity of the well or reservoir to produce. Information on proration of
gas production has been considered in arriving at the rates projected.
Gas volumes are expressed at a temperature of 60 degrees Fahrenheit and at
the legal pressure base of the states in which the gas reserves are
located. Gross volumes are reported as wet gas and the net volumes are
reported as salable gas; however, neither the gross nor net volumes were
reduced for plant fuel usage, which is estimated to be 43.7 billion cubic
feet of gross wet gas. The value of this fuel is deducted as part of the
plant operating costs. Condensate reserves estimated herein are those to
be obtained by conventional lease separation.
Revenue values in this report were estimated using current prices and
costs. Future prices were estimated using guidelines established by the
Securities and Exchange Commission and the Financial Accounting Standards
Board. The initial and future prices and producing rates used in this
report are those that MESA Inc. can reasonably expect to be received over
the life of the properties. The assumptions used for estimating future
prices and costs are as follows:
Oil and Condensate Prices
- -------------------------
Oil and condensate prices were held constant for the life of the
properties.
Natural Gas, Helium, and Carbon Dioxide Prices
- ----------------------------------------------
Natural gas prices were held constant for the life of the properties except
for some 75 percent of the gas in the Texas Panhandle field.
Under existing contractual arrangements in the Panhandle properties, about
75 percent of the total gas is sold to Energas under a long-term contract.
In 1992, MESA Inc. and Energas negotiated a new pricing formula for the
next five years of gas sales to Energas. Seventy percent of the gas sold
to Energas will be sold at a fixed price that escalates by a total of $0.75
per thousand cubic feet from 1993 to 1997. The remaining 30 percent of
such gas will be sold at the "spot-market" gas price plus $0.10 per
thousand cubic feet. The pricing formula will be renegotiated for periods
after 1997. In this report, the prices applicable under the current
contract pricing formula were used through 1997. Beginning in 1998, the
1996 weighted average price was applied to the subsequent Energas sales.
Helium and carbon dioxide prices were held constant for the life of the
properties.
Natural Gas Liquids Prices
- --------------------------
Natural gas liquids prices were held constant for the life of the
properties.
Operating and Capital Costs
- ---------------------------
Estimates of operating costs based on current costs were used for the life
of the properties with no increases in the future based on inflation.
Future capital expenditures were estimated using 1995 values and were not
adjusted for inflation.
Oil and condensate production taxes were calculated using net removal
prices after deducting transportation charges.
Economic estimates were made, as of December 31, 1995, under the
aforementioned assumptions concerning future prices and costs and are
summarized as follows:
Future Gross Revenue (M$)........... 3,804,371
Production Taxes (M$)............... (100,230)
Ad Valorem Taxes (M$)............... (192,035)
Operating Costs (M$)................ (965,692)
Capital Costs (M$).................. (96,594)
Future Net Revenue (M$)(1).......... 2,449,820
Present Worth at 10 Percent (M$)(1). 1,040,413
(1) Future income tax expenses were not taken into account in
the preparation of these estimates.
Included above is revenue from nonhydrocarbon reserves (helium and carbon
dioxide) that will be produced with and separated from certain natural gas
as it is produced. It is estimated that about 3 percent of the present
worth shown above is attributable to this planned helium and carbon dioxide
recovery.
The information relating to estimated proved reserves, estimated future net
revenue from proved reserves, and present worth of estimated future net
revenue from proved reserves of oil, condensate, natural gas liquids, and
gas contained in this report has been prepared in accordance with
Paragraphs 10-13, 15 and 30(a)-(b) of Statement of Financial Accounting
Standards No. 69 (November 1982) of the Financial Accounting Standards
Board and Rules 4-10(a)(1)-(13) of Regulation S-X and Rule 302(b) of
Regulation S-K of the Securities and Exchange Commission; provided,
however, certain estimated data have not been provided with respect to
changes in reserve information, (i) future income tax expenses have not
been taken into account in estimating the future net revenue and present
worth values set forth herein, and (ii) minor amounts of revenue from
nonhydrocarbon gases are included herein.
To the extent the above-enumerated rules, regulations, and statements
require determinations of an accounting or legal nature or information
beyond the scope of this report, MESA Inc. is necessarily unable to express
an opinion as to whether the above-described information is in accordance
therewith or sufficient therefor.
Submitted,
/s/ Dennis E. Fagerstone
- ------------------------------------------
Dennis E. Fagerstone
Vice President-Exploration and Production
Signed: /s/ Dennis E. Fagerstone
---------------------------------