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EXHIBIT 99(a)
February 3, 1998
Pennzoil Company
Post Office Box 2967
Houston, Texas 77001
Gentlemen:
At your request we have prepared an estimate of the reserves, future
production, and income attributable to certain leasehold and royalty interests
of Pennzoil Company including Pennzoil Exploration and Production Company,
Pennzoil Caspian Corporation, Pennzoil Venezuela Incorporated and Pennzoil
Products Company (collectively referred to herein as the Company) as of December
31, 1997. In accordance with the requirements of FASB 69, our estimates of the
Company's net proved reserves as of December 31, 1994, 1995, 1996, and 1997, as
contained in this report and our previous reports, are presented in attached
Table No. 1 together with a tabulation of the components of the differences in
the estimates as of such dates. The Company's reserves in the United States are
located in all the main producing states (except Alaska), and in state and
federal waters offshore California, Louisiana, and Texas. The Company's foreign
reserves are located in Venezuela and Azerbaijan.
The estimated reserve volumes and future income amounts presented in this
report are related to hydrocarbon prices. December 1997 hydrocarbon prices were
used in the preparation of this report as required by Securities and Exchange
Commission (SEC) and Financial Accounting Standards Bulletin No. 69 (FASB 69)
guidelines; however, actual future prices may vary significantly from December
1997 prices. Therefore, volumes of reserves actually recovered and amounts of
income actually received may differ significantly from the estimated quantities
presented in this report. Our estimates of the proved net reserves attributable
to the interests of the Company as of December 31, 1997 are shown below:
PROVED NET RESERVES
AS OF DECEMBER 31, 1997
----------------------------
LIQUID, BARRELS GAS, MMCF
--------------- ---------
Developed and Undeveloped
United States................................... 152,311,973 1,054,369
Foreign......................................... 75,184,915 4,418
----------- ---------
Total Worldwide......................... 227,496,888 1,058,787
Developed
United States................................... 127,838,778 963,554
Foreign......................................... 14,018,093 4,418
----------- ---------
Total Worldwide......................... 141,856,871 967,972
The "Liquid" reserves shown above are comprised of crude oil, condensate,
and natural gas liquids. Natural gas liquids comprise 20 percent of the
Company's developed liquid reserves and 13 percent of the Company's developed
and undeveloped liquid reserves. All hydrocarbon liquid reserves are expressed
in standard 42 gallon barrels. All gas volumes are hydrocarbon sales gas
expressed in MMCF at the pressure and temperature bases of the area where the
gas reserves are located. Our estimates of hydrocarbon sales gas reserves as of
December 31, 1997 do not include 177,684 MMCF of carbon dioxide which is also
sales gas. Revenues from carbon dioxide sales are included in our estimates of
future cash inflows as of December 31, 1997. In addition, the Company owns
40,210 long tons of sulfur reserves as of December 31, 1997 which are not shown
above; however, the revenue from these sulfur reserves is included in the cash
inflow data in this report. Our estimates of proved net reserves as of December
31, 1997 include 21,261,444 barrels and 4,418 MMCF for Pennzoil Venezuela, Inc.
for which the Company has a contract to develop and produce but does not have
actual ownership of the hydrocarbons.
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February 3, 1998
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The proved reserves presented in this report comply with the SEC's
Regulation S-X Part 210.4-10 Sec. (a) as clarified by subsequent Commission
Staff Accounting Bulletins, and are based on the following definitions and
criteria:
Proved reserves of crude oil, condensate, natural gas, and natural gas
liquids are estimated quantities that geological and engineering data
demonstrate with reasonable certainty to be recoverable in the future from
known reservoirs under existing 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 escalation based on future conditions. Reservoirs are considered
proved if economic producibility is supported by either actual production
or conclusive formation test. In certain instances, proved reserves are
assigned on the basis of a combination of core analysis and electrical and
other type logs which indicate the reservoirs are analogous to reservoirs
in the same field which are producing or have demonstrated the ability to
produce on a formation test. The area of a reservoir considered proved
includes (1) that portion delineated by drilling and defined by fluid
contacts, if any, and (2) the adjoining portions not yet drilled that can
be reasonably judged as economically productive on the basis of available
geological and engineering data. In the absence of data on fluid contacts,
the lowest known structural occurrence of hydrocarbons controls the lower
proved limit of the reservoir. Reserves that can be produced economically
through the application of improved recovery techniques are included in the
proved classification when these qualifications are met: (1) 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, and (2) it is reasonably certain the project
will proceed. Improved recovery includes all methods for supplementing
natural reservoir forces and energy, or otherwise increasing ultimate
recovery from a reservoir, including (1) pressure maintenance, (2) cycling,
and (3) secondary recovery in its original sense. Improved recovery also
includes the enhanced recovery methods of thermal, chemical flooding, and
the use of miscible and immiscible displacement fluids. Proved natural gas
reserves are comprised of non-associated, associated and dissolved gas. An
appropriate reduction in gas reserves has been made for the expected
removal of natural gas liquids, for lease and plant fuel, and for the
exclusion of non-hydrocarbon gases if they occur in significant quantities
and are removed prior to sale. Estimates of proved reserves do not include
crude oil, natural gas, or natural gas liquids being held in underground or
surface storage. Proved reserves are estimates of hydrocarbons to be
recovered from a given date forward. They may be revised as hydrocarbons
are produced and additional data become available.
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.
Developed reserves may be subcategorized as producing or non-producing
using the SPE/WPC Definitions:
Producing
Reserves sub-categorized as producing are expected to be recovered from
completion intervals which are open and producing at the time of the
estimate. Improved recovery reserves are considered producing only after
the improved recovery project is in operation.
Non-Producing
Reserves sub-categorized as non-producing include shut-in and behind
pipe reserves. Shut-in reserves are expected to be recovered from (1)
completion intervals which are open at the time of the estimate but
which have not started producing, (2) wells which were shut-in for
market conditions or pipeline connections, or (3) wells not capable of
production for mechanical reasons.
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February 3, 1998
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Behind pipe reserves are expected to be recovered from zones in existing
wells, which will require additional completion work or future
recompletion prior to the start of production.
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 reasonable certainty that there is continuity of
production from the existing productive formation. Estimates for proved
undeveloped reserves are attributable to any acreage for which an
application of fluid injection or other improved technique is contemplated,
only when such techniques have been proved effective by actual tests in the
area and in the same reservoir.
Because of the direct relationship between volumes of proved undeveloped
reserves and development plans, we include in the proved undeveloped category
only reserves assigned to undeveloped locations that we have been assured will
definitely be drilled and reserves assigned to the undeveloped portions of
secondary or tertiary projects which we have been assured will definitely be
developed.
The Company has interests in certain tracts which have substantial
additional hydrocarbon quantities which cannot be classified as proved and
consequently are not included herein. The Company has active exploratory and
development drilling programs which may result in the reclassification of
significant additional volumes to the proved category.
In accordance with the requirements of FASB 69, our estimates of future
cash inflows, future costs, and future net cash inflows before income tax as of
December 31, 1997 from this report and as of December 31, 1996 from our previous
report are presented below.
TOTAL WORLDWIDE
AS OF DECEMBER 31(1)(2)
-------------------------------
1997 1996
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Future Cash Inflows............................ $5,807,484,505 $8,958,482,749
Future Costs
Production................................... $1,925,735,766 $2,266,664,101
Development.................................. 544,076,586 490,063,774
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Total Costs.......................... $2,469,812,352 $2,756,727,875
Future Net Cash Inflows Before Income Tax...... $3,337,672,153 $6,201,754,874
Present Value at 10% Before Income Tax......... $2,052,998,650 $3,967,371,608
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(1) The cash inflow data for December 31, 1997 include revenues from 177,684 net
MMCF of carbon dioxide reserves which have a future net cash inflow before
income tax of $70,271,184 and present value at 10 percent before income tax
of $21,362,976. The cash inflow data for December 31, 1996 include revenues
from 181,855 net MMCF of carbon dioxide reserves which have a future net
cash inflow before income tax of $56,210,214 and present value at 10 percent
before income tax of $19,770,225.
(2) The cash inflow data for December 31, 1997 includes net cash inflow before
income tax of $28,467,080 and present value at 10 percent before income tax
of $5,453,598 attributable to Pennzoil Venezuela, Inc.
Our estimates as of December 31, 1997 and 1996 of future cash inflows,
future costs, future net cash inflows before income tax, and present value at 10
percent before income tax are shown individually for total worldwide, total
United States (onshore and offshore), and foreign areas in Table No. 2 which is
attached.
The future cash inflows are gross revenues before any deductions. The
production costs were based on current data and include production taxes in the
United States, certain foreign taxes where applicable, ad
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February 3, 1998
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valorem taxes, and certain other items such as transportation and processing
costs, in addition to the operating costs directly applicable to the individual
leases or wells. The development costs were based on current data and include
certain dismantlement and abandonment costs net of salvage for properties where
such costs are relatively significant.
The Company furnished us with gas prices in effect at December 31, 1997 and
with its forecasts of future gas prices which take into account SEC guidelines,
current market prices, contract prices, and fixed and determinable price
escalations where applicable. In accordance with SEC guidelines, the future gas
prices used in this report make no allowances for future gas price increases
which may occur as a result of inflation nor do they account for seasonal
variations in gas prices which may cause future yearly average gas prices to be
somewhat different than December gas prices. For gas sold under contract, the
contract gas price including fixed and determinable escalations exclusive of
inflation adjustments was used until the contract expires and then was adjusted
to the current market price for the area and held at this adjusted price to
depletion of the reserves.
The Company furnished us with liquid prices in effect at December 31, 1997
and these prices were held constant to depletion of the properties. In
accordance with SEC guidelines, changes in liquid prices subsequent to December
31, 1997 were not considered in this report.
Operating costs for the leases and wells in this report were based on
information provided by the Company and include only those costs directly
applicable to the leases or wells. When applicable, the operating costs include
a portion of general and administrative costs allocated directly to the leases
and wells under terms of operating agreements. Development costs were furnished
to us by the Company and are based on authorizations for expenditure for the
proposed work or actual costs for similar projects. The current operating and
development costs were held constant throughout the life of the properties. At
the request of the Company, their estimate of zero net abandonment costs after
salvage value for onshore properties was used in this report. Ryder Scott has
not performed a detailed study of the abandonment costs nor the salvage value
and makes no warranty for the Company's estimate. The estimated net cost of
abandonment after salvage was included for offshore properties where abandonment
costs net of salvage are significant. The estimates of the offshore net
abandonment costs furnished by the Company were accepted without independent
verification. No deduction was made for indirect costs such as general
administration and overhead expenses, loan repayments, interest expenses, and
exploration and development prepayments. The Company supplied data on
accumulated gas production imbalances which were taken into account in our
estimates of future production and income.
The estimates of reserves presented herein are based upon a detailed study
of the properties in which the Company owns an interest; however, we have not
made any field examination of the properties. 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. The Company has informed us that they have
furnished us all of the accounts, records, geological and engineering data and
reports, and other data required for this investigation. The ownership
interests, prices, and other factual data furnished by the Company were accepted
without independent verification. The estimates presented in this report are
based on data available through December 1997.
The reserves included in this report are estimates only and should not be
construed as being exact quantities. They may or may not be actually recovered,
and if recovered, the revenues therefrom and the actual costs related thereto
could be more or less than the estimated amounts. Moreover, estimates of
reserves may increase or decrease as a result of future operations.
In general, we estimate that future gas production rates limited by
allowables or marketing conditions will continue to be the same as the average
rates for the latest available 12 months of actual production until such time
that the well or wells are incapable of producing at these rates. The well or
wells were then projected to decline at their decreasing delivery capacity rate.
Our general policy on estimates of future gas production
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February 3, 1998
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rates is adjusted when necessary to reflect actual gas market conditions in
specific cases. The future production rates from wells now on production may be
more or less than estimated because of changes in market demand or allowables
set by regulatory bodies. Wells or locations which are not currently producing
may start producing earlier or later than anticipated in our estimates of their
future production rates.
While it may reasonably be anticipated that the future prices received for
the sale of production and the operating costs and other costs relating to such
production may also increase or decrease from existing levels, such changes
were, in accordance with rules adopted by the SEC, omitted from consideration in
making this evaluation.
Neither we nor any of our employees have any interest in the subject
properties and neither the employment to make this study nor the compensation is
contingent on our estimates of reserves and future cash inflows for the subject
properties.
Very truly yours,
RYDER SCOTT COMPANY
PETROLEUM ENGINEERS
Ronald Harrell, P.E.
President
RH/sw
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TABLE NO. 1
PENNZOIL COMPANY
PROVED NET RESERVE DATA(1)
UNITED STATES
TOTAL ONSHORE AND
TOTAL WORLDWIDE OFFSHORE FOREIGN(2)
--------------------- --------------------- -------------------
1997 1996 1995 1997 1996 1995 1997 1996 1995
----- ----- ----- ----- ----- ----- ---- ----- ----
Net Proved Liquid(3) Reserves,
Millions
of Barrels
Developed and Undeveloped
Beginning of Year................... 187.4 191.6 206.2 165.1 174.9 204.5 22.3 16.7 1.7
12/31/95 Est. Prepared by Outrim
Szabo Assoc. Ltd.(4)............ 0 9.6 0 0 0 0 0 9.6 0
Revisions......................... 3.2 12.2 (14.9) (0.8) 8.1 (14.4) 4.0 4.1 (0.5)
Extensions and Discoveries........ 41.6 23.2 20.4 11.7 10.5 18.9 29.9 12.7 1.5
Improved Recovery................. 1.0 2.1 2.7 1.0 2.1 2.7 0 0 0
Estimated Production.............. (19.8) (21.6) (22.1) (19.5) (20.4) (21.9) (0.3) (1.2) (0.2)
Purchase of Reserves In-Place..... 19.9 8.1 22.2 0 7.0 8.0 19.9 1.1 14.2
Sales of Reserves In-Place........ (5.8) (37.8) (22.9) (5.2) (17.1) (22.9) (0.6) (20.7) Neg
----- ----- ----- ----- ----- ----- ---- ----- ----
End of Year........................... 227.5 187.4 191.6 152.3 165.1 174.9 75.2 22.3 16.7
Developed
Beginning of Year(5)................ 142.2 152.6 177.7 140.7 151.2 176.1 1.5 1.3 1.6
End of Year......................... 141.8 142.2 152.6 127.8 140.7 151.2 14.0 1.5 1.3
Net Proved Gas(6) Reserves, Billions
of Cubic Feet
Developed and Undeveloped
Beginning of Year................... 1,277 1,291 1,376 1,187 1,256 1,341 90 35 35
12/31/95 Est. Prepared by Outrim
Szabo Assoc. Ltd.(4)............ 0 178 0 0 0 0 0 178 0
Revisions......................... 2 61 51 (26) 38 56 28 23 (5)
Extensions and Discoveries........ 127 172 219 104 143 211 23 29 8
Improved Recovery................. 0 2 1 0 2 1 0 0 0
Estimated Production.............. (214) (219) (220) (206) (202) (218) (8) (17) (2)
Purchase of Reserves In-Place..... 0 36 26 0 8 26 0 28 0
Sales of Reserves In-Place............ (133) (244) (162) (5) (58) (161) (128) (186) (1)
----- ----- ----- ----- ----- ----- ---- ----- ----
End of Year........................... 1,059 1,277 1,291 1054 1,187 1,256 5 90 35
Developed
Beginning of Year(5)................ 1,160 1,161 1,273 1,070 1,132 1,242 90 29 31
End of Year......................... 968 1,160 1,161 963 1,070 1,132 5 90 29
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(1) All reserve changes in 1995 were categorized by Ryder Scott Company. Reserve
changes due to extensions and discoveries and improved recovery during 1996
and 1997 were categorized by Ryder Scott Company. The remaining reserve
changes during 1996 and 1997 were categorized by the Company.
(2) 1995 includes 1.2 million barrels and 5 billion cubic feet, 1996 includes
1.4 million barrels and 4 billion cubic feet and 1997 includes 21.3 million
barrels and 4 billion cubic feet of natural gas in Venezuela for which
Pennzoil has a contract to develop and produce but does not have actual
ownership of the hydrocarbons.
(3) Liquid reserves shown above are comprised of crude oil, condensate, and
natural gas liquids.
(4) These estimates were prepared by Outrim Szabo Associates, Ltd. for Pennzoil
Petroleums, Ltd. as of December 31, 1995. The reserves attributable to
Pennzoil Petroleums, Ltd. were sold during 1996. These estimates are
included at the Company's request in order to reconcile reserve revisions.
Ryder Scott Company has not reviewed these reserve estimates and therefore
expresses no opinion as to their validity.
(5) Beginning of year proved developed gas and liquid reserves for 1996 excludes
proved developed reserves estimated by Outrim Szabo Assoc. Ltd. for Pennzoil
Petroleums, Ltd. as of December 31, 1995.
(6) Excludes carbon dioxide reserve and production data.
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TABLE NO. 2
PENNZOIL COMPANY
CASH INFLOW AND COST DATA(1)
(MILLIONS OF U.S. DOLLARS)
UNITED STATES FOREIGN
TOTAL WORLDWIDE ONSHORE AND OFFSHORE AS OF
AS OF DECEMBER 31 AS OF DECEMBER 31 DECEMBER 31
----------------- --------------------- -------------
1997 1996 1997 1996 1997 1996
------- ------- --------- --------- ----- -----
Future Cash Inflows(2)................. $ 5,808 $ 8,958 $ 4,847 $ 8,270 $ 961 $ 688
Future Costs
Production(3)........................ $(1,926) $(2,267) $(1,621) $(2,055) $(305) $(212)
Development(4)....................... (544) (490) (458) (445) (86) (45)
------- ------- ------- ------- ----- -----
Total Costs............................ $(2,470) $(2,757) $(2,079) $(2,500) $(391) $(257)
Future Cash Inflows Before Income
Tax.................................. $ 3,338 $ 6,201 $ 2,768 $ 5,770 $ 570 $ 431
Present Value @ 10% Before Income
Tax.................................. $ 2,053 $ 3,967 $ 1,791 $ 3,697 $ 262 $ 270
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(1) Data for 1997 and 1996 include cash inflows and costs attributable to carbon
dioxide reserves located in the United States. The 1997 carbon dioxide
reserves account for $70.3 million of cash inflows before income tax and
$21.4 million of present value at 10% before income tax. The 1996 carbon
dioxide reserves account for $56.2 million of future cash inflows before
income tax and $19.8 million of present value at 10% before income tax.
(2) Gross revenues are before any deductions.
(3) Includes production taxes in the U.S.A., certain foreign taxes where
applicable, ad valorem taxes, and certain other items such as transportation
and processing charges.
(4) Includes future dismantlement and abandonment costs net of salvage for
offshore properties where such costs are relatively significant.