Oklahoma State University Oil & Gas Accounting Conference Nov. 16, 2007

1. Oklahoma State University Oil & Gas Accounting ConferenceNov. 16, 2007 Reserves Estimation in Accounting and Reporting presented by Don Roesle, Chairman and CEO Ryder Scott Company, L.P. www.ryderscott.com

2. Discussion Outline • SEC Compliant Report • Validating a Reserve Report • SEC Comment Letters • SEC Hot Button Issues

3. The information presented herein represents informed opinions about U.S. SEC reserves reporting regulations but does not purport to be identical to advice to be obtained from the SEC.This presentation is offered for information purposes only. Ryder Scott assumes no liability for the use (or misuse) of the presented materials.

4. What does the United States Securities and Exchange Commission (SEC) expect in a 10-K Reserves filing?

5. RESERVES DEFINITIONS SEC 1978 • Proved oil and gas reserves are the estimated quantities of crude oil, natural gas, and natural gas liquids 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 cost as of the date the estimate is made. SPE/WPC 1997 • Proved reserves are those quantities of petroleum which, by analysis of geological and engineering data, can be estimated with reasonable certainty to be commercially recoverable, from a given date forward, from known reservoirs and under economic condition, operating methods, and government regulations.

6. SEC Guidelines“Reasonable Certainty” • “The concept of reasonable certainty implies that, as more technical data becomes available, a positive, or upward, revision is much more likely than a negative, or downward, revision.”

7. SEC GuidelinesReasonable Certainty Requirements • Generated by supporting geological and engineering data. • Validation of assumptions are necessary. • Criteria for analogies should be equal to or better than referenced reservoirs used as analogies. • Reasonable certainty is more than just the technical considerations that oil and gas is recoverable. It also includes resolution of how other barriers such as financial, environmental, marketing, legal and political will be overcome.

8. What is a SEC “compliant report”? • An estimate of the reserves and future revenues using “existing economic and operating conditions” (12/31 prices and costs). • Recoverable from “known reservoirs” to a level of “reasonable certainty”. • Revenues limited to that from sale of produced hydrocarbons and not associated income from sulphur, CO2, processing fees, platform rentals, etc. • Limited reliance upon 3-D seismic and other new technology.

9. How does SEC assure that companies are in compliance?SEC Review Process • In recent years, the engineering staff issues “comment letters” initially asking generic type questions about many issues, including PUDs, pricing, reliance upon third-party firms, reserves-linked performance bonuses, recovery factors and other matters.

10. How does SEC assure that companies are in compliance?SEC Review Process • Upon producer response, SEC then narrows remaining relevant questions to specific properties and may ask for maps and other supporting documentation. • May result in iteration of several letters back and forth until SEC is satisfied or asks producer to make modifications (Debooking or Restatement)

11. SEC terms related to reserves compliance • “De-booking” typically results from SEC request to remove certain reserves from the next annual reserves filing. Rather common but is not typically publicized if the issuer voluntarily complies in the next annual 10-K filing. • “Restatement” is a much more serious result, particularly under SOX, as it requires the issuer to retroactively “correct” past reserves disclosures and recalculate earnings. • U.S. Department of Justice (DOJ) will probably be involved in any investigation that subsequently leads to a reserves restatement.

12. What May Cause a Reserves Audit by SEC • Reasons for a Reserves Audits by SEC: • History of downward reductions • By press releases • Response to Comment Letter • Annual reports that don’t conform to press releases • Partner Activity, press releases, or revisions • A history of SEC infractions • Negative publicity • The Calendar – Every 3 years • Unusual Stock Volume or Movement • “Whistle blowers” or • for several other reasons.

13. Reserves Terminology Reviews - Audits - Determinations

14. Two typical types of reviews • Process review is an analysis of the process and procedures established to ensure that reserves have been estimated using industry accepted practices and in compliance with relevant standards. May involve qualifications and independence of internal reserves evaluators and auditors. Does not address reserves quantities • Reserves reviewis more typically a cursory investigation of client-selected properties for various client purposes.

15. Reserves audit • A reserves audit is an examination of the work of others for the purpose of expressing an opinion that a reserves report is reasonable in the aggregate and generally conforms to accepted engineering and geological principals and relevant reserves definitions. • May include all or a portion of the properties of an entity. • Acceptable tolerances usually within 5 to 10 percent. • May include reserves, production forecasts and/or economics.

16. Reserves determination (reserves report) • A reserves report is a “grass roots” evaluation in which an evaluator has examined and evaluated all available source data for the purpose of producing an independent estimate of reserves and reserves information in full compliance with the relevant reserves definitions. • Includes projections of production, revenues, costs ( Capex, Opex, Taxes, Abandonment ) and future net income discounted at 10%. • A reserves report may be internally or externally prepared.

17. Creation of “auditable” data and workproduct files • Personnel should be trained in industry “best practices” regarding (1) acceptable geological interpretations and reservoir description (2) basic understanding of reservoir mechanics and fluid flow (3) comprehension of pertinent reserves definitions and (4) ethics. • Evaluators should establish “real time” access to data from employer-operated properties and “ASAP” data from partner-operated assets.

18. Creation of “auditable” data and workproduct files • Partners should be wary of accepting operator-supplied reserves estimates. • Attention must be given to documentation of all interpretative data steps, including narrative descriptions of critical decisions. • All data and information related to a reserves report, including geological maps, must be archived in a form that can be accessed and reviewed by authorized parties at any time.

19. General Reserves DeterminationProblems Identified by the SEC • Some abuses of the proved classification (in no particular order) Spacing violations for PUDs PUDs which are too optimistic based on supporting data Seismic amplitudes for down dip limits Use of non-hydrocarbon revenue streams Misuse of reservoir simulation results Field level decline curve analysis Declining operating costs with declining well count Allocation of development costs to probable category to justify proved reserves economics Justification of proved reserves by analogy with non-analogous properties Misuse of statistical analysis Reserves being declared proved when no sales market exists Scheduling of reserves which extend beyond the term of foreign concessions

20. Validating a Reserve Report Series of questions that should be asked to help assess the degree of reserve risk associated with a company’s reserves and their reserve report.

21. 1. Who did the underlying reserve evaluation? internal engineering or independent engineering firm

22. 2. Is the independent engineering firm or company engineering staff knowledgeable of SEC reserve definitions and the appropriate reporting requirement ?

23. 3. How long has the independent engineering firm been doing the company’s reserves ? Is the engineering firm familiar with special issues that might be involved with the company’s properties ?

24. 4. Where are the reserves located ? How knowledgeable is the company of the areas where the reserves are located ? Are they in an area where assessment of reserves carries greater risk (I.e. Gulf Coast vs. Mid-Continent) ? Are the reserves concentrated in specific areas, or are they widely scattered (I.e. do they have core areas of competency) ? Are the reserves in areas that require higher operating and development costs (I.e. profit margin is smaller and expenditure demands are higher on the company) ? Are the reserves in areas that are environmentally very sensitive ? Are the reserves all domestic, or do they include international properties ?

25. 5. Is the independent engineering firm familiar with the areas where the reserves are located ?

26. 6. Does the independent engineering firm look at all of the company reserves or just a percentage ? Does the engineering firm do a detailed study or an audit ?

27. 7. Are the company’s reserves concentrated in a small number of properties, or is the portfolio of properties more diverse ? What type of interest position does the company hold in its different properties ?

28. 8. Are the reserves mature, or relatively new with minimal production ? Is the reserve analysis primarily based on performance methods or volumetrics ? Are the reserves strictly primary, or do they include secondary and EOR projects ?

29. 9. Are most of the properties operated or non-operated ? If a high percentage of the company’s reserves are non-operated, what is known about the operators ? Are the various operators substantial from a technical and business standpoint ? Do the operators have an established track record of operations in the areas where the reserves are located ?

30. 10. What is the breakdown on proved reserve status categories (I.e. producing, shut-in, behind pipe and undeveloped) ? Are the reserves fairly well split between categories, or is there a high percentage in the non-producing andparticularly in the undeveloped ?

31. 11. What kind of reserve life index is there for the proved producing reserves ? Is this realistic for the type of proved producing reserves stated in the SEC filing ? Is this realistic taking into account the current production of the company ?

32. 12. What kind of reserve life index is there for the total proved reserves ? What level of producing rates will have to be added by non-producing and undeveloped reserves to make a reasonable life index ? Does this seem attainable for the types of reserves involved ?

33. 13. Are the reported reserves based on the appropriate economic parameters as specified by the Securities and Exchange Commission ? Did the reserve appraiser use current economic conditions ?

34. 14. Historical Checks Do future revenue projections appear reasonable considering recent historical company revenues ?

35. 15. Historical Checks Do future cost projections appear reasonable considering recent historical company expenditures ? Have the appropriate operating costs been applied against the reserve projections ? Does the company have sufficient cashflow to carry their burden of operating costs and service other necessary company expenditures ? Have sufficient development costs been included to develop the stated non-producing and undeveloped reserves ? Does the company have an established track record and the financial stability to spend the amounts of capital dollars necessary to fund the development ?

36. 16. Company Performance How does the company look over the years in regards to “revisions of previous estimates” ? Have the revisions consistently been significant in size in relation to the company’s base reserves ? Are the revisions consistently negative ? Are the negative revisions consistently associated with the non-producing and undeveloped reserve categories ?

37. 17. Company Performance “Extensions, discoveries, other additions” are an indicator of how well the company is moving proved undeveloped and probable reserves into the developed reserve base of the company. Is the company historically demonstrating an ability to do so ? How well is the company finding new reserves through the drill bit ? Does the company have an active exploration and development drilling program ? Does the company have a good acreage position around its developing properties ? What kind of exploratory acreage position does the company hold ?

38. 18. Company Performance Does the company typically grow through acquisitions or the drill bit ? Is there a good mix of both ? Does “purchase of reserves in place” contribute significantly to the company’s reserve base ? If the company traditionally grows through acquisitions, is the company paying an appropriate amount for reserves ? Could too much success with competitive bids mean they are over-paying for the reserves ?

39. 19. Company Performance Does the company “sell reserves in place” to divest themselves of non-strategic reserves ? Is the company burdened with a large number of low margin wells in non-core areas ?

40. 20. How recent is the reserve evaluation that is the source of the company’s reserves in the public filing ? Based on the answers to some of the previous questions, are the reserves of a nature that significant changes in reserve quantities can occur over a limited period of time ? Is the reserve evaluation a recent study or a prior study that has been mechanically adjusted to a specific as-of date for public reporting purposes ?

41. Introduction – SEC Comment & Audit Letters SEC Comment & Audit Letters • A series of questions posed by accountants, lawyers, and engineers designed to test the compliance of the company with SEC regulations regarding technical and commercial issues. • The first producer answers are typically followed by a shorter list of questions, which typically are more specific and ask for more detail. SEC may request maps, logs, test data, copies of contracts, market studies, etc. • Iteration of letters may lead to request to restate previous filings, "de-booking" of reserves in subsequent reports or, simply, no more letters. • Most favorable response from SEC is “ We have no more questions at this time”.

42. SEC Comment & Audit Letters • Typical SEC Staff question : • Please inform us of any circumstance where you have reported proved reserves located structurally below the lowest-knownhydrocarbons as established through well logs and if these additional reserves have not been confirmed through performance history.

43. SEC Comment & Audit Letters • Another question may be: • Please inform us of any circumstances where your reported reserves and future income were estimated using prices other than those in effect on the last day of the year.

44. SEC Comment & Audit Letters • Another common question asks: • Have you reported any undeveloped reserves attributable to well locations more than one offset location (“legal location”) away from a commercial well?

45. SEC Comment & Audit Letters • A recent letter also posed the following: • Are performance bonuses linked to reserves increases?

46. SEC Comment & Audit Letters • In the same letter: • Who has the authority to engage third party engineers and who do they report to?

47. SEC Comment & Audit Letters • Interesting Questions – One recent SEC comment letter asked for the following: • Identify all independent engineering firms used over last 5 years. • What properties were reviewed? • How much the firms were paid for work on projects other than year-end type work? • If the firms were discharged, reason(s) why?

48. SEC Comment & Audit Letters • Another common question asks: • Have you reported proved reserves in untested fault blocks, structures, or seismic amplitudes? (Untested here refers to the drilling of a well confirming presence of oil and/or gas)

49. SEC Comment & Audit Letters • November 9th, 2004, the SEC sent a 9 page, 23 question inquiry to an independent US oil company • Among other items, the SEC asked for: • A one line summary for each proved reserve entry on the books as of 12/31/2002 and 12/31/2003 • Narratives, engineering and geological exhibits for the three largest reserve extensions or discoveries during 2003

50. SEC Comment & Audit Letters • Hindsight analysis of 5 largest PUD locations booked as of 12/31/2002 drilled during 2003 • “Include the engineering and geological exhibits used to justify the reserve booking at each year end and a brief narrative reconciling the differences between the two estimates.” • “Address corporate methodology for eliminating future discrepancies between the estimates”