IOGA West Virginia Financial Access Seminar December 12, 2005

1. “The Oil and Gas Reserves Report: What it Means and How it Can be Used” IOGA West Virginia Financial Access Seminar December 12, 2005 D. Randall Wright, President randy@wrightandcompany.com (615) 370-0755 Ext. 12 Brentwood, Tennessee

2. Benefits of the Reserves Report • An independent appraisal • The availability of industry wide data network • Technical Consultants • Accounting Firms • Banks • Investment and other Financial Institutions • Technical expertise and the reputation of the firm • Cost and time efficient reserves management

3. Needs satisfied by Reserves Reports • In-house accounting requirements, budgets, and planning • Re-organizations • Bank financing • Government filings • Public offerings • Limited partnerships and joint ventures • Divestitures, acquisitions, and mergers • Estates, trusts, and gifts

4. Terminology Two very important words to understand in the Reserves Report: • Estimated Ultimate Recovery (EUR): the amount of hydrocarbon to be recovered over the lifetime of a particular well. • Reserves: the amount of hydrocarbon to be recovered as of a particular date.

5. What is included in a Reserves Report? • Statement of purpose and scope of engagement • Who authorized the appraisal • Source of information and vintage of data • Methods used to make reserves estimates • Outline of all assumptions • Classification of reserves • Values generated • Clear statement of any caveats • Map showing location of properties

6. Reserves Report vs. Review and/or Audit • Reserves Report • “Grass Roots” evaluation • Independent evaluation of all available source data • Review and/or Audit • Opinion that company’s internally generated reserves report is reasonable in the aggregate • Report conforms with accepted technical and geological evaluation principles

7. Reserves Reports • Independent estimate of reserves, by category, production forecast, estimate of future revenues and costs • May include all properties of an entity • May include only major valued properties (typically properties comprising the top 80 percent) • May be based entirely on “raw data” with all interpretations made by the consultant • May rely in part on information prepared by the client, but modified as appropriate by the consultant

8. Reviews and Audits • Review of work done by others • Cursory or in-depth • Concentrates on 75 to 80 percent of the value • Underlying report must be current and of adequate quality • Test of classification of reserves

9. Reviews and Audits,Continued • Not considered to be a detailed study by the auditing consultant • Does not encompass all “remaining” reserves • Not a rigorous test of the “economic” part of reserves definitions of the SEC • Does not provide nor infer a fair market value • Not used for bank loans, litigation, or estate appraisals

10. Details of the Reserves Report The following should be found in an independent reserves report: • Property identification • Ownership interests • Product Prices • Future 8/8 production by years • Remaining/Ultimate 8/8 reserves • Future annual gross revenue to net interests • Future annual severance taxes

11. Details of the Reserves Report,Continued What is found in a reserves report, continued: • Annual Deduction for • Operating Costs • Ad Valorem Taxes • Capital Costs • Other Costs • Annual future new income before state and federal income taxes • Undiscounted • Discounted at 10%

12. Typical Summary Levels • Reserves Categories • Total Proved • Total Proved Developed • Proved Developed Producing • Proved Developed Nonproducing • Proved Shut-In • Proved Behind Pipe • Total Proved Undeveloped • State • Field

13. Data Sources • Client • Other Operators • Public Sources • Dwight’s/Petroleum Information Energy Data • State Agencies • Log Libraries • Consultant’s non-confidential in-house data “Usually accepted and fully relied upon by consultant, many times without independent verification.”

14. Pricing Assumptions • Constant Pricing • NYMEX • Henry Hub • Appalachia Premiums • MMBtu (heating value) • West Texas Intermediate (WTI) • Escalated Pricing* • Specified by client (usually 3–6 % per annum) • Setting a maximum price (capping) • Combining Constant and Escalated Pricing *The SEC does not accept price escalations for filing purposes.

15. Future Costs • Taxes • Severance (state) • Ad Valorem (county/parish) • Operating Costs • Gathering, transportation, compression, and dehydration • 12 month average • Actual or Allocated • Excludes Management and Overhead • Capital Expenditures • Workover, recompletion, hook-up • Equipment Replacement • Development Drilling

16. Future Costs, Continued • Capital Expenditures, Continued • Additional Facilities • Artificial Lift • Compression • Enhanced Recovery • Environmental • Rectify existing conditions • Meet new Requirements • Salvage and Abandonment

17. RESERVES TERMINOLOGY

18. Calculating Hydrocarbon Reserves Methods generally accepted: • Volumetric Analyses • Performance Analyses • Analogy

20. Definitions of Reserves Proved Reserves • Economic producibility supported by production or conclusive formation test • Defined by oil-gas and/or oil-water contact • Adjoining portions judged economically productive based on geological and technical data • Successful pilot test • Economically viable using fixed costs and prices

21. Definitions of Reserves Proved Developed Reserves • Expected to be recovered through existing wells • Proved Developed Producing (PDP) -- Actively producing wells • Proved Developed Nonproducing (PDNP) -- Shut-in waiting on equipment or pipeline • Proved Developed Shut-in (PDSI) -- Previously productive wells not currently active • Proved Developed Behind Pipe (PDBP) -- Recompletion to another zone

22. Definitions of Reserves Proved Undeveloped (PUD) • New wells on undrilled acreage • Recompletion of existing well with major capital expenditure • Offsetting productive units that are reasonably certain of production • Certainty of production based on continuity of the existing productive formation • One “legal location” offsetting commercially productive well

23. Definitions of Reserves Probable (PROB) • Reserves below the lowest known contact • Untested formations and reservoirs • Fault separated • Improved recovery-secondary and primary with no active pilot test • 3-D seismic bright spots

24. Definitions of Reserves Possible (POSS) • Areas removed from geological control • Geophysically defined limits • Questionable log analysis • Untested fault segments • Enhanced recovery possibilities

25. Reasonable Certainty The SEC’s underlying principle for classifying and quantifying reserves is based on the concept of “reasonable certainty.” It maintains that proved reserves are most likely to be revised UPWARD rather than downward over time.

26. Consequences of Noncompliance • Restatement of earnings • Investor suspicion of management practices • Subject to civil liability “The SEC staff reminds professionals engaged in the practice of reserves estimating and evaluation that the Securities Act of 1933 subjects to potential civil liability every expert who, with his or her consent, has been named as having prepared or certified any part of the registration statement, or as having prepared or certified any report or valuation used in connection with the registration statement. These experts include accountants, attorneys, engineers, or appraisers.”

27. Reserves Report Considerations • Don’t overlook value • Reasonable pricing and costs • Organization and presentation of data • Full disclosure • Allow ample time for completion • Prepare to answer questions • Be skeptical – ask questions • Concentrate on major value

28. Conclusions Questions and Discussion Thank you very much for your attention!