OIL AND GAS EVALUATIONS PROBABLE & POSSIBLE RESERVES WHAT WILL THE INVESTOR THINK? February 15, 2010 FORREST A. GARB & ASSOCIATES, INC. INTERNATIONAL PETROLEUM CONSULTANTS

2 Reserve evaluations are performed for: - Companies - buying oil & gas properties -Investors - looking to invest in oil and gas properties -Banks - verifying reserves when companies need financing based on their oil and gas assets -Mid-year, year-end, and SEC 10-K filings -Bankruptcy and Estate purposes Who Needs Them? OIL & GAS EVALUATIONS

3 Why is it necessary to have a definition of proved reserves? - Basis for comparison and reliability - Geologic prospects must be generated, risks applied consistently and evaluated fairly -With no rigid guidelines the reserve evaluations prepared are worthless -Multi-million dollar decisions are made based on proved reserves What’s so Important about “Proved”? OIL & GAS EVALUATIONS

4 SEC Definition: Proved reserves shall mean those quantities of crude oil, natural gas, and natural gas liquids which, upon analysis of geological and engineering data, appear with reasonable certainty to be recoverable in future years from known oil and gas reservoirs under existing economic and operating conditions. Probability of Producing > 90% What is the Definition of Proved Reserves? OIL & GAS EVALUATIONS

5 For new wells: evaluating geologic data, such as logs, seismic, and maps to make volumetric calculations, and looking at initial production rates. When you have no well data, you look for analogous wells nearby producing in the same formation. - Production histories - Pool and Reservoir data from publicly-available sources (publications, press releases, websites) - Operator Development Plans Perform Decline Curve Analysis on older wells What’s Involved in Prospect Evaluations? OIL & GAS EVALUATIONS

6 Now that companies can report Probable and Possible reserves, will investors understand their meaning? The U.S. SEC has revised its reserves reporting guidelines to include Probable & Possible reserves. But has something been lost in the translation? Just because you may report Probable & Possible does not change them from being “UNPROVED” reserves. An attempt should be made to define these two categories clearly for the investor. Probable & Possible are an indicator of future potential, but they have large amounts of risk associated with them. What are Probable & Possible Reserves? OIL & GAS EVALUATIONS

UNRECOVERABLE Future Potential / Discoveries Conceptual Evaluation Based on Analogy & Inference No Exploration Activities RESOURCES PROSPECTIVE Sandra W. Wall Forrest A. Garb & Assoc., Inc.

UNRECOVERABLE RESOURCES PROSPECTIVE Future Discoveries Investing Money for Data Frontier Exploration begins - Surface Geology - Gravity Surveys and Other Studies - Seismic Surveys Seismic Sandra W. Wall Forrest A. Garb & Assoc., Inc.

UNRECOVERABLE Discovered Known Accumulation – Not Economic Early Stages of Evaluation - Exploration Wells - Structure Being Delineated - Legal Hurdles - No Facilities / Market Requires New Technology RESOURCES CONTINGENT PROSPECTIVE Future Potential Investing Money Frontier Exploration Sandra W. Wall Forrest A. Garb & Assoc., Inc.

UNRECOVERABLE RESOURCES Possible “Less likely than not” to be economically recoverable. Chances >10% PROSPECTIVE Future Potential Investing Money Frontier Exploration Discovered Known Accumulation Early Stages of Evaluation CONTINGENT UNPROVEN Discovered & Evaluating Uncertainties exclude from proven at this time. RESERVES Probable “More likely than not” to be economically recoverable. Chances >50% Sandra W. Wall Forrest A. Garb & Assoc., Inc.

UNRECOVERABLE UNPROVEN PROVEN RESOURCESRESOURCES PROSPECTIVE Future Potential Investing Money Frontier Exploration Discovered Known Accumulation Early Stages of Evaluation Discovered & Evaluating Probable Chances > 50% Possible Chances > 10% Economic at current prices & costs under existing legal conditions using current technology. Producing or Undeveloped Chances > 90% CONTINGENT RESERVES Sandra W. Wall Forrest A. Garb & Assoc., Inc.

5 WAYS TO ESTIMATE RESERVES 1) Volumetric - Use specified reservoir data and parameters 2) Analogy - Compare to area wells 3) Decline Curve Analysis - Extrapolation of historical production 4) Extrapolation of Other Performance - Use pressure buildup data, etc. 5) Computer Simulation Models

DECLINE CURVE ANALYSIS Allows extrapolation of historical production data to estimate remaining reserves Most popular reserve calculation method where detailed reservoir data is not known Best tool for forecasting mature producing areas Widely used in the petroleum industry Lends itself to computer analysis Assumes constant pressure maintenance What happens in the past will continue in the future

3 TYPES OF DECLINE CURVES Exponential percent of all production has exponential decline, including all ANS pools Harmonic Hyperbolic

(Qi-Qf) D = ÷ Yrs Qi  Qi = initial production rate  Qf = final production rate QiQi QfQf TIME, Years EXPONENTIAL DECLINE

16 Company 1’s Field A Forecast 5% Decline Curve

100,000 1,000,000 10,000, Years Bbl/Day 2 3 Outlier Field A – Comparison of Forecasts 1 Historical 4

Field B – Comparison of Forecasts 10, ,000 1,000,000 10,000,000 Bbl/Day Outlier Years Historical

10, ,000 1,000,000 Bbl/Day Field C – Comparison of Forecasts 2 3 Outlier Years 1 Historical

20 RESERVE FORECAST COMPARISON Field A Field BField C Reserves (millions of barrels) Company 1 Company 2 Company 3 Avg. of First 4 CompaniesOutlier Company Avg Avg Avg

Average* Extreme Outlier FIELD A - COMPARISON (Millions of Barrels) * Average of First 5 Forecasts.