2009 Evaluation Parameters

Survey Committee Report

SPEE Annual MeetingSanta Fe, New Mexico

16 June 2009

2009 Survey CommitteeMichael Garcia, P.E.

Cary McGregor, P.E.

Tom Collier, P.E.

Chair

Statement of Purpose• This Survey is conducted annually by the Society of Petroleum Evaluation Engineers

to obtain opinions from the evaluation community regarding a limited number of economic parameters used largely in the United States and Canada to evaluate oil and gas properties. The stated purpose of the Survey is to capture and analyze, at a single point in time, a set of chronically volatile economic parameters including, among other things, projections of future oil and gas prices, drilling and operating costs, and inflation. Opinions on the factors and methods used to calculate the present value of future cash flows are also reflected in the statistical data.

• When used with an appreciation for the purpose of the Survey and the source of the statistical results, we believe this information can be useful in preparing and using evaluations of oil and gas properties. Results can be particularly useful in comparing the relative thinking of different groups, such as producers, consultants, and bankers, and in appreciating how opinions have changed over time. Care should be taken in using the information in this report. The Survey covers only a few of the many considerations of importance in the evaluation of oil and gas properties. Those that are included represent opinions expressed by the individual participants in response to the questions asked. The questions may not be precisely stated and the analysis provided might not fully reveal the difference of opinion that may exist among the respondents. All respondents do not answer every question. Additionally, the responses are subject to change over time and may not be relevant to any period other than April – May 2007. Additionally, some questions had so few responses as to be statistically insignificant – we have noted these as best we can.

• The SPEE does not endorse the use of the Survey results, either in whole or in part, as a valuation guideline. Neither the Survey nor its contents are intended to dictate Fair Market Value parameters. Nevertheless, the popularity of the Survey shows that the Survey is relevant when used within the scope of its intended purpose.

• The Survey results in no way represent nor are they endorsed by preparers employer. Preparer’s employer expressly disclaims any responsibility for the preparation or use of this presentation.

•Of the many questions we could ask, we only ask a few each year, mostly of North American oil and gas valuation professionals.

•The information from the survey makes useful comparison material, but it has a short shelf life.

•The respondents wrote the report, SPEE didn’t

•Tom’s Company had nothing to do with it, either.

Overview

• Survey Response Demographics• Crude Oil & Natural Gas Pricing• Cost Growth Projections• Reserve Estimating• Valuation

Respondent Information

Producer45%

Consultant38%

Other6%

Private Equity

3%Banker8%

2009 2008

37%Small (0 - 5 employees)

30%Medium (Level 1)

(6 – 30 employees)

14%

Medium (Level 2)(31 - 100 employees)

19%

Large (31 - 100 employees)

Producer44%Consultant

38%

Private Equity

8%Other

7%Banker3%

Value of Properties Evaluated

4%13%

24%

17%

26%

8%8%

26%34%

42%59%

83%96%100%

0%5%

10%15%20%25%30%35%

< $

1 M

M

$1

0 M

M

$1

00

MM

$2

50

MM

$5

00

MM

$1

B

Ov

er

$1

B

Fre

qu

en

cy

of

Re

sp

on

de

nts

, %

0%

20%

40%

60%

80%

100%C

um

ula

tiv

e F

req

ue

nc

y,

%

2009 2009

2009 & Historic Crude OilPrice Forecasts

Actual

1982

1983198419851986

1987

1988

1989

19901991 1992

1993

19941995

19961997

199819992000

2001

20022003

20042005

2006

2007

20082009

$0

$20

$40

$60

$80

$100

$120

1986

1989

1992

1995

1998

2001

2004

2007

2010

2013

2016

2019

$ p

er

ba

rre

ll

Oil Price Forecast by Affiliation

$40.00

$50.00

$60.00

$70.00

$80.00

$90.00

$100.00

$110.00

2009

2011

2013

2015

2017

2019

Composite

Producer

Consultant

Banker

Private Equity

Other

2009 & Historic Natural Gas Price Forecasts

Actual

1982

19831984

19851986

19871988

19891990

1991 1992

199319941995

19961997

1998

19992000

2001

20022003

2004

2005

2006

2007

20082009

$1.00

$2.00

$3.00

$4.00

$5.00

$6.00

$7.00

$8.00

$9.00

$10.00

$11.00

1986

1989

1992

1995

1998

2001

2004

2007

2010

2013

2016

2019

$ p

er

mm

btu

Natural Gas Price Forecast by Affiliation

$4.00

$5.00

$6.00

$7.00

$8.00

$9.00

$10.00

$11.00

20

09

20

10

20

11

20

12

20

13

20

14

20

15

20

16

20

17

20

18

20

19

Composite

Producer

Consultant

Banker

PrivateEquity

Other

Use of Hedges

Other, 32%

Weighted average: Hedge plus internal,

12%

Other, 4%

Hedge pricing alone, 8%

Weighted average: Hedge plus bank, 8%

Do not rely on hedges, 68%

Cost Growth

• Generally lower than last year

• Drilling costs reported deflation

• Operating costs, CPI low inflation in early years

• All categories converge in 5-6 years

Year on Year

-5.00%

0.00%

5.00%

10.00%

Inflation(CPI)

DrillingCosts

OperatingExpenses

Cumulative

90%

110%

130%

150%

2009

2011

2013

2015

2017

2019

Inflation(CPI)

DrillingCosts

OperatingExpenses

Probabilistic Methods

49%54%

39%

48%

57%

45% 46%

Pre-drill, 63%

Early, 32%

Middle, 4%

Late, 1%

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

2003

2004

2005

2006

2007

2008

2009

2009

by

Phase

0%

5%

10%

15%

20%

25%

Hig

h de

gree

Mod

erat

e de

gree

Low

deg

ree

Not

ado

ptin

g

Aware, good understandingAware, basic understandingAware, haven't reviewed itUnaware, hadn't heard of it

2008

0%

5%

10%

15%

20%

Hig

h de

gree

Mod

erat

e de

gree

Low

deg

ree

Not

ado

ptin

g

Aware, good understandingAware, basic understandingAware, haven't reviewed itUnaware, hadn't heard of it

2009

PRMS Correlation

Forecast Impact of New SEC Rules

10%

9%

17%

12%

19%

13%

3%

4% 13%

Non-proved disclosure

Offset spacing

Technologies other than flow ...

Contacts (lowest known oil)

High Medium Low

Discount Rate Applied to Cash Flows (by affiliation)

1%

13%

1%

12%

3%

61%

9%

15%13%

56%

4%

13%

11%

62%

3%

16%

3% 5%8%8% 8%

75%

17%17%

67%

0%

10%

20%

30%

40%

50%

60%

70%

80%

4.5% to6%

6% to7.5%

7.5% to9%

9% to10.5%

10.5% to12%

12% to13.5%

13.5%+

AllProducerConsultantBankerPrivate Equity & Other

“The yield rate used to determine the present value of a future cash flow based solely on the cost of capital”

Risk Adjusted Discount Rate Applied to Cash Flows (by application)

2%

6%

16%16%

38%

28%

2%

38%

0%

31%

15%15% 17%17%

39%

17%

6%

0%5%

10%15%20%25%30%35%40%45%

4%

to

8%

8%

to

12

%

12

% t

o 1

6%

16

% t

o 2

0%

20

% t

o 2

4%

>2

4%

All

ONLY DiscountRates

BOTH Discount &Rsrv Adj

Average Reserve Adjustment Factors

 Non-

Bankers BankersRAF Only

RAF+RADR

Proved Producing 96.7 100.0 96.6 98.1

Proved Shut In 75.8 71.0 74.4 76.1

Proved Behind Pipe 70.4 68.5 69.0 72.1

Proved Undeveloped 55.0 50.5 51.5 58.5

Probable Producing 46.6 0.0 35.9 48.5

Probable Behind Pipe 33.6 0.0 26.1 36.1

Probable Undeveloped 30.2 0.0 23.1 34.1

Possible Producing 26.6 0.0 20.3 30.8

Possible Behind Pipe 17.1 0.0 13.4 13.8

Possible Undeveloped 9.8 0.0 8.5 7.8

Thank you!

Basis for Discount Rate

Capital Structure, 37%

Cost of Debt/Equity,

17%

Debt Alone, 6%

Equity Alone, 15%

Prime Lending Rate, 4%

Prime Lending Rate /

Judgement, 6%

Financial Indices, 2%

Professional Judgement, 25%

Past SPEE Surveys, 4%

Clients, 19% Other, 2%

Borrowing Rate

3%

17%

24%

29%

0%

16%

12%

0%

5%

10%

15%

20%

25%

30%

35%

2.5% to4%

4% to5.5%

5.5% to7%

7% to8.5%

8.5% to10%

10% to11.5%

>11.5%

“Profit” of “Value Creation” Component

Subsequent sale6%

Conservative price forecast

9%

Don't provide valuations

6%

Other2%

Conservative production &

reserves26%

RADR , Reserve adjustment

factors51%