Because of Enron's financial condition, the Company concluded that the derivatives contracts no longer qualified for hedge accounting treatment. As required by SFAS No. 133, the value of these derivative instruments as of November 2001 $(0.8 million) was recorded in accumulated other comprehensive income and will be reclassified into earnings over the original term of the derivative instruments. An allowance for the related asset was charged to other expense. At December 31, 2001 and 2002, $0.7 million and none, respectively, remained in accumulated other comprehensive income.

Total oil purchased and sold under hedging arrangements during 2000, 2001 and 2002 were 87,900 Bbls, 18,000 Bbls and 131,300 Bbls, respectively. Total natural gas purchased and sold under hedging arrangements in 2000, 2001 and 2002 were 1,590,000 MMBtu, 3,087,000 MMBtu and 2,314,000 MMBtu, respectively. The net gains and (losses) realized by the Company under such hedging arrangements were $(1.5 million) and $2.0 million and $(0.9 million) for 2000, 2001 and 2002, respectively.

At December 31, 2001 the Company had no derivative instruments outstanding designated as hedge positions. At December 31, 2002 the Company had the following outstanding hedge positions:

COMPETITION AND TECHNOLOGICAL CHANGES

The Company encounters competition from other oil and natural gas companies in all areas of its operations, including the acquisition of exploratory prospects and proven properties. The Company's competitors include major integrated oil and natural gas companies and numerous independent oil and natural gas companies, individuals and drilling and income programs. Many of its competitors are large, well-established companies with substantially larger operating staffs and greater capital resources than those of the Company and which, in many instances, have been engaged in the oil and natural gas business for a much longer time than the Company. Such companies may be able to pay more for exploratory prospects and productive oil and natural gas properties and may be able to identify, evaluate, bid for and purchase a greater number of properties and prospects than the Company's financial or human resources permit. In addition, such companies may be able to expend greater resources on the existing and changing technologies that the Company believes are and will be increasingly important to the current and future success of oil and natural gas companies. The Company's ability to explore for oil and natural gas prospects and to acquire additional properties in the future will be dependent upon its ability to conduct its operations, to evaluate and select suitable properties and to consummate transactions in this highly competitive environment. The Company believes that its exploration, drilling and production capabilities and the experience of its management generally enable it to compete effectively. Many of the Company's competitors, however, have financial resources and exploration and development budgets that are substantially greater than those of the Company, which may adversely affect the Company's ability to compete with these companies.

The oil and natural gas industry is characterized by rapid and significant technological advancements and introductions of new products and services utilizing new technologies. As others use or develop new technologies, the Company may be placed at a competitive disadvantage, and competitive pressures may force the Company to implement such new technologies at substantial cost. In addition, other oil and natural gas companies may have greater financial, technical and personnel resources that allow them to enjoy technological advantages and may in the future allow them to implement new technologies before the Company. There can be no assurance that the Company will be able to respond to such competitive pressures and implement such technologies on a timely basis or at an acceptable cost. One or more of the technologies currently utilized by the Company or implemented in the future may become obsolete. In such case, the Company's business, financial condition and results of operations could be materially adversely affected. If the Company is unable to utilize the most advanced commercially available technology, the Company's business, financial condition and results of operations could be materially and adversely affected.

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