WYOMING/MONTANA COALBED METHANE PROJECT AREA

Rocky Mountain Region

As discussed below under "--Pinnacle Transaction," in the second quarter of 2003, we contributed to Pinnacle our Powder River Basin properties in the Clearmont, Kirby, Arvada and Bobcat project areas located in Wyoming and Montana. We also own direct interests in approximately 145,000 gross acres of coalbed methane properties in the Castle Rock project area in Montana and the Oyster Ridge project area in Wyoming that were not contributed to Pinnacle, but we currently have no proved reserves of, and are no longer receiving revenue from, coalbed methane gas other than through Pinnacle.

By 2003 year end, Pinnacle had completed the acquisition and/or drilling of 201 wells (or approximately 96 net). All of the wells encountered coal accumulations and are apparent successes in various stages of development and/or stages of production. Coalbed methane wells typically first produce water in a process called dewatering and then, as the water production declines, begin producing methane gas at an increasing rate. As the wells mature, the production peaks and begins declining.

In February 2004, the CSFB Parties contributed additional funds of $11.8 million into Pinnacle to continue funding the 2004 development program which will increase their ownership to 66.7% on a fully diluted basis should we and RMG each elect not to exercise our available options. The business operations and development program of Pinnacle does not require us to provide any further capital infusion, unless we determine to exercise our options. See "-The Pinnacle Transaction" below for more information on this transaction.

Of the approximate 319,000 gross and 90,000 net mineral acres held by us and Pinnacle, respectively, as of December 31, 2003, approximately 193,000 and 21,000 net mineral acres, respectively, are located in the State of Montana. The issuance of new coalbed methane drilling permits in Montana was halted temporarily pending the Federal Bureau of Land Management's approval of a final record of decision on Montana's Resource Management Plan environmental impact statement and the Montana Department of Environmental Quality's approval of a statewide oil and gas environmental impact statement. These two program approvals were obtained in April and August of 2003, respectively. Accordingly, the Montana Board of Oil and Gas Conservation has begun accepting new coalbed methane drilling permit applications. Environmental groups have initiated two lawsuits, each challenging one of these program approvals. We believe that the decisions by the Federal Bureau of Land Management and the State of Montana ultimately will be upheld and new coalbed methane development will continue to be authorized in Montana. Pinnacle holds approximately 56 grandfathered drilling permits in Montana that were contributed by our joint venture partner RMG at the time of Pinnacle's formation, and RMG holds approximately 56 grandfathered drilling permits in Montana for acreage in which CCBM also has an interest. There can be no assurance that any new permits will be obtained in a given time period or at all.

OTHER PROJECT AREAS

U.K. North Sea Region

We have been awarded seven acreage blocks, consisting of one "Traditional" and three "Promote" licenses, in the United Kingdom's 21st Round of Licensing. The awarded blocks, to explore for natural gas and oil totaling 209,613 acres, are located within mature producing areas of the Central and Southern North Sea in water depths of 30 to 350 feet. The Promote licenses do not have drilling commitments and have two-year terms. The Traditional license will be canceled after four years if we or our assignee elects not to commit to drilling a well. We believe our U.K. North Sea interest is a natural extension to our technical analyses, portfolio and business plan. The U.K. North Sea includes proven hydrocarbon trends with established technological expertise, available large 3-D seismic datasets and significant exploration potential. We plan to promote our interests to other parties experienced in drilling and operating in this region. Geological and geophysical costs will be incurred in an attempt to maximize the value of our retained interest. Our estimated project commitments from commencement through mid-2005 are $0.9 million, comprised of $0.2 million for seismic data, $0.2 million for leasehold costs and $0.2 million for data processing in 2003 and $0.3 million for seismic data processing in 2004.

WORKING INTEREST AND DRILLING IN PROJECT AREAS

The actual working interest we will ultimately own in a well will vary based upon several factors, including the depth, cost and risk of each well relative to our strategic goals, activity levels and budget availability. From time to time some fraction of these wells may be sold to industry partners either on a prospect by prospect basis or a program basis. In addition, we may also contribute acreage to larger drilling units thereby reducing prospect working interest. We have, in the past, retained less than 100% working interest in our drilling prospects. References to our interests are not intended to imply that we have or will maintain any particular level of working interest.

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