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OUR RESERVE DATA AND ESTIMATED DISCOUNTED
FUTURE NET CASH FLOWS ARE ESTIMATES BASED ON ASSUMPTIONS THAT MAY
BE INACCURATE AND ARE BASED ON EXISTING ECONOMIC AND OPERATING CONDITIONS
THAT MAY CHANGE IN THE FUTURE.
There are numerous uncertainties inherent
in estimating natural gas and oil reserves and their estimated value,
including many factors beyond the control of the producer. The reserve
data set forth in this Form 10-K represents only estimates. Reservoir
engineering is a subjective and inexact process of estimating underground
accumulations of natural gas and oil that cannot be measured in
an exact manner. The reserve data included in or filed as an exhibit
to this Form 10-K represents estimates that depend on a number of
factors and assumptions that may vary considerably from actual results,
including:
- historical production from the area compared
with production from other areas;
- the assumed effects of regulations by governmental
agencies;
- assumptions concerning future natural gas
and oil prices;
- future operating costs;
- severance and excise taxes;
- development costs; and
- workover and remedial costs.
For these reasons, estimates of the economically
recoverable quantities of natural gas and oil attributable to any
particular group of properties, classifications of those reserves
based on risk of recovery and estimates of the future net cash flows
expected from them prepared by different engineers or by the same
engineers but at different times may vary substantially. Accordingly,
reserve estimates may be subject to upward or downward adjustment,
and actual production, revenue and expenditures with respect to
our reserves likely will vary, possibly materially, from estimates.
Additionally, there recently has been increased debate and disagreement
over the classification of reserves, with particular focus on proved
undeveloped reserves. Changes in interpretations as to classification
standards, or disagreements with our interpretations, could cause
us to write down these reserves.
As of December 31, 2004, approximately 83%
of our proved reserves were proved undeveloped and proved nonproducing.
Moreover, some of the producing wells included in our reserve reports
as of December 31, 2004 had produced for a relatively short period
of time as of that date. Because most of our reserve estimates are
calculated using volumetric analysis, those estimates are less reliable
than estimates based on a lengthy production history. Volumetric
analysis involves estimating the volume of a reservoir based on
the net feet of pay of the structure and an estimation of the area
covered by the structure based on seismic analysis. In addition,
realization or recognition of our proved undeveloped reserves will
depend on our development schedule and plans. Lack of certainty
with respect to development plans for proved undeveloped reserves
could cause the discontinuation of the classification of these reserves
as proved. We have from time to time chosen to delay development
of our proved undeveloped reserves in the Camp Hill Field in East
Texas in favor of pursuing shorter-term exploration projects with
higher potential rates of return, adding to our lease position in
this field and further evaluating additional economic enhancements
for this field's development.
The discounted future net cash flows included
in this Form 10-K are not necessarily the same as the current market
value of our estimated natural gas and oil reserves. As required
by the Commission, the estimated discounted future net cash flows
from proved reserves are based on prices and costs as of the date
of the estimate. Actual future net cash flows also will be affected
by factors such as:
- the actual prices we receive for natural
gas and oil;
- our actual operating costs in producing
natural gas and oil;
- the amount and timing of actual production;
- supply and demand for natural gas and oil;
- increases or decreases in consumption of
natural gas and oil; and
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