PART I

Item 1. and Item 2. Business and Properties

General

Carrizo Oil & Gas, Inc. (“Carrizo,” the “Company” or “We”) is an independent energy company engaged in the exploration, development and production of natural gas and oil. Our current operations are focused in proven, producing natural gas and oil geologic trends along the onshore Gulf Coast area in Texas and Louisiana, primarily in the Miocene, Wilcox, Frio and Vicksburg trends, and, since mid-2003, in the Barnett Shale area in North Texas. Our other interests include properties in East Texas, the U.K. North Sea, and acreage in shale plays in the Barnett/Woodford in West Texas/New Mexico, Floyd/Neal in Mississippi, the western New Albany in Kentucky/Illinois and the Fayetteville in Arkansas. We also have a coalbed methane investment in the Rocky Mountains.

We have traditionally grown our production through our 3-D seismic-driven exploratory drilling program. Our compound production growth rate for the period December 31, 2000 through December 31, 2006 on an annualized basis was 17%. From our inception through December 31, 2006, we participated in the drilling of 508 wells (200.3 net) with an apparent success rate of approximately 71% in our onshore Gulf Coast area and an apparent success rate of 100% in the Barnett Shale area in North Texas (also called “Barnett Shale area” or “Ft. Worth Barnett Shale area”). Exploratory wells accounted for 81% of the total wells we drilled. Our total proved reserves as of December 31, 2006 were an estimated 210.0 Bcfe with a PV-10 value of $387.2 million. During 2006, we added a record 71.1 Bcfe to proved reserves and produced a record 11.7 Bcfe. We finance the majority of our drilling activity through internal cash flow generated primarily from oil and natural gas production sales revenue, proceeds from the issuance of various securities and borrowings under our credit facilities.

As a main component of our business strategy, we have acquired licenses for over 11,800 square miles of 3-D seismic data for processing and evaluation. Historically, we either (1) sought to acquire seismic permits from landowners that included options to lease the acreage prior to conducting proprietary surveys or (2) participated in 3-D group shoots in which we typically sought to obtain leases or farm-ins rather than lease options. Since 2001, we have been able to increase the size of our 3-D seismic holdings in our onshore Gulf Coast area by approximately 195% to over 8,400 square miles, in large part by taking advantage of very favorable pricing available for nonproprietary data from libraries of seismic companies. Since 2003, we have also grown our 3-D seismic holdings in the Barnett Shale area to over 386 square miles.

One of our primary strengths is the experience of our management and technical staff in the development, processing and analysis of this 3-D seismic data to generate and drill natural gas and oil prospects. Our technical and operating employees have an average of over 20 years of industry experience, in many cases with major and large independent oil and gas companies, including Shell Oil, Ocean Energy, ARCO, Conoco, Burlington Resources, Unocal, Pennzoil and Tenneco. Analyzing and reprocessing our 3-D seismic database, our highly qualified technical staff is continually adding to and refining our substantial inventory of drilling locations.

We believe that our utilization of large-scale 3-D seismic surveys and related technology allows us to create and maintain a multiyear inventory of high-quality exploration prospects. As of December 31, 2006, we had 194,719 net acres in Texas and Louisiana under lease or lease option (all references to acres under lease in this Form 10-K also include lease option acres unless otherwise indicated), including 37,644 net acres in our onshore Gulf Coast area, predominantly all covered by 3-D seismic data, 86,752 net acres in our Ft. Worth Barnett Shale area and 65,506 net acres in our West Texas Woodford/Barnett Shale area. We have identified: (1) 191 potential exploratory drilling locations in our onshore Gulf Coast area, comprised of 106 leased exploratory drillsites, 55 of which are field extension wells based on initial drilling activities, and 85 seismically defined prospects on which we are pursuing acreage, and (2) over 675 potential exploratory and development horizontal drilling locations on our leased acreage in the Ft. Worth Barnett Shale area. The vast majority of our 3-D seismic data covers productive geological trends in our onshore Gulf Coast area, where we have made 265 completions as a result of our utilization and evaluation of this data.

In our onshore Gulf Coast area, most of our drilling targets prior to 2000 were shallow (from 4,000 to 7,000 feet), normally pressured reservoirs that generally involved moderate cost (typically $0.3 million to $0.4 million per completed well) and risk. Since then, the depth of many of the wells that we have drilled, as well as our current drilling prospects, are deeper, overpressured targets with greater economic potential but generally higher cost (typically $1.0 million to $4.0 million per completed well) and risk. We seek to sell a portion of these deeper prospects to reduce our exploration risk and financial exposure while retaining significant upside potential. More recently, we have begun to retain larger percentages of, and increased our exposure to, higher cost, higher potential wells.

In mid-2003, we became active in the Barnett Shale area in North Texas (primarily in the Tarrant, Parker, Denton, Johnson, Hill and Erath counties). Improvements in fracture techniques in recent years have dramatically changed the economics of