H.J. GRUY AND ASSOCIATES, INC. 
---------------------------------------------------------------
1200  Smith Street, Suite 3040, Houston, Texas 77002 o 
FAX  (713) 739-6112 o (713) 739-1100



                            March 25, 1997



XCL Ltd.
110 Rue Jean Lafitte
Lafayette, Louisiana 70508

                                               Zhao Dong Block
                                               Bohai Bay, China
                                               97-202-102
                                               
Gentlemen:

At  your  request, we have made an estimate of the  reserves  and
future  net revenue as of January 1, 1997, for certain  interests
owned  by  XCL Ltd. (XCL) through a production sharing  agreement
with  the  China  National Oil & Gas Exploration and  Development
Corporation.  These are  interests in oil properties  located  in
the  Zhao  Dong  Block,  Bohai Bay,  China.   The  estimated  net
reserves,  future net cash flow and discounted  future  net  cash
flow are summarized by reserve category as follows:


                          Estimated                 Estimated
                         Net Reserves         Future Net Cash Flow
                       _________________   ___________________________
                            Oil &                         Discounted
                          Condensate                         at 10%
                           (Barrels)         Nondiscounted   Per Year
                          ___________       ____________  ____________
Total Proved Undeveloped  10,579,000        $142,860,000  $79,062,000


XCL  is  contractually  obligated  to  spend  $16.1  million   on
exploration drilling within the Zhao Dong Block, but outside  the
area  of  proved  reserves.   This dollar  amount  has  not  been
included  in  the cash flow calculations, but has been  recovered
through  the cost oil provision of the agreement.  The discounted
future  net  cash flow is not represented to be the  fair  market
value  of these reserves, and the estimated reserves included  in
this report have not been adjusted for risk.
The estimated future net cash flow is that revenue which will  be
realized  from  the  sale of the estimated net  production  after
deduction  of  royalties,  direct operating  costs  and  required
capital  expenditures in accordance with the  production  sharing
agreement.   Surface and well equipment salvage values  and  well
plugging and field abandonment costs have not been considered  in
the  cash  flow projections.  Future net cash flow as  stated  in
this report is before the deduction of federal income tax.

In   the  economic  projections,  prices,  operating  costs   and
development costs remain constant for the projected life of  each
lease, except that the operating costs have been reduced the last
two   years   to  reflect  an  anticipated  change  in  operating
practices.

Reserves  have  been estimated from volumetric  calculations  and
analogy  with the performance of comparable wells.  The  reserves
included  in  this  study are estimates only and  should  not  be
construed  as  exact  quantities.  Future conditions  may  affect
recovery  of estimated reserves and cash flow, and all categories
of  reserves  may  be  subject to revision as  more  data  become
available.   The proved reserves included in this report  conform
to  the applicable definitions promulgated by the Securities  and
Exchange  Commission.  Attachment 1, following this letter,  sets
forth all reserve definitions incorporated in this study.
Extent and character of ownership, oil and gas prices, production
data,  direct operating costs, capital expenditure estimates  and
other data provided by XCL have been accepted as represented.  No
independent  well  tests,  property  inspections  or  audits   of
operating  expenses  were conducted by our staff  in  conjunction
with  this  study.   We did not verify or determine  the  extent,
character,  obligations, status or liabilities, if  any,  arising
from  any  current  or possible future environmental  liabilities
that might be applicable.

In  order to estimate reserves, costs and future cash flows shown
in this report, we have relied in part on geological, engineering
and economic data furnished by our client.  Although we have made
a  best  efforts  attempt to acquire all pertinent  data  and  to
analyze  it  carefully  with methods accepted  by  the  petroleum
industry,  there is no guarantee that the volumes of oil  or  the
cash  flow projected will be realized.  The reserve and cash flow
projections  presented  in this report may  require  revision  as
additional data become available.

If  investments or business decisions are to be made in  reliance
on  these estimates by anyone other than our client, such  person
with  the approval of our client is invited to visit our  offices
at  his expense so that he can evaluate the assumptions made  and
the  completeness and extent of the data available on  which  our
estimates are based.

Any  distribution  or  publication of this  report  or  any  part
thereof must include this letter in its entirety.

                            Yours very truly,
                            H.J. GRUY AND ASSOCIATES, INC.


                            /s/ James H. Hartsock

                            James H. Hartsock, PhD., P.E.
                            Executive Vice President
                            
JHH:rrw

Attachment
A:\XCL.LTR
                          ATTACHMENT I
           DEFINITIONS OF PROVED OIL AND GAS RESERVES1
                                
                                
Proved Oil and Gas Reserves

Proved oil and gas reserves are the estimated quantities of crude
oil,  natural  gas, and natural gas liquid which  geological  and
engineering  data  demonstrate with reasonable  certainty  to  be
recoverable in future years from known reservoirs under  existing
economic and operating conditions, i.e., prices and costs  as  of
the  date the estimate is made.  Prices include consideration  of
changes   in   existing  prices  provided  only  by   contractual
arrangements,   but   not  on  escalations  based   upon   future
conditions.

Reservoirs  are  considered proved if economic  producibility  is
supported  by  either  actual production or conclusive  formation
test.   The  area of a reservoir considered proved  includes  (A)
that portion delineated by drilling and defined by gas-oil and/or
oil-water  contacts,  if any, and (B) the  immediately  adjoining
portions  not yet drilled, but which can be reasonably judged  as
economically productive on the basis of available geological  and
engineering  data.   In  the  absence  of  information  on  fluid
contacts,  the lowest known structural occurrence of hydrocarbons
controls the lower proved limit of the reservoir.
Reserves  which can be produced economically through  application
of  improved  recovery techniques (such as fluid  injection)  are
included  in the "proved" classification when successful  testing
by  a pilot project, or the operation of an installed program  in
the  reservoir, provides support for the engineering analysis  on
which the project or program was based.
Estimates  of proved reserves do not include the following:   (A)
oil  that  may  become  available from known  reservoirs  but  is
classified  separately  as "indicated additional  reserves";  (B)
crude oil, natural gas, and natural gas liquids, the recovery  of
which is subject to reasonable doubt because of uncertainty as to
geology,  reservoir  characteristics, or  economic  factors;  (C)
crude  oil, natural gas, and natural gas liquids, that may  occur
in  undrilled  prospects; and (D) crude  oil,  natural  gas,  and
natural gas liquids, that may be recovered from oil shales, coal,
gilsonite and other such sources.

Proved Developed Oil and Gas Reserves

Proved  developed oil and gas reserves are reserves that  can  be
expected  to  be recovered through existing wells  with  existing
equipment and operating methods.  Additional oil and gas expected
to  be  obtained  through the application of fluid  injection  or
other  improved recovery techniques for supplementing the natural
forces  and mechanisms of primary recovery should be included  as
"proved developed reserves" only after testing by a pilot project
or  after  the  operation of an installed program  has  confirmed
through  production  response that  increased  recovery  will  be
achieved.

Proved Undeveloped Reserves

Proved  undeveloped oil and gas reserves are  reserves  that  are
expected to be recovered from new wells on undrilled acreage,  or
from  existing  wells  where a relatively  major  expenditure  is
required  for recompletion.  Reserves on undrilled acreage  shall
be  limited  to those drilling units offsetting productive  units
that  are reasonably certain of production when drilled.   Proved
reserves  for other undrilled units can be claimed only where  it
can  be  demonstrated with certainty that there is continuity  of
production  from  the  existing productive formation.   Under  no
circumstances should estimates for proved undeveloped reserves be
attributable  to  any acreage for which an application  of  fluid
injection  or  other improved recovery technique is contemplated,
unless such techniques have been proved effective by actual tests
in the area and in the same reservoir.



__________________________
1      Contained in Securities and Exchange Commission Regulation
       S-X, Rule 4-10 (a)

H.J. Gruy and Associates, Inc.

ATTACHMENT II

XCL CHINA, LTD.
PROJECTED CASH FLOWS
ZHAO DONG CONCESSION  45 MM BBL CASE (CASE 1: PROVED ONLY - FLAT
PRICING)

                                    1996     1997     1998   1999
                                    ----     ----     ----   ----
OIL PRICE ($BBL)                   21.06    21.06   21.06   21.06
GROSS OIL VOLUME (MBBLS)             -        -       234   3,736
CONS IND & COMM TAX (MBBLS)          -        -        12     187
ROYALTY (MBBLS)                      -        -        -      -
COST RECOVERY OIL (MBBLS)            -        -       140   2,242
OPERATING EXPENSES (M$)              -        -     1,315  10,734
OPERATING EXPENSE VOLUME (MBBLS)     -        -        62     510
INVESTMENT RECOVERY OIL (MBBLS)      -        -        78   1,732
EXPLORATION COSTS (M$)            80,452      -       -       -
EXPLORATION RECOVERY (MBBLS)       3,820      -       -       -
EXPLORATION RECOVERY ADJUSTMENT     (180)     -       -       -
EXPLORATION RECOVERY UTILIZED         -       -        78   1,732
EXPLORATION COST CARRYOVER (MBBLS)  3,640    3,640   3,562  1,830
DEVELOPMENT COSTS (M$)                -      1,000  55,357 93,400
DEVELOPMENT RECOVERY (MBBLS)          -         47   2,629  4,435
DEVELOPMENT RECOVERY UTILIZED         -        -       -      -
DEVELOPMENT COST CARRYOVER (MBBLS)    -         47   2,676  7,111
TOTAL COST RECOVERY OIL (MBBLS)       -        -        78  1,732
REMAINDER OIL (MBBLS)                 -        -        82  1,308
X FACTOR                              -        -      0.95  0.887
CHINESE SHARE OIL (MBBLS)             -        -         4    147
ALLOCABLE REMAINDER OIL (MBBLS)       -        -        78  1,160
CONTRACTOR ALLOCABLE OIL-49% (MBBLS)  -        -        38    569
TOTAL CONTRACTOR OIL (MBBLS)          -        -       147  2,550

PROJECTED CASH FLOWS (CONT'D.)
                                    2000     2001     2002   2003
                                    ----     ----     ----   ----
OIL PRICE ($BBL)                    21.06    21.06   21.06  21.06
GROSS OIL VOLUME (MBBLS)            8,062    7,804   6,800  5,220
CONS IND & COMM TAX (MBBLS)           403      390     340    261
ROYALTY (MBBLS)                        42       32     -      -
COST RECOVERY OIL (MBBLS)           4,837    4,682   4,080  3,132
OPERATING EXPENSES (M$)            18,015   19,416  18,020 15,824
OPERATING EXPENSE VOLUME (MBBLS)      855      922     856    751
INVESTMENT RECOVERY OIL (MBBLS)     3,982    3,760   3,224  2,381
EXPLORATION COSTS (M$)                -        -       -      -
EXPLORATION RECOVERY (MBBLS)          -        -       -      -
EXPLORATION RECOVERY ADJUSTMENT       -        -       -      -
EXPLORATION RECOVERY UTILIZED       1,830      -       -      -
EXPLORATION COST CARRYOVER (MBBLS)    -        -       -      -
DEVELOPMENT COSTS (M$)             17,200      -       -      -
DEVELOPMENT RECOVERY (MBBLS)          817      -       -      -
DEVELOPMENT RECOVERY UTILIZED       2,152    3,760   2,016    -
DEVELOPMENT COST CARRYOVER (MBBLS)  5,776    2,016     -      -
TOTAL COST RECOVERY OIL (MBBLS)     3,982    3,760   2,016    -
REMAINDER OIL (MBBLS)               2,779    2,699   3,589  4,208
X FACTOR                            0.830    0.883   0.845  0.868
CHINESE SHARE OIL (MBBLS)             473      452     557    554
ALLOCABLE REMAINDER OIL (MBBLS)     2,306    2,247   3,031  3,653
CONTRACTOR ALLOCABLE OIL-49% (MBBLS)1,130    1,101   1,485  1,790
TOTAL CONTRACTOR OIL (MBBLS)        4,434    3,395   2,892  2,158

PROJECTED CASH FLOWS (CONT'D.)
                                    2004     2005     2006   2007
                                    ----     ----     ----   ----
OIL PRICE ($BBL)                   21.06     21.06   21.06  21.06
GROSS OIL VOLUME (MBBLS)           3,826     2,733   1,983  1,441
CONS IND & COMM TAX (MBBLS) 191      191       137      99     72
ROYALTY (MBBLS)                      -         -       -      -
COST RECOVERY OIL (MBBLS)          2,296     1,640   1,190    865
OPERATING EXPENSES (M$)           13,886    12,367  11,325 10,153
OPERATING EXPENSE VOLUME (MBBLS)     659       587     538    482
INVESTMENT RECOVERY OIL (MBBLS)    1,636     1,053     652    383
EXPLORATION COSTS (M$)               -         -       -      -
EXPLORATION RECOVERY (MBBLS)         -         -       -      -
EXPLORATION RECOVERY ADJUSTMENT      -         -       -      -
EXPLORATION RECOVERY UTILIZED        -         -       -      -
EXPLORATION COST CARRYOVER (MBBLS)   -         -       -      -
DEVELOPMENT COSTS (M$)               -         -       -      -
DEVELOPMENT RECOVERY (MBBLS)         -         -       -      -
DEVELOPMENT RECOVERY UTILIZED        -         -       -      -
DEVELOPMENT COST CARRYOVER (MBBLS)   -         -       -      -
TOTAL COST RECOVERY OIL (MBBLS)      -         -       -      -
REMAINDER OIL (MBBLS)              2,975     2,009   1,346    887
X FACTOR                           0.886     0.911   0.926  0.948
CHINESE SHARE OIL (MBBLS)            340       179      99     46
ALLOCABLE REMAINDER OIL (MBBLS)    2,636     1,830   1,247    840
CONTRACTOR ALLOCABLE OIL-49%(MBBLS)1,292       897     611    412
TOTAL CONTRACTOR OIL (MBBLS)       1,615     1,185     875    648

PROJECTED CASH FLOWS (CONT'D.)
                                    2008     2009     2010   2011
                                    ----     ----     ----   ----
OIL PRICE ($BBL)                   21.06    21.06    21.06  21.06
GROSS OIL VOLUME (MBBLS)           1,048      764      556    406
CONS IND & COMM TAX (MBBLS)           52       38       28     20
ROYALTY (MBBLS)                      -        -        -      -
COST RECOVERY OIL (MBBLS)            629      458      334    244
OPERATING EXPENSES (M$)            9,244    8,534    5,468  5,016
OPERATING EXPENSE VOLUME (MBBLS)     439      405      260    238
INVESTMENT RECOVERY OIL (MBBLS)      190       53       74      5
EXPLORATION COSTS (M$)               -        -        -      -
EXPLORATION RECOVERY (MBBLS)         -        -        -      -
EXPLORATION RECOVERY ADJUSTMENT      -        -        -      -
EXPLORATION RECOVERY UTILIZED        -        -        -      -
EXPLORATION COST CARRYOVER (MBBLS)   -        -        -      -
DEVELOPMENT COSTS (M$)               -        -        -      -
DEVELOPMENT RECOVERY (MBBLS)         -        -        -      -
DEVELOPMENT RECOVERY UTILIZED        -        -        -      -
DEVELOPMENT COST CARRYOVER (MBBLS)   -        -        -      -
TOTAL COST RECOVERY OIL (MBBLS)      -        -        -      -
REMAINDER OIL (MBBLS)                557      321      269    148
X FACTOR                            0.95     0.95     0.95   0.95
CHINESE SHARE OIL (MBBLS)             28       16       13      7
ALLOCABLE REMAINDER OIL (MBBLS)      529      305      255    140
CONTRACTOR ALLOCABLE OIL-49% (MBBLS) 259      149      125     69
TOTAL CONTRACTOR OIL (MBBLS)         474      348      252    185
PROJECTED CASH FLOWS (CONT'D.)
                                    2012     2013     2014   2015   TOTALS
                                    ----     ----     ----   ----   -----
OIL PRICE ($BBL)                   21.06    21.06    21.06  21.06
GROSS OIL VOLUME (MBBLS)             -        -        -      -    44,613
CONS IND & COMM TAX (MBBLS)          -        -        -      -     2,231
ROYALTY (MBBLS)                      -        -        -      -        75
COST RECOVERY OIL (MBBLS)            -        -        -      -    26,768
OPERATING EXPENSES (M$)              -        -        -      -   159,317
OPERATING EXPENSE VOLUME (MBBLS)     -        -        -      -     7,565
INVESTMENT RECOVERY OIL (MBBLS)      -        -        -      -    19,203
EXPLORATION COSTS (M$)               -        -        -      -    80,452
EXPLORATION RECOVERY (MBBLS)         -        -        -      -     3,820
EXPLORATION RECOVERY ADJUSTMENT      -        -        -      -      (180)
EXPLORATION RECOVERY UTILIZED        -        -        -      -     3,640
EXPLORATION COST CARRYOVER (MBBLS)   -        -        -      -     9,033
DEVELOPMENT COSTS (M$)               -        -        -      -   166,957
DEVELOPMENT RECOVERY (MBBLS)         -        -        -      -     7,928
DEVELOPMENT RECOVERY UTILIZED        -        -        -      -     7,928
DEVELOPMENT COST CARRYOVER (MBBLS)   -        -        -      -    17,626
TOTAL COST RECOVERY OIL (MBBLS)      -        -        -      -    11,568
REMAINDER OIL (MBBLS)                -        -        -      -    23,175
X FACTOR                            0.95     0.95     0.95   0.95    -
CHINESE SHARE OIL (MBBLS)            -        -        -      -     2,916
ALLOCABLE REMAINDER OIL (MBBLS)      -        -        -      -    20,259
CONTRACTOR ALLOCABLE OIL-49% (MBBLS) -        -        -      -     9,927
TOTAL CONTRACTOR OIL (MBBLS)         -        -        -      -    21,158


FOREIGN CONTRACTOR CASH FLOW (M$)

                                    1996    1997    1998   1999
                                    ----    ----    ----   ----
COST RECOVERY REVENUES               -       -     2,286  41,734
ALLOCABLE REVENUES                   -       -       803  11,975
EXPLORATION EXPENSE              (80,452)    -       -       -
SUBSEQUENT DEVELOPMENT EXPENSE       -     (490) (27,125)(45,766)
OPERATING EXPENSE                    -       -      (644) (5,260)
                                 -------   ----  -------  ------
NET CASH FLOW                    (80,452)  (490) (24,680)  2,683
                                 =======   ====  =======  ======

FOREIGN CONTRACTOR CASH FLOW (M$) (CONT'D.)

                                   2000    2001    2002    2003
                                   ----    ----    ----    ----
COST RECOVERY REVENUES            69,575 48,320   29,631   7,754
ALLOCABLE REVENUES                23,801 23,190   31,282  37,701
EXPLORATION EXPENSE                  -      -        -       -
SUBSEQUENT DEVELOPMENT EXPENSE    (8,428)   -        -       -
OPERATING EXPENSE                 (8,827)(9,514)  (8,830) (7,754)
                                  ------ ------   ------  -----
NET CASH FLOW                     76,121 61,995   52,082  37,701
                                  ====== ======   ======  ======

FOREIGN CONTRACTOR CASH FLOW (M$)(CONT'D.)

                                   2004    2005    2006    2007
                                   ----    ----    ----    ----
COST RECOVERY REVENUES             6,804  6,060    5,549   4,975
ALLOCABLE REVENUES                27,199 18,887   12,870   8,673
EXPLORATION EXPENSE                  -      -        -       -
SUBSEQUENT DEVELOPMENT EXPENSE       -      -        -       -
OPERATING EXPENSE                 (6,804)(6,060)  (5,549) (4,975)
                                  ------ ------   ------   -----
NET CASH FLOW                     27,199 18,887   12,870   8,673
                                  ====== ======   ======   =====

FOREIGN CONTRACTOR CASH FLOW (M$)(CONT'D.)

                                   2008    2009    2010    2011
                                   ----    ----    ----    ----

COST RECOVERY REVENUES             4,530  4,182    2,679   2,458
ALLOCABLE REVENUES                 5,457  3,143    2,633   1,446
EXPLORATION EXPENSE                  -      -        -       -
SUBSEQUENT DEVELOPMENT EXPENSE       -      -        -       -
OPERATING EXPENSE                 (4,530)(4,182)  (2,679) (2,458)
                                   -----  -----    -----   -----
NET CASH FLOW                      5,457  3,143    2,633   1,446
                                   =====  =====    =====   =====

FOREIGN CONTRACTOR CASH FLOW (M$)(CONT'D.)

                                    2012   2013    2014    2015     TOTALS
                                    ----   ----    ----    ----     ------
COST RECOVERY REVENUES                -     -        -       -     236,535
ALLOCABLE REVENUES                    -     -        -       -     209,060
EXPLORATION EXPENSE                   -     -        -       -        -
SUBSEQUENT DEVELOPMENT EXPENSE        -     -        -       -     (81,809)
OPERATING EXPENSE                     -     -        -       -     (78,065)
                                    ----   ---     ----    ----     -------
NET CASH FLOW                         -     -        -       -      285,721 
                                    ====   ===    =====    =====    =======


CASH FLOW TO EACH PARTNER (M$) (50% INTEREST)

                                   1996     1997    1998    1999
                                   ----     ----    ----    ----
TOTAL OIL REVENUES                   -       -     1,545  26,854
EXPLORATION EXPENSE              (40,226)    -       -       -
SUBSEQUENT DEVELOPMENT EXPENSE       -     (245) (13,562)(22,883)
OPERATING EXPENSE                    -       -      (322) (2,630)
                                  ------   ----   ------  ------
NET CASH FLOW                    (40,226)  (245) (12,340)  1,341
                                  ======    ===   ======   =====
                                  
                                  
CASH FLOW TO EACH PARTNER (M$) (50% INTEREST)(CONT'D.)

                                   2000    2001     2002     2003
                                   ----    ----     ----     ----
TOTAL OIL REVENUES                46,688 35,755   30,456  22,727
EXPLORATION EXPENSE                  -      -        -       -
SUBSEQUENT DEVELOPMENT EXPENSE    (4,214)   -        -       -
OPERATING EXPENSE                 (4,414)(4,757)  (4,415) (3,877)
                                  ------ ------   ------  ------
NET CASH FLOW                     38,061 30,998   26,041  18,850
                                  ====== ======   ======  ======

CASH FLOW TO EACH PARTNER (M$) (50% INTEREST) (CONT'D.)

                                   2004    2005     2006    2007
                                   ----    ----     ----    ----
TOTAL OIL REVENUES                17,002 12,474    9,209   6,824
EXPLORATION EXPENSE                  -      -        -       -
SUBSEQUENT DEVELOPMENT EXPENSE       -      -        -       -
OPERATING EXPENSE                 (3,402)(3,030)  (2,775) (2,487)
                                  ------  -----    -----   -----
NET CASH FLOW                     13,600  9,444    6,435   4,337
                                  ======  =====    =====   =====

CASH FLOW TO EACH PARTNER (M$) (50% INTEREST) (CONT'D.)

                                   2008    2009     2010    2011
                                   ----    ----     ----    ----
TOTAL OIL REVENUES                 4,993  3,662    2,656   1,952
EXPLORATION EXPENSE                  -      -        -       -
SUBSEQUENT DEVELOPMENT EXPENSE       -      -        -       -
OPERATING EXPENSE                 (2,265)(2,091)  (1,340) (1,229)
                                   -----  -----    -----   -----
NET CASH FLOW                      2,729  1,571    1,316     723
                                   =====  =====    =====   =====

CASH FLOW TO EACH PARTNER (M$) (50% INTEREST) (CONT'D.)

                                    2012    2013    2014     2015    TOTALS
                                    ----    ----    ----     ----    ------
TOTAL OIL REVENUES                   -      -        -       -       222,797
EXPLORATION EXPENSE                  -      -        -       -          -
SUBSEQUENT DEVELOPMENT EXPENSE       -      -        -       -       (40,904)
OPERATING EXPENSE                    -      -        -       -       (39,033)  
                                   ----   ----     ----    ----      --------
NET CASH FLOW                        -      -        -       -       142,860
                                   ====   ====     =====   =====     =======

INTERNAL RATE OF RETURN      121%
NET PRESENT VALUES @ 10% AS OF 1-1-1997     79,062