**Exhibit 99.1**

 
|                                                                            | **NETHERLAND, SEWELL  & ASSOCIATES, INC.** | **CHAIRMAN & CEO** | **EXECUTIVE COMMITTEE** |
|----------------------------------------------------------------------------|------------------------------------------------|-----------------------------|-------------------------|
| C.H. (SCOTT) REES III                                                      | P. SCOTT FROST - DALLAS                        |
| **PRESIDENT & COO**                                               | J. CARTER HENSON, JR. - HOUSTON                |
| **WORLDWIDE PETROLEUM CONSULTANTS**                                        | DANNY D. SIMMONS                               | DAN PAUL SMITH - DALLAS     |
| **ENGINEERING**·**GEOLOGY**·**GEOPHYSICS**·**PETROPHYSICS** | **EXECUTIVE****VP**                            | JOSEPH J. SPELLMAN - DALLAS |
| G. LANCE BINDER                                                            | THOMAS J. TELLA II - DALLAS                    |

 

March 18, 2010

 

Mr. FrédéricBriens

BPZEnergy, Inc.

580Westlake Park BoulevardHouston, Texas 77079

 

DearMr. Briens:

 

Inaccordance with your request, we have estimated the proved reserves and futurerevenue, as of December 31, 2009, to the BPZ Energy, Inc. (BPZ)interest in certain oil properties located in Albacora and Corvina Fields,offshore Peru. It is our understanding that the proved reserves estimated inthis report constitute all of the proved reserves owned by BPZ. The estimatesin this report have been prepared in accordance with the definitions andguidelines of the U.S. Securities and Exchange Commission (SEC) and, with theexception of the exclusion of future income taxes, conform to the FASBAccounting Standards Codification Topic 932, Extractive Activities—Oil and Gas.Definitions are presented immediately following this letter. This report hasbeen prepared for BPZ’s use in filing with the SEC.

 

Weestimate the oil reserves and future net revenue to the BPZ interest in theseproperties, as of December 31, 2009, to be:

 
| ** **                     | ** ** | **Oil  Reserves(1) (MBBL)** | ** ** | **Future  Net Revenue (M$)** | ** ** |
|--------------------------------|------------|----------------------------------|------------|------------------------------|------------|
| **Category**                   | ** ** | **Gross**                        | ** ** | **Net**                      | ** ** | **Total** | ** ** | **Present  Worth****at 10%** | ** ** |
| Proved Developed Producing     |       | 4,298.1                          |       | 4,298.1                      |       | 148,083.3 |   | 114,415.8 | ** ** |
| Proved Developed Non-Producing |       | 5,613.6                          |       | 5,613.6                      |       | 237,223.9 |   | 161,428.2 | ** ** |
| Proved Undeveloped             |       | 27,572.8                         |       | 27,572.8                     |       | 957,281.7 |   | 633,971.3 | ** ** |
|                           |       |                             |       |                         |       |   |   |   | ** ** |
| Total Proved                   |       | 37,484.5                         |       | 37,484.5                     |       | 1,342,588.9 |   | 909,815.3 | ** ** |

 

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(1)     Under Peruvianhydrocarbon law the contractor has rights to 100 percent of the hydrocarbonsproduced. Because BPZ owns a 100 percent interest in these properties, grossand net volumes are the same.

 

Theoil reserves shown include crude oil only. Oil volumes are expressed inthousands of barrels (MBBL); a barrel is equivalent to 42 United Statesgallons. Gas reserves that may exist for these properties have not beenestimated at this time. Revenue estimates are expressed in thousands of UnitedStates dollars (M$).

 

Theestimates shown in this report are for proved reserves. As requested, probableand possible reserves that exist for these properties have not been included.This report does not include any value that could be attributed to interests inundeveloped acreage beyond those tracts for which undeveloped reserves havebeen estimated. Reserves categorization conveys the relative degree ofcertainty; reserves subcategorization is based on development and productionstatus. The estimates of reserves and future revenue included herein have notbeen adjusted for risk.

 

Futuregross revenue to the BPZ interest is before deducting government royaltypayments. Future net revenue is after deductions for royalty expense payments, futurecapital costs, and operating expenses but before consideration of any incometaxes. The future net revenue has been discounted at an annual rate of 10percent

 
| 4500 THANKSGIVING TOWER · 1601  ELM STREET · DALLAS, TEXAS 75201-4754 · PH: 214-969-5401 · FAX:  214-969-5411 |   | nsai@nsai-petro.com  |
|-----------------------------------------------------------------------------------------------------------------------------------|--------|----------------------|
| 1221 LAMAR STREET, SUITE 1200 ·  HOUSTON, TEXAS 77010-3072 · PH: 713-654-4950 · FAX:  713-654-4951                 |   | netherlandsewell.com |

 

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todetermine its present worth. The present worth is shown to indicate the effectof time on the value of money and should not be construed as being the fairmarket value of the properties.

 

Forthe purposes of this report, we did not perform any field inspection of theproperties, nor did we examine the mechanical operation or condition of the wellsand facilities. We have not investigated possible environmental liabilityrelated to the properties; therefore, our estimates do not include any costsdue to such possible liability. Our estimates of future revenue do not includeany salvage value for the lease and well equipment but do include BPZ’sestimates of the costs to abandon the wells, platforms, and productionfacilities. Abandonment costs are included as capital costs.

 

Theoil price used in this report is based on the terms of the existing oil salescontract for these properties. The price of $57.30 per barrel is the 12-monthunweighted arithmetic average of the first-day-of-the-month contract price forthe period January through December 2009. The oil price is heldconstant throughout the lives of the properties.

 

Leaseand well operating costs used in this report are based on operating expenserecords and internal budgets of BPZ, the operator of the properties. Asrequested, lease and well operating costs are limited to direct lease- and field-levelcosts and BPZ’s estimate of the portion of its headquarters general andadministrative overhead expenses necessary to operate the properties. Lease andwell operating costs are held constant throughout the lives of the properties.Capital costs are included as required for new development wells, platforms,and production equipment. The future capital costs are held constant to thedate of expenditure.

 

Thereserves shown in this report are estimates only and should not be construed asexact quantities. Proved reserves are those quantities of oil and gas which, byanalysis of engineering and geoscience data, can be estimated with reasonablecertainty to be economically producible. If the reserves are recovered, therevenues therefrom and the costs related thereto could be more or less than theestimated amounts. Because of governmental policies and uncertainties of supplyand demand, the sales rates, prices received for the reserves, and costsincurred in recovering such reserves may vary from assumptions made whilepreparing this report. Estimates of reserves may increase or decrease as aresult of future operations, market conditions, or changes in regulations.

 

Forthe purposes of this report, we used technical and economic data including, butnot limited to, well logs, geologic maps, seismic data, well test data,production data, historical price and cost information, and property ownershipinterests. The reserves in this report have been estimated using deterministicmethods; these estimates have been prepared in accordance with generallyaccepted petroleum engineering and evaluation principles. We used standardengineering and geoscience methods, or a combination of methods, such asperformance analysis, volumetric analysis, and analogy, that we considered tobe appropriate and necessary to establish reserves quantities and reservescategorization that conform to SEC definitions and guidelines. A substantialportion of these reserves are for behind-pipe zones, non-producing zones,undeveloped locations, and producing wells that lack sufficient productionhistory upon which performance-related estimates of reserves can be based.Therefore, these reserves are based on estimates of reservoir volumes andrecovery efficiencies along with analogy to properties with similar geologicand reservoir characteristics. In evaluating the information at our disposalconcerning this report, we have excluded from our consideration all matters asto which the controlling interpretation may be political, socioeconomic, legal,or accounting, rather than engineering and geoscience. As in all aspects of oiland gas evaluation, there are uncertainties inherent in the interpretation ofengineering and geoscience data; therefore, our conclusions necessarilyrepresent only informed professional judgment.

 

Thecontractual rights to the properties have not been examined by Netherland,Sewell & Associates, Inc. (NSAI), nor has the actual degree ortype of interest owned been independently confirmed. The data used in ourestimates were obtained from BPZ and the nonconfidential files of NSAI and wereaccepted as accurate. Supporting geoscience, field performance, and work dataare on file in our office. The technical persons responsible for preparing thereserves estimates presented herein meet the requirements regardingqualifications, independence, objectivity, and confidentiality set forth in theStandards Pertaining to the Estimating and Auditing

 

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of Oil and Gas ReservesInformation promulgated by the Society of Petroleum Engineers. We areindependent petroleum engineers, geologists, geophysicists, andpetrophysicists; we do not own an interest in these properties and are notemployed on a contingent basis.

 
|                              |                        | Sincerely,                                                                                    |
|-----------------------------------|-----------------------------|-----------------------------------------------------------------------------------------------|
|                              |                        |                                                                                          |
|                              |                        | **NETHERLAND, SEWELL & ASSOCIATES, INC.**Texas  Registered Engineering Firm F-002699 |
|                              |                        |                                                                                          |
|                              |                        |                                                                                          |
|                              |                        | By:                                                                                           | /s/ C.H. (Scott) Rees  III |
|                              |                        |                                                                                          |   |
|                              |                        |                                                                                          | C.H. (Scott) Rees III,  P.E. |
|                              |                        |                                                                                          | Chairman and Chief  Executive Officer |
|                              |                        |                                                                                          |
|                              |                        |                                                                                          |
| By:                               | /s/ Dan Paul Smith          |                                                                                          | By: | /s/ John G. Hattner |
|                              |                        |                                                                                          |   |   |
|                              | Dan Paul Smith, P.E.  49093 |                                                                                          |   | John G. Hattner, P.G.  559 |
|                              | Senior Vice President       |                                                                                          |   | Senior Vice President |
|                              |                        |                                                                                          |
|                              |                        |                                                                                          |
| Date Signed:  March 18, 2010 |                        | Date Signed:  March 18, 2010                                                             |

 

 

DPS:ARS

 

Pleasebe advised that the digital document you are viewing is provided by Netherland,Sewell & Associates, Inc. (NSAI) as a convenience to our clients.The digital document is intended to be substantively the same as the originalsigned document maintained by NSAI. The digital document is subject to theparameters, limitations, and conditions stated in the original document. In theevent of any differences between the digital document and the originaldocument, the original document shall control and supersede the digitaldocument.

 

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**DEFINITIONS OF OIL AND GASRESERVES**Adapted from U.S. Securities and Exchange Commission Regulation S-X Section 210.4-10(a)

 

Thefollowing definitions are set forth in U.S. Securities and Exchange Commission(SEC) Regulation S-X Section 210.4-10(a). Also included is supplementalinformation from (1) the 2007 Petroleum Resources Management Systemapproved by the Society of Petroleum Engineers, (2) the FASB AccountingStandards Codification Topic 932, Extractive Activities—Oil and Gas, and (3) theSEC’s Compliance and Disclosure Interpretations.

 

(1) *Acquisition of properties.*Costs incurredto purchase, lease or otherwise acquire a property, including costs of leasebonuses and options to purchase or lease properties, the portion of costsapplicable to minerals when land including mineral rights is purchased in fee,brokers’ fees, recording fees, legal costs, and other costs incurred inacquiring properties.

 

(2) *Analogous reservoir.*Analogous reservoirs, as usedin resources assessments, have similar rock and fluid properties, reservoirconditions (depth, temperature, and pressure) and drive mechanisms, but aretypically at a more advanced stage of development than the reservoir ofinterest and thus may provide concepts to assist in the interpretation of morelimited data and estimation of recovery. When used to support proved reserves,an “analogous reservoir” refers to a reservoir that shares the followingcharacteristics with the reservoir of interest:

 

(i)    Same geological formation(but not necessarily in pressure communication with the reservoir of interest);

(ii)   Same environment ofdeposition;

(iii)  Similar geological structure;and

(iv)  Same drive mechanism.

 

*Instruction to paragraph (a)(2)*:**Reservoirproperties must, in the aggregate, be no more favorable in the analog than inthe reservoir of interest.

 

(3) *Bitumen.*Bitumen, sometimes referredto as natural bitumen, is petroleum in a solid or semi-solid state in naturaldeposits with a viscosity greater than 10,000 centipoise measured at originaltemperature in the deposit and atmospheric pressure, on a gas free basis. Inits natural state it usually contains sulfur, metals, and othernon-hydrocarbons.

 

(4) *Condensate.*Condensate is a mixture ofhydrocarbons that exists in the gaseous phase at original reservoir temperatureand pressure, but that, when produced, is in the liquid phase at surfacepressure and temperature.

 

(5) *Deterministic estimate.*The method of estimatingreserves or resources is called deterministic when a single value for eachparameter (from the geoscience, engineering, or economic data) in the reservescalculation is used in the reserves estimation procedure.

 

(6) *Developed oil and gas reserves.*Developed oiland gas reserves are reserves of any category that can be expected to be recovered:

 

(i)    Through existing wells withexisting equipment and operating methods or in which the cost of the requiredequipment is relatively minor compared to the cost of a new well; and

(ii)   Through installed extractionequipment and infrastructure operational at the time of the reserves estimateif the extraction is by means not involving a well.

 

*Supplemental definitionsfrom the 2007 Petroleum Resources Management System:*

* *

*Developed Producing Reserves— Developed Producing Reserves are expected to be recovered from completionintervals that are open and producing at the time of the estimate. Improvedrecovery reserves are considered producing only after the improved recoveryproject is in operation.*

 

*Developed Non-ProducingReserves — Developed Non-Producing Reserves include shut-in and behind-pipeReserves. Shut-in Reserves are expected to be recovered from(1) completion intervals which are open at the time of the estimate butwhich have not yet started producing, (2) wells which were shut-in for marketconditions or pipeline connections, or (3) wells not capable of productionfor mechanical reasons. Behind-pipe Reserves are expected to be recovered fromzones in existing wells which will require additional completion work or futurerecompletion prior to start of production. In all cases, production can beinitiated or restored with relatively low expenditure compared to the cost ofdrilling a new well.*

 

(7)* Development costs.*Costs incurredto obtain access to proved reserves and to provide facilities for extracting,treating, gathering and storing the oil and gas. More specifically, developmentcosts, including depreciation and applicable operating costs of supportequipment and facilities and other costs of development activities, are costsincurred to:

 

(i)    Gain access to and preparewell locations for drilling, including surveying well locations for the purposeof determining specific development drilling sites, clearing ground, draining,road building, and relocating public roads, gas lines, and power lines, to theextent necessary in developing the proved reserves.

(ii)   Drill and equip developmentwells, development-type stratigraphic test wells, and service wells, includingthe costs of platforms and of well equipment such as casing, tubing, pumpingequipment, and the wellhead assembly.

 

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** **

**DEFINITIONS OF OIL AND GASRESERVES**

Adapted from U.S. Securities and Exchange Commission Regulation S-X Section 210.4-10(a)

 

(iii)  Acquire, construct, and installproduction facilities such as lease flow lines, separators, treaters, heaters,manifolds, measuring devices, and production storage tanks, natural gas cyclingand processing plants, and central utility and waste disposal systems.

(iv)  Provide improved recoverysystems.

 

(8) *Development project.*Adevelopment project is the means by which petroleum resources are brought tothe status of economically producible. As examples, the development of a singlereservoir or field, an incremental development in a producing field, or theintegrated development of a group of several fields and associated facilitieswith a common ownership may constitute a development project.

 

(9) *Development**well.* A well drilled within the proved area of an oil or gasreservoir to the depth of a stratigraphic horizon known to be productive.

 

(10) *Economically producible.*Theterm economically producible, as it relates to a resource, means a resourcewhich generates revenue that exceeds, or is reasonably expected to exceed, thecosts of the operation. The value of the products that generate revenue shallbe determined at the terminal point of oil and gas producing activities asdefined in paragraph (a)(16) of this section.

 

(11)*Estimated ultimaterecovery (EUR).*Estimated ultimate recovery is the sum of reservesremaining as of a given date and cumulative production as of that date.

 

(12)*Exploration costs.*Costs incurred in identifying areas that may warrant examination andin examining specific areas that are considered to have prospects of containingoil and gas reserves, including costs of drilling exploratory wells andexploratory-type stratigraphic test wells. Exploration costs may be incurredboth before acquiring the related property (sometimes referred to in part asprospecting costs) and after acquiring the property. Principal types ofexploration costs, which include depreciation and applicable operating costs ofsupport equipment and facilities and other costs of exploration activities,are:

 

(i)    Costs of topographical,geographical and geophysical studies, rights of access to properties to conductthose studies, and salaries and other expenses of geologists, geophysicalcrews, and others conducting those studies. Collectively, these are sometimesreferred to as geological and geophysical or “G&G” costs.

(ii)   Costs of carrying andretaining undeveloped properties, such as delay rentals, ad valorem taxes onproperties, legal costs for title defense, and the maintenance of land andlease records.

(iii)  Dry hole contributions and bottomhole contributions.

(iv)  Costs of drilling andequipping exploratory wells.

(v)   Costs of drillingexploratory-type stratigraphic test wells.

 

(13)*Exploratory**well.* An exploratory well is a well drilled to find a newfield or to find a new reservoir in a field previously found to be productiveof oil or gas in another reservoir. Generally, an exploratory well is any wellthat is not a development well, an extension well, a service well, or astratigraphic test well as those items are defined in this section.

 

(14)*Extension**well.* An extension well is a well drilled to extend thelimits of a known reservoir.

 

(15)*Field.*Anarea consisting of a single reservoir or multiple reservoirs all grouped on orrelated to the same individual geological structural feature and/orstratigraphic condition. There may be two or more reservoirs in a field whichare separated vertically by intervening impervious strata, or laterally bylocal geologic barriers, or by both. Reservoirs that are associated by being inoverlapping or adjacent fields may be treated as a single or common operationalfield. The geological terms “structural feature” and “stratigraphic condition”are intended to identify localized geological features as opposed to thebroader terms of basins, trends, provinces, plays, areas-of-interest, etc.

 

(16)*Oil and gasproducing activities.*

 

(i)      Oil and gasproducing activities include:

 

(A)  The search for crude oil,including condensate and natural gas liquids, or natural gas (“oil and gas”) intheir natural states and original locations;

(B)   The acquisition of propertyrights or properties for the purpose of further exploration or for the purposeof removing the oil or gas from such properties;

(C)   The construction, drilling,and production activities necessary to retrieve oil and gas from their naturalreservoirs, including the acquisition, construction, installation, andmaintenance of field gathering and storage systems, such as:

*(1)*  Lifting the oil and gas tothe surface; and

*(2)*  Gathering, treating, and fieldprocessing (as in the case of processing gas to extract liquid hydrocarbons);and

 

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**DEFINITIONS OF OIL AND GASRESERVES**Adapted from U.S. Securities and Exchange Commission Regulation S-X Section 210.4-10(a)

 

(D) Extraction of saleable hydrocarbons, in thesolid, liquid, or gaseous state, from oil sands, shale, coalbeds, or othernonrenewable natural resources which are intended to be upgraded into syntheticoil or gas, and activities undertaken with a view to such extraction.

 

*Instruction 1 to paragraph(a)(16)(i):*The oil and gas production function shall be regardedas ending at a “terminal point”, which is the outlet valve on the lease orfield storage tank. If unusual physical or operational circumstances exist, itmay be appropriate to regard the terminal point for the production function as:

 

a.     The first point at which oil, gas, or gas liquids,natural or synthetic, are delivered to a main pipeline, a common carrier, arefinery, or a marine terminal; and

b.     In the case of natural resources that are intended tobe upgraded into synthetic oil or gas, if those natural resources are deliveredto a purchaser prior to upgrading, the first point at which the naturalresources are delivered to a main pipeline, a common carrier, a refinery, amarine terminal, or a facility which upgrades such natural resources intosynthetic oil or gas.

 

*Instruction 2 to paragraph(a)(16)(i):*For purposes of this paragraph (a)(16), the term *saleable hydrocarbons*means hydrocarbons that aresaleable in the state in which the hydrocarbons are delivered.

 

(ii) Oiland gas producing activities do not include:

 

(A)  Transporting, refining, ormarketing oil and gas;

(B)   Processing of produced oil,gas, or natural resources that can be upgraded into synthetic oil or gas by aregistrant that does not have the legal right to produce or a revenue interestin such production;

(C)   Activities relating to theproduction of natural resources other than oil, gas, or natural resources fromwhich synthetic oil and gas can be extracted; or

(D)  Production of geothermalsteam.

 

(17)*Possible reserves.*Possiblereserves are those additional reserves that are less certain to be recoveredthan probable reserves.

 

(i)    When deterministic methodsare used, the total quantities ultimately recovered from a project have a lowprobability of exceeding proved plus probable plus possible reserves. Whenprobabilistic methods are used, there should be at least a 10% probability thatthe total quantities ultimately recovered will equal or exceed the proved plusprobable plus possible reserves estimates.

(ii)   Possible reserves may beassigned to areas of a reservoir adjacent to probable reserves where datacontrol and interpretations of available data are progressively less certain.Frequently, this will be in areas where geoscience and engineering data areunable to define clearly the area and vertical limits of commercial productionfrom the reservoir by a defined project.

(iii)  Possible reserves alsoinclude incremental quantities associated with a greater percentage recovery ofthe hydrocarbons in place than the recovery quantities assumed for probablereserves.

(iv)  The proved plus probable andproved plus probable plus possible reserves estimates must be based onreasonable alternative technical and commercial interpretations within thereservoir or subject project that are clearly documented, including comparisonsto results in successful similar projects.

(v)   Possible reserves may beassigned where geoscience and engineering data identify directly adjacentportions of a reservoir within the same accumulation that may be separated fromproved areas by faults with displacement less than formation thickness or othergeological discontinuities and that have not been penetrated by a wellbore, andthe registrant believes that such adjacent portions are in communication withthe known (proved) reservoir. Possible reserves may be assigned to areas thatare structurally higher or lower than the proved area if these areas are incommunication with the proved reservoir.

(vi)  Pursuant to paragraph (a)(22)(iii) ofthis section, where direct observation has defined a highest known oil (HKO)elevation and the potential exists for an associated gas cap, proved oilreserves should be assigned in the structurally higher portions of thereservoir above the HKO only if the higher contact can be established withreasonable certainty through reliable technology. Portions of the reservoirthat do not meet this reasonable certainty criterion may be assigned asprobable and possible oil or gas based on reservoir fluid properties andpressure gradient interpretations.

 

(18)*Probable reserves.*Probablereserves are those additional reserves that are less certain to be recoveredthan proved reserves but which, together with proved reserves, are as likely asnot to be recovered.

 

(i)    Whendeterministic methods are used, it is as likely as not that actual remainingquantities recovered will exceed the sum of estimated proved plus probablereserves. When probabilistic methods are used, there should be at least a 50%probability that the actual quantities recovered will equal or exceed theproved plus probable reserves estimates.

 

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**DEFINITIONS OF OIL AND GASRESERVES**

Adapted from U.S. Securities and Exchange Commission Regulation S-X Section 210.4-10(a)

 

(ii)   Probable reserves may beassigned to areas of a reservoir adjacent to proved reserves where data controlor interpretations of available data are less certain, even if the interpretedreservoir continuity of structure or productivity does not meet the reasonablecertainty criterion. Probable reserves may be assigned to areas that arestructurally higher than the proved area if these areas are in communicationwith the proved reservoir.

(iii)  Probable reserves estimatesalso include potential incremental quantities associated with a greaterpercentage recovery of the hydrocarbons in place than assumed for provedreserves.

(iv)  See also guidelines in paragraphs(a)(17)(iv) and (a)(17)(vi) of this section.

 

(19)*Probabilisticestimate.*The method of estimation of reserves or resources iscalled probabilistic when the full range of values that could reasonably occurfor each unknown parameter (from the geoscience and engineering data) is usedto generate a full range of possible outcomes and their associatedprobabilities of occurrence.

 

(20)*Production costs.*

 

(i)    Costs incurredto operate and maintain wells and related equipment and facilities, includingdepreciation and applicable operating costs of support equipment and facilitiesand other costs of operating and maintaining those wells and related equipmentand facilities. They become part of the cost of oil and gas produced. Examplesof production costs (sometimes called lifting costs) are:

 

(A)  Costs of labor to operate thewells and related equipment and facilities.

(B)   Repairs and maintenance.

(C)   Materials, supplies, and fuelconsumed and supplies utilized in operating the wells and related equipment andfacilities.

(D)  Property taxes and insuranceapplicable to proved properties and wells and related equipment and facilities.

(E)   Severance taxes.

 

(ii)   Some support equipment or facilities may serve two ormore oil and gas producing activities and may also serve transportation,refining, and marketing activities. To the extent that the support equipmentand facilities are used in oil and gas producing activities, their depreciationand applicable operating costs become exploration, development or productioncosts, as appropriate. Depreciation, depletion, and amortization of capitalizedacquisition, exploration, and development costs are not production costs butalso become part of the cost of oil and gas produced along with production(lifting) costs identified above.

 

(21)*Proved area.*Thepart of a property to which proved reserves have been specifically attributed.

 

(22)*Proved oil and gasreserves.*Proved oil and gas reserves are those quantities of oiland gas, which, by analysis of geoscience and engineering data, can beestimated with reasonable certainty to be economically producible—from a givendate forward, from known reservoirs, and under existing economic conditions,operating methods, and government regulations—prior to the time at which contractsproviding the right to operate expire, unless evidence indicates that renewalis reasonably certain, regardless of whether deterministic or probabilisticmethods are used for the estimation. The project to extract the hydrocarbonsmust have commenced or the operator must be reasonably certain that it willcommence the project within a reasonable time.

 

(i) The area of thereservoir considered as proved includes:

 

(A)  The area identified bydrilling and limited by fluid contacts, if any, and

(B)   Adjacent undrilled portionsof the reservoir that can, with reasonable certainty, be judged to becontinuous with it and to contain economically producible oil or gas on thebasis of available geoscience and engineering data.

 

(ii) In the absence of data on fluid contacts,proved quantities in a reservoir are limited by the lowest known hydrocarbons(LKH) as seen in a well penetration unless geoscience, engineering, orperformance data and reliable technology establishes a lower contact withreasonable certainty.

(iii) Where direct observation from wellpenetrations has defined a highest known oil (HKO) elevation and the potentialexists for an associated gas cap, proved oil reserves may be assigned in thestructurally higher portions of the reservoir only if geoscience, engineering,or performance data and reliable technology establish the higher contact withreasonable certainty.

(iv) Reserves which can be produced economicallythrough application of improved recovery techniques (including, but not limitedto, fluid injection) are included in the proved classification when:

 

(A)  Successfultesting by a pilot project in an area of the reservoir with properties no morefavorable than in the reservoir as a whole, the operation of an installedprogram in the reservoir or an analogous

 

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**DEFINITIONS OF OIL AND GASRESERVES**

Adapted from U.S. Securities and Exchange Commission Regulation S-X Section 210.4-10(a)

 

reservoir,or other evidence using reliable technology establishes the reasonablecertainty of the engineering analysis on which the project or program wasbased; and

(B)   The project has been approvedfor development by all necessary parties and entities, including governmentalentities.

 

(v)  Existing economic conditions includeprices and costs at which economic producibility from a reservoir is to bedetermined. The price shall be the average price during the 12-month periodprior to the ending date of the period covered by the report, determined as anunweighted arithmetic average of the first-day-of-the-month price for eachmonth within such period, unless prices are defined by contractualarrangements, excluding escalations based upon future conditions.

 

*(23)  Proved properties.*Properties with provedreserves.

 

*(24)  Reasonable certainty.*If deterministic methods areused, reasonable certainty means a high degree of confidence that thequantities will be recovered. If probabilistic methods are used, there shouldbe at least a 90% probability that the quantities actually recovered will equalor exceed the estimate. A high degree of confidence exists if the quantity ismuch more likely to be achieved than not, and, as changes due to increasedavailability of geoscience (geological, geophysical, and geochemical), engineering,and economic data are made to estimated ultimate recovery (EUR) with time,reasonably certain EUR is much more likely to increase or remain constant thanto decrease.

 

*(25)  Reliable technology.*Reliable technology is agrouping of one or more technologies (including computational methods) that hasbeen field tested and has been demonstrated to provide reasonably certainresults with consistency and repeatability in the formation being evaluated orin an analogous formation.

 

*(26)  Reserves.*Reserves are estimated remaining quantities ofoil and gas and related substances anticipated to be economically producible,as of a given date, by application of development projects to knownaccumulations. In addition, there must exist, or there must be a reasonableexpectation that there will exist, the legal right to produce or a revenueinterest in the production, installed means of delivering oil and gas orrelated substances to market, and all permits and financing required toimplement the project.

 

*Note to paragraph (a)(26):*Reserves shouldnot be assigned to adjacent reservoirs isolated by major, potentially sealing,faults until those reservoirs are penetrated and evaluated as economicallyproducible. Reserves should not be assigned to areas that are clearly separatedfrom a known accumulation by a non-productive reservoir (i.e., absence ofreservoir, structurally low reservoir, or negative test results). Such areasmay contain prospective resources (i.e., potentially recoverable resources fromundiscovered accumulations).

 

*Excerpted from the FASBAccounting Standards Codification Topic 932, Extractive Activities—Oil and Gas:*

* *

*932-235-50-30 A standardizedmeasure of discounted future net cash flows relating to an entity’s interestsin both of the following shall be disclosed as of the end of the year:*

* *

*a.**  **Proved oil and gas reserves (see paragraphs 932-235-50-3through 50-11B)*

*b.**  **Oil and gas subject to purchase under long-term supply,purchase, or similar agreements and contracts in which the entity participatesin the operation of the properties on which the oil or gas is located orotherwise serves as the producer of those reserves (see paragraph932-235-50-7).*

* *

*The standardized measure ofdiscounted future net cash flows relating to those two types of interests inreserves may be combined for reporting purposes.*

* *

*932-235-50-31 All of thefollowing information shall be disclosed in the aggregate and for eachgeographic area for which reserve quantities are disclosed in accordance withparagraphs 932-235-50-3 through 50-11B:*

* *

*a.**  **Future cash inflows. These shall be computed by applyingprices used in estimating the entity’s proved oil and gas reserves to theyear-end quantities of those reserves. Future price changes shall be consideredonly to the extent provided by contractual arrangements in existence atyear-end.*

*b.**  **Future development and production costs. These costs shallbe computed by estimating the expenditures to be incurred in developing andproducing the proved oil and gas reserves at the end of the year, based onyear-end costs and assuming continuation of existing economic conditions. Ifestimated development expenditures are significant, they shall be presentedseparately from estimated production costs.*

*c.**  **Future income tax expenses. These expenses shall be computedby applying the appropriate year-end statutory tax rates, with consideration offuture tax rates already legislated, to the future pretax net cash flowsrelating to the entity’s proved oil and gas reserves, less the tax basis of theproperties involved. The future income tax expenses shall give effect to taxdeductions and tax credits and allowances relating to the entity’s proved oiland gas reserves.*

*d.**  **Future net cash flows. These amounts are the result ofsubtracting future development and production costs and future income taxexpenses from future cash inflows.*

 

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**DEFINITIONS OF OIL AND GASRESERVES**

Adapted from U.S. Securities and Exchange Commission Regulation S-X Section 210.4-10(a)

 

*e.**  **Discount. This amount shall be derived from using a discountrate of 10 percent a year to reflect the timing of the future net cash flowsrelating to proved oil and gas reserves.*

*f.**   **Standardized measure of discounted future net cash flows.This amount is the future net cash flows less the computed discount.*

 

(27)*Reservoir.*A porous andpermeable underground formation containing a natural accumulation of producibleoil and/or gas that is confined by impermeable rock or water barriers and isindividual and separate from other reservoirs.

 

(28)*Resources.*Resources arequantities of oil and gas estimated to exist in naturally occurringaccumulations. A portion of the resources may be estimated to be recoverable,and another portion may be considered to be unrecoverable. Resources includeboth discovered and undiscovered accumulations.

 

(29)***Service**well.* A well drilledor completed for the purpose of supporting production in an existing field.Specific purposes of service wells include gas injection, water injection,steam injection, air injection, salt-water disposal, water supply forinjection, observation, or injection for in-situ combustion.

 

(30)*Stratigraphic test**well.* A stratigraphictest well is a drilling effort, geologically directed, to obtain informationpertaining to a specific geologic condition. Such wells customarily are drilledwithout the intent of being completed for hydrocarbon production. Theclassification also includes tests identified as core tests and all types ofexpendable holes related to hydrocarbon exploration. Stratigraphic tests areclassified as “exploratory type” if not drilled in a known area or “developmenttype” if drilled in a known area.

 

(31)*Undeveloped oil and gasreserves.*Undeveloped oil and gas reserves are reserves of anycategory that are expected to be recovered from new wells on undrilled acreage,or from existing wells where a relatively major expenditure is required forrecompletion.

 

(i)    Reserves on undrilled acreageshall be limited to those directly offsetting development spacing areas thatare reasonably certain of production when drilled, unless evidence usingreliable technology exists that establishes reasonable certainty of economicproducibility at greater distances.

(ii)   Undrilled locations can beclassified as having undeveloped reserves only if a development plan has beenadopted indicating that they are scheduled to be drilled within five years,unless the specific circumstances, justify a longer time.

 

*From the SEC’s Compliance and Disclosure Interpretations(October 26, 2009):*

 

*Although several types ofprojects — such as constructing offshore platforms and development in urbanareas, remote locations or environmentally sensitive locations — by theirnature customarily take a longer time to develop and therefore often do justifylonger time periods, this determination must always take into consideration allof the facts and circumstances. No particular type of project per se justifiesa longer time period, and any extension beyond five years should be theexception, and not the rule.*

 

*Factors that a companyshould consider in determining whether or not circumstances justify recognizingreserves even though development may extend past five years include, but arenot limited to, the following:*

 

·      *The company’s level of ongoing significant developmentactivities in the area to be developed (for example, drilling only the minimumnumber of wells necessary to maintain the lease generally would not constitutesignificant development activities);*

·      *The company’s historical record at completingdevelopment of comparable long-term projects;*

·      *The amount of time in which the company has maintainedthe leases, or booked the reserves, without significant development activities;*

·      *The extent to which the company has followed apreviously adopted development plan (for example, if a company has changed itsdevelopment plan several times without taking significant steps to implementany of those plans, recognizing proved undeveloped reserves typically would notbe appropriate); and*

·      *The extent to which delays in development are caused byexternal factors related to the physical operating environment (for example,restrictions on development on Federal lands, but not obtaining governmentpermits), rather than by internal factors (for example, shifting resources todevelop properties with higher priority).*

 

(iii) Under no circumstances shall estimates forundeveloped reserves be attributable to any acreage for which an application offluid injection or other improved recovery technique is contemplated, unlesssuch techniques have been proved effective by actual projects in the samereservoir or an analogous reservoir, as defined in paragraph (a)(2) ofthis section, or by other evidence using reliable technology establishingreasonable certainty.

 

(32)*Unproved properties.*Properties withno proved reserves.

 

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