**Exhibit 99.1**

 

|        |   |        |
|--------|--------|--------|
|   |   |   |

 

January 27, 2014

 

The Bank of New York Mellon Trust Company, N.A.

As Trustee of SandRidge Permian Trust

919 Congress Avenue, Suite 500

Austin, Texas 78701

 

Ladies and Gentlemen:

 

In accordance with your request, we have estimated the proved reserves and future revenue, as December 31, 2013, to the SandRidge Permian Trust (SRPT) royalty interest in certain oil and gas properties located in Texas.  We completed our evaluation on or about the date of this letter.  It is our understanding that the proved reserves estimated in this report constitute all of the proved reserves owned by SRPT.  The estimates in this report have been prepared in accordance with the definitions and regulations of the U.S. Securities and Exchange Commission (SEC) and, with the exception of the exclusion of future income taxes, conform to the FASB Accounting Standards Codification Topic 932, Extractive Activities—Oil and Gas.  Definitions are presented immediately following this letter.  This report has been prepared for SRPT’s use in filing with the SEC; in our opinion the assumptions, data, methods, and procedures used in the preparation of this report are appropriate for such purpose.

 

We estimate the net reserves and future net revenue to the SRPT royalty interest in these properties, as of December 31, 2013, to be:

 
| ** **                     | ** ** | **Net Reserves** | ** ** | **Future Net Revenue (M$)** | ** ** |
|--------------------------------|------------|-----------------------|------------|--------------------------------------------|------------|
| ** **                     | ** ** | **Oil**               | ** ** | **NGL**                                    | ** ** | **Gas** | ** ** | ** ** | ** ** | **Present Worth** | ** ** |
| **Category**                   | ** ** | **(MBBL)**            | ** ** | **(MBBL)**                                 | ** ** | **(MMCF)** | ** ** | **Total** | ** ** | **at 10%** | ** ** |
|                           |       |                  |       |                                       |       |   |   |   |   |   |   |
| Proved Developed Producing     |       | 8,102.7               |       | 877.3                                      |       | 2,663.7 |   | 746,954.1 |   | 367,396.8 |   |
| Proved Developed Non-Producing |       | 1,521.9               |       | 166.4                                      |       | 500.2 |   | 140,327.6 |   | 75,338.4 |   |
| Proved Undeveloped             |       | 2,678.8               |       | 279.6                                      |       | 807.3 |   | 246,399.3 |   | 143,770.2 |   |
|                           |       |                  |       |                                       |       |   |   |   |   |   |   |
| Total Proved                   |       | 12,303.4              |       | 1,323.3                                    |       | 3,971.2 |   | 1,133,681.0 |   | 586,505.4 |   |

 

The oil volumes shown include crude oil and condensate.  Oil and natural gas liquids (NGL) volumes are expressed in thousands of barrels (MBBL); a barrel is equivalent to 42 United States gallons.  Gas volumes are expressed in millions of cubic feet (MMCF) at standard temperature and pressure bases.

 

The estimates shown in this report are for proved reserves.  No study was made to determine whether probable and possible reserves might be established for these properties.  This report does not include any value that could be attributed to interests in undeveloped acreage beyond those tracts for which undeveloped reserves have been estimated.  Reserves categorization conveys the relative degree of certainty; reserves subcategorization is based on development and production status.  The estimates of reserves and future revenue included herein have not been adjusted for risk.

 

Gross revenue is SRPT’s share of the gross (100 percent) revenue from the properties prior to any deductions.  Future net revenue is after deductions for SRPT’s share of production taxes and ad valorem taxes but before consideration of any income taxes.  The future net revenue has been discounted at an annual rate of 10 percent to determine its present worth, which is shown to indicate the effect of time on the value of money.  Future net revenue presented in this report, whether discounted or undiscounted, should not be construed as being the fair market value of the properties.

 

|   |   |   |
|--------|--------|--------|
|        |   |        |

 

----

 

 

Prices used in this report are based on the 12-month unweighted arithmetic average of the first-day-of-the-month price for each month in the period January through December 2013.  For oil and NGL volumes, the average West Texas Intermediate posted price of $93.42 per barrel is adjusted for quality, transportation fees, and a regional price differential.  For gas volumes, the average Henry Hub spot price of $3.670 per MMBTU is adjusted for energy content, transportation fees, and a regional price differential.  All prices are held constant throughout the lives of the properties.  The average adjusted product prices weighted by production over the remaining lives of the properties are $94.81 per barrel of oil, $32.10 per barrel of NGL, and $2.679 per MCF of gas.

 

Because SRPT owns no working interest in these properties, no operating costs or capital costs would be incurred.  However, estimated operating costs and capital costs have been used to confirm economic producibility and determine economic limits for the properties.  These cost estimates are based on operating expense records of SandRidge Energy, Inc. (SandRidge).  Operating costs and capital costs are not escalated for inflation.  SRPT would not incur any costs due to abandonment, nor would it realize any salvage value for the lease and well equipment.

 

For the purposes of this report, we did not perform any field inspection of the properties, nor did we examine the mechanical operation or condition of the wells and facilities.  Since SRPT owns a royalty interest rather than a working interest in these properties, it would not incur any costs due to possible environmental liability.

 

We have made no investigation of potential volume and value imbalances resulting from overdelivery or underdelivery to the SRPT royalty interest.  Therefore, our estimates of reserves and future revenue do not include adjustments for the settlement of any such imbalances; our projections are based on SRPT receiving its royatly interest share of estimated future gross production.

 

The reserves shown in this report are estimates only and should not be construed as exact quantities.  Proved reserves are those quantities of oil and gas which, by analysis of engineering and geoscience data, can be estimated with reasonable certainty to be economically producible; probable and possible reserves are those additional reserves which are sequentially less certain to be recovered than proved reserves.  Estimates of reserves may increase or decrease as a result of market conditions, future operations, changes in regulations, or actual reservoir performance.  In addition to the primary economic assumptions discussed herein, our estimates are based on certain assumptions including, but not limited to, that the properties will be developed consistent with current development plans, that the properties will be operated in a prudent manner, that no governmental regulations or controls will be put in place that would impact the ability of the interest owner to recover the reserves, and that our projections of future production will prove consistent with actual performance.  If the reserves are recovered, the revenues therefrom could be more or less than the estimated amounts.  Because of governmental policies and uncertainties of supply and demand, the sales rates, prices received for the reserves, and costs incurred by the working interest owners in recovering such reserves may vary from assumptions made while preparing this report.

 

For the purposes of this report, we used technical and economic data including, but not limited to, well logs, geologic maps, well test data, production data, historical price and cost information, and property ownership interests.  The reserves in this report have been estimated using deterministic methods; these estimates have been prepared in accordance with the Standards Pertaining to the Estimating and Auditing of Oil and Gas Reserves Information promulgated by the Society of Petroleum Engineers (SPE Standards).  We used standard engineering and geoscience methods, or a combination of methods, including performance analysis and analogy, that we considered to be appropriate and necessary to categorize and estimate reserves in accordance with SEC definitions and regulations.  A substantial portion of these reserves are for undeveloped locations and producing wells that lack sufficient production history upon which performance-related estimates of reserves can be based; such reserves are based on analogy to properties with similar geologic and reservoir characteristics.  As in all aspects of oil and gas evaluation, there are uncertainties inherent in the interpretation of engineering and geoscience data; therefore, our conclusions necessarily represent only informed professional judgment.

 

----

 

 

The data used in our estimates were obtained from SandRidge and the nonconfidential files of Netherland, Sewell & Associates, Inc. and were accepted as accurate.  Supporting work data are on file in our office.  We have not examined the titles to the properties or independently confirmed the actual degree or type of interest owned.  The technical persons responsible for preparing the estimates presented herein meet the requirements regarding qualifications, independence, objectivity, and confidentiality set forth in the SPE Standards.  We are independent petroleum engineers, geologists, geophysicists, and petrophysicists; we do not own an interest in these properties nor are we employed on a contingent basis.

 
|   | Sincerely,                                              |
|--------|---------------------------------------------------------|
|   |                                                    |
|   | **NETHERLAND, SEWELL & ASSOCIATES, INC.** |
|   | Texas Registered Engineering Firm F-2699                |
|   |                                                    |
|   |                                                    |
|   |                                                    | /s/   C.H. (Scott) Rees III |
|   | By:                                                     |   |
|   |                                                    | C.H.   (Scott) Rees III, P.E. |
|   |                                                    | Chairman   and Chief Executive Officer |
|   |                                                    |   |
|   |                                                    |   |
|   |                                                    | /s/   David T. Miller |
|   | By:                                                     |   |
|   |                                                    | David   T. Miller, P.E. 96134 |
|   |                                                    | Vice   President |
|   |                                                    |   |
|   |                                                    |   |
|   | Date   Signed: January 27, 2014                    |

 

GSC:CLM

 

Please be 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 original signed document maintained by NSAI.  The digital document is subject to the parameters, limitations, and conditions stated in the original document.  In the event of any differences between the digital document and the original document, the original document shall control and supersede the digital document.

 

----

** **

****

** **

**DEFINITIONS OF OIL AND GAS RESERVES**

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

 

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

 

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

 

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

 
| (i)   |   | Same   geological formation (but not necessarily in pressure communication with the   reservoir of interest); |
|-------|--------|---------------------------------------------------------------------------------------------------------------|
| (ii)  |   | Same   environment of deposition;                                                                             |
| (iii) |   | Similar   geological structure; and                                                                           |
| (iv)  |   | Same   drive mechanism.                                                                                       |

 

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

 

(3) *Bitumen*.  Bitumen, sometimes referred to as natural bitumen, is petroleum in a solid or semi-solid state in natural deposits with a viscosity greater than 10,000 centipoise measured at original temperature in the deposit and atmospheric pressure, on a gas free basis.  In its natural state it usually contains sulfur, metals, and other non-hydrocarbons.

 

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

 

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

 

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

 
| (i)  |   | Through   existing wells with existing equipment and operating methods or in which the   cost of the required equipment is relatively minor compared to the cost of a   new well; and |
|------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (ii) |   | Through   installed extraction equipment and infrastructure operational at the time of   the reserves estimate if the extraction is by means not involving a well.                    |

 
| * *

*Supplemental definitions from the 2007 Petroleum   Resources Management System:*

* *

*Developed Producing Reserves — Developed Producing   Reserves are expected to be recovered from completion intervals that are open   and producing at the time of the estimate. Improved recovery reserves are   considered producing only after the improved recovery project is in   operation.*

 

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

  |   |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|

 

Definitions - Page 1 of 7

----

 

 

**DEFINITIONS OF OIL AND GAS RESERVES**

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

 

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

 
| (i)   |   | Gain   access to and prepare well locations for drilling, including surveying well   locations for the purpose of determining specific development drilling sites,   clearing ground, draining, road building, and relocating public roads, gas   lines, and power lines, to the extent necessary in developing the proved   reserves. |
|-------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (ii)  |   | Drill   and equip development wells, development-type stratigraphic test wells, and   service wells, including the costs of platforms and of well equipment such as   casing, tubing, pumping equipment, and the wellhead assembly.                                                                                                    |
| (iii) |   | Acquire,   construct, and install production facilities such as lease flow lines,   separators, treaters, heaters, manifolds, measuring devices, and production   storage tanks, natural gas cycling and processing plants, and central utility   and waste disposal systems.                                                          |
| (iv)  |   | Provide   improved recovery systems.                                                                                                                                                                                                                                                                                                   |

 

(8) *Development project*.  A development project is the means by which petroleum resources are brought to the status of economically producible.  As examples, the development of a single reservoir or field, an incremental development in a producing field, or the integrated development of a group of several fields and associated facilities with a common ownership may constitute a development project.

 

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

 

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

 

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

 

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

 
| (i)   |   | Costs   of topographical, geographical and geophysical studies, rights of access to   properties to conduct those studies, and salaries and other expenses of   geologists, geophysical crews, and others conducting those studies.   Collectively, these are sometimes referred to as geological and geophysical   or “G&G” costs. |
|-------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (ii)  |   | Costs   of carrying and retaining undeveloped properties, such as delay rentals, ad   valorem taxes on properties, legal costs for title defense, and the   maintenance of land and lease records.                                                                                                                                                |
| (iii) |   | Dry   hole contributions and bottom hole contributions.                                                                                                                                                                                                                                                                                           |
| (iv)  |   | Costs   of drilling and equipping exploratory wells.                                                                                                                                                                                                                                                                                              |
| (v)   |   | Costs   of drilling exploratory-type stratigraphic test wells.                                                                                                                                                                                                                                                                                    |

 

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

 

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

 

Definitions - Page 2 of 7

----

 

 

**DEFINITIONS OF OIL AND GAS RESERVES**

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

 

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

 

(16) *Oil and gas producing activities.*

 
| (i) |   | Oil   and gas producing activities include: |
|-----|--------|---------------------------------------------|

 
| (A)      |   | The   search for crude oil, including condensate and natural gas liquids, or natural   gas (“oil and gas”) in their natural states and original locations;                                                                                                                 |
|----------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (B)      |   | The   acquisition of property rights or properties for the purpose of further   exploration or for the purpose of removing the oil or gas from such   properties;                                                                                                                    |
| (C)      |   | The   construction, drilling, and production activities necessary to retrieve oil   and gas from their natural reservoirs, including the acquisition,   construction, installation, and maintenance of field gathering and storage   systems, such as:                               |
| * * |   | *(1) *Lifting the oil and gas to   the surface; and                                                                                                                                                                                                                             |
| * * |   | *(2) *Gathering, treating, and   field processing (as in the case of processing gas to extract liquid   hydrocarbons); and                                                                                                                                                      |
| (D)      |   | Extraction   of saleable hydrocarbons, in the solid, liquid, or gaseous state, from oil   sands, shale, coalbeds, or other nonrenewable natural resources which are   intended to be upgraded into synthetic oil 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 regarded as ending at a “terminal point”, which is the outlet valve on the lease or field storage tank.  If unusual physical or operational circumstances exist, it may 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, a refinery, or a marine   terminal; and                                                                                                                                                                                                                            |
|----|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| b. |   | In   the case of natural resources that are intended to be upgraded into synthetic   oil or gas, if those natural resources are delivered to a purchaser prior to   upgrading, the first point at which the natural resources are delivered to a   main pipeline, a common carrier, a refinery, a marine terminal, or a facility   which upgrades such natural resources into synthetic oil or gas. |

 

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

 
| (ii) |   | Oil   and gas producing activities do not include: |
|------|--------|----------------------------------------------------|

 
| (A) |   | Transporting,   refining, or marketing oil and gas;                                                                                                                                                                |
|-----|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (B) |   | Processing   of produced oil, gas, or natural resources that can be upgraded into   synthetic oil or gas by a registrant that does not have the legal right to   produce or a revenue interest in such production; |
| (C) |   | Activities   relating to the production of natural resources other than oil, gas, or   natural resources from which synthetic oil and gas can be extracted; or                                                     |
| (D) |   | Production   of geothermal steam.                                                                                                                                                                                  |

 

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

 
| (i) |   | When deterministic methods are used, the total quantities ultimately   recovered from a project have a low probability of exceeding proved plus   probable plus possible reserves. When probabilistic methods are used, there   should be at least a 10% probability that the total quantities ultimately   recovered will equal or exceed the proved plus probable plus possible   reserves estimates. |
|-----|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

Definitions - Page 3 of 7

----

 

 

**DEFINITIONS OF OIL AND GAS RESERVES**

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

 
| (ii)  |   | Possible   reserves may be assigned to areas of a reservoir adjacent to probable   reserves where data control and interpretations of available data are   progressively less certain. Frequently, this will be in areas where   geoscience and engineering data are unable to define clearly the area and   vertical limits of commercial production from the reservoir by a defined   project.                                                                                                                                                                                                                                                    |
|-------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (iii) |   | Possible   reserves also include incremental quantities associated with a greater   percentage recovery of the hydrocarbons in place than the recovery quantities   assumed for probable reserves.                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| (iv)  |   | The   proved plus probable and proved plus probable plus possible reserves   estimates must be based on reasonable alternative technical and commercial   interpretations within the reservoir or subject project that are clearly   documented, including comparisons to results in successful similar projects.                                                                                                                                                                                                                                                                                                                                   |
| (v)   |   | Possible   reserves may be assigned where geoscience and engineering data identify   directly adjacent portions of a reservoir within the same accumulation that   may be separated from proved areas by faults with displacement less than   formation thickness or other geological discontinuities and that have not   been penetrated by a wellbore, and the registrant believes that such adjacent   portions are in communication with the known (proved) reservoir. Possible reserves   may be assigned to areas that are structurally higher or lower than the   proved area if these areas are in communication with the proved reservoir. |
| (vi)  |   | Pursuant   to paragraph (a)(22)(iii) of this section, where direct observation has   defined a highest known oil (HKO) elevation and the potential exists for an   associated gas cap, proved oil reserves should be assigned in the   structurally higher portions of the reservoir above the HKO only if the   higher contact can be established with reasonable certainty through reliable   technology. Portions of the reservoir that do not meet this reasonable   certainty criterion may be assigned as probable and possible oil or gas based   on reservoir fluid properties and pressure gradient interpretations.                  |

 

(18)*Probable reserves.* Probable reserves are those additional reserves that are less certain to be recovered than proved reserves but which, together with proved reserves, are as likely as not to be recovered.

 
| (i)   |   | When   deterministic methods are used, it is as likely as not that actual remaining   quantities recovered will exceed the sum of estimated proved plus probable   reserves. When probabilistic methods are used, there should be at least a 50%   probability that the actual quantities recovered will equal or exceed the   proved plus probable reserves estimates.                                                                                             |
|-------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (ii)  |   | Probable   reserves may be assigned to areas of a reservoir adjacent to proved reserves   where data control or interpretations of available data are less certain,   even if the interpreted reservoir continuity of structure or productivity   does not meet the reasonable certainty criterion. Probable reserves may be   assigned to areas that are structurally higher than the proved area if these   areas are in communication with the proved reservoir. |
| (iii) |   | Probable   reserves estimates also include potential incremental quantities associated   with a greater percentage recovery of the hydrocarbons in place than assumed   for proved reserves.                                                                                                                                                                                                                                                                        |
| (iv)  |   | See   also guidelines in paragraphs (a)(17)(iv) and (a)(17)(vi) of this   section.                                                                                                                                                                                                                                                                                                                                                                        |

 

(19) *Probabilistic estimate.* The method of estimation of reserves or resources is called probabilistic when the full range of values that could reasonably occur for each unknown parameter (from the geoscience and engineering data) is used to generate a full range of possible outcomes and their associated probabilities of occurrence.

 

(20) *Production costs.*

 
| (i) |   | Costs   incurred to operate and maintain wells and related equipment and facilities,   including depreciation and applicable operating costs of support equipment   and facilities and other costs of operating and maintaining those wells and   related equipment and facilities. They become part of the cost of oil and gas   produced. Examples of production costs (sometimes called lifting costs) are: |
|-----|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 
| (A) |   | Costs   of labor to operate the wells and related equipment and facilities.                                                   |
|-----|--------|-------------------------------------------------------------------------------------------------------------------------------|
| (B) |   | Repairs   and maintenance.                                                                                                    |
| (C) |   | Materials,   supplies, and fuel consumed and supplies utilized in operating the wells and   related equipment and facilities. |

 

Definitions - Page 4 of 7

----

 

 

**DEFINITIONS OF OIL AND GAS RESERVES**

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

 
| (D) |   | Property   taxes and insurance applicable to proved properties and wells and related   equipment and facilities. |
|-----|--------|------------------------------------------------------------------------------------------------------------------|
| (E) |   | Severance   taxes.                                                                                               |

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

 

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

 

(22) *Proved oil and gas reserves.* Proved oil and gas reserves are those quantities of oil and gas, which, by analysis of geoscience and engineering data, can be estimated with reasonable certainty to be economically producible—from a given date forward, from known reservoirs, and under existing economic conditions, operating methods, and government regulations—prior to the time at which contracts providing the right to operate expire, unless evidence indicates that renewal is reasonably certain, regardless of whether deterministic or probabilistic methods are used for the estimation.  The project to extract the hydrocarbons must have commenced or the operator must be reasonably certain that it will commence the project within a reasonable time.

 
| (i)    |   | The   area of the reservoir considered as proved includes:                                                                                                                                                                                                                                                                                                                                  |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                                        |
|   |   | (A)  The area identified by drilling and limited   by fluid contacts, if any, and                                                                                                                                                                                                                                                                                                      |
|   |   | (B)  Adjacent   undrilled portions of the reservoir that can, with reasonable certainty, be   judged to be continuous with it and to contain economically producible oil or   gas on the basis 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, or performance data and reliable technology   establishes a lower contact with reasonable certainty.                                                                                      |
| (iii)  |   | Where   direct observation from well penetrations has defined a highest known oil   (HKO) elevation and the potential exists for an associated gas cap, proved   oil reserves may be assigned in the structurally higher portions of the   reservoir only if geoscience, engineering, or performance data and reliable   technology establish the higher contact with reasonable certainty. |
| (iv)   |   | Reserves   which can be produced economically through application of improved recovery   techniques (including, but not limited to, fluid injection) are included in   the proved classification when:                                                                                                                                                                                      |

 
| (A) |   | Successful   testing by a pilot project in an area of the reservoir with properties no   more favorable than in the reservoir as a whole, the operation of an   installed program in the reservoir or an analogous reservoir, or other   evidence using reliable technology establishes the reasonable certainty of   the engineering analysis on which the project or program was based; and |
|-----|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (B) |   | The   project has been approved for development by all necessary parties and   entities, including governmental entities.                                                                                                                                                                                                                                                                     |

 
| (v) |   | Existing   economic conditions include prices and costs at which economic producibility   from a reservoir is to be determined. The price shall be the average price   during the 12-month period prior to the ending date of the period covered by   the report, determined as an unweighted arithmetic average of the   first-day-of-the-month price for each month within such period, unless prices   are defined by contractual arrangements, excluding escalations based upon   future conditions. |
|-----|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

(23) *Proved properties.*  Properties with proved reserves.

 

(24) *Reasonable certainty.*  If deterministic methods are used, reasonable certainty means a high degree of confidence that the quantities will be recovered.  If probabilistic methods are used, there should be at least a 90%

 

Definitions - Page 5 of 7

----

 

 

**DEFINITIONS OF OIL AND GAS RESERVES**

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

 

probability that the quantities actually recovered will equal or exceed the estimate.  A high degree of confidence exists if the quantity is much more likely to be achieved than not, and, as changes due to increased availability 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 than to decrease.

 

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

 

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

 

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

 

| * *

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

 

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

 

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

*b.**       **Oil and   gas subject to purchase under long-term supply, purchase, or similar   agreements and contracts in which the entity participates in the operation of   the properties on which the oil or gas is located or otherwise serves as the   producer of those reserves (see paragraph 932-235-50-7).*

 

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

 

*932-235-50-31    All of the following information shall be disclosed in the aggregate   and for each geographic area for which reserve quantities are disclosed in   accordance with paragraphs 932-235-50-3 through 50-11B:*

 

*a.**       **Future   cash inflows.  These shall be computed   by applying prices used in estimating the entity’s proved oil and gas   reserves to the year-end quantities of those reserves.  Future price changes shall be considered   only to the extent provided by contractual arrangements in existence at   year-end.*

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

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

*d.**       **Future   net cash flows.  These amounts are the   result of subtracting future development and production costs and future   income tax expenses from future cash inflows.*

*e.**        **Discount.  This amount shall be derived from using a   discount rate of 10 percent a year to reflect the timing of the future net   cash flows relating 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 and permeable underground formation containing a natural accumulation of producible oil and/or gas that is confined by impermeable rock or water barriers and is individual and separate from other reservoirs.

 

Definitions - Page 6 of 7

----

 

 

**DEFINITIONS OF OIL AND GAS RESERVES**

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

 

(28) *Resources.*  Resources are quantities of oil and gas estimated to exist in naturally occurring accumulations.  A portion of the resources may be estimated to be recoverable, and another portion may be considered to be unrecoverable.  Resources include both discovered and undiscovered accumulations.

 

(29) *Service well.*  A well drilled or 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 for injection, observation, or injection for in-situ combustion.

 

(30) *Stratigraphic test well.*  A stratigraphic test well is a drilling effort, geologically directed, to obtain information pertaining to a specific geologic condition.  Such wells customarily are drilled without the intent of being completed for hydrocarbon production.  The classification also includes tests identified as core tests and all types of expendable holes related to hydrocarbon exploration.  Stratigraphic tests are classified as “exploratory type” if not drilled in a known area or “development type” if drilled in a known area.

 

(31) *Undeveloped oil and gas reserves.*  Undeveloped oil and gas reserves are reserves of any category 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.

 
| (i)  |   | Reserves   on undrilled acreage shall be limited to those directly offsetting   development spacing areas that are reasonably certain of production when   drilled, unless evidence using reliable technology exists that establishes   reasonable certainty of economic producibility at greater distances. |
|------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (ii) |   | Undrilled   locations can be classified as having undeveloped reserves only if a   development plan has been adopted 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 of projects — such as   constructing offshore platforms and development in urban areas, remote   locations or environmentally sensitive locations — by their nature   customarily take a longer time to develop and therefore often do justify   longer time periods, this determination must always take into consideration   all of the facts and circumstances. No particular type of project per se   justifies a longer time period, and any extension beyond five years should be   the exception, and not the rule.*

 

*Factors that a company should consider in   determining whether or not circumstances justify recognizing reserves even   though development may extend past five years include, but are not limited to,   the following:*

 

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

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

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

·*           **The extent to which the company has followed a previously adopted   development plan (for example, if a company has changed its development plan   several times without taking significant steps to implement any of those   plans, recognizing proved undeveloped reserves typically would not be   appropriate); and*

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

  |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 
| (iii) |   | Under   no circumstances shall estimates for 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 projects in the same reservoir or an analogous reservoir,   as defined in paragraph (a)(2) of this section, or by other evidence using   reliable technology establishing reasonable certainty. |
|-------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

(32) *Unproved properties.*  Properties with no proved reserves.

 

Definitions - Page 7 of 7

----