October 5, 2000
National Fuel Exploration Corp.
1000, 550 - 6 th Avenue S.W.
Calgary, Alberta
T2P 0S2
Attention: Mr. D. Goruk, Chief Operating Officer
Reference: National Fuel Exploration Corp.
Update of Oil & Gas Reserves
Constant Price Assumptions
Dear Sir:
Pursuant to your request we have prepared an Update of the crude oil, natural
gas and natural gas products reserves and the present worth values of these
reserves for the petroleum and natural gas interests of National Fuel
Exploration Corp., hereinafter referred to as the "Company", as of October 1,
2000. The future net revenues and present worth values presented in this report
were calculated using "Constant Price" assumptions supplied by the Company and
were presented in Canadian dollars. No allowance was made for income tax or the
Saskatchewan Corporation Capital Tax Surcharge however an allowance was made for
the Alberta Royalty Tax Credit.
For this update, our previous evaluation entitled "Tri Link Resources Ltd.,
Evaluation of Oil & Gas Reserves, Based on Escalating Price Assumptions as of
April 1, 2000" dated June 26, 2000, was advanced to October 1, 2000 by
subtracting the estimated production for the six months from April 1, 2000 to
October 1, 2000. The Company's recent drilling activity which consisted of some
28 oil wells was then included. Operating cost, capital cost and development
drilling assumptions were all based on our previous report. It should be noted
that recent production data was not reviewed for any properties with the
exception of the new wells. It should also be noted that it is our understanding
from the Company that due to frequent power interruptions the Company's recent
production has been below the levels forecast in our April report.
The properties evaluated in this report were indicated to include essentially
all of the Company's conventional petroleum and natural gas interests in Canada.
The Company's principal crude oil properties are located in the Hazelwood and
Corning areas in the province of Saskatchewan. The principal natural gas
property is located in the Meadow area in the province of Alberta.
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National Fuel Exploration Corp. Page 2
Constant Price Assumptions October 5, 2000
The Company's share of proved remaining and probable additional crude oil,
natural gas and natural gas products reserves as of October 1, 2000 and the
respective present worth values assigned to these reserves based on Tri Link
"Constant Price" assumptions were estimated to be as follows:
ESTIMATED COMPANY SHARE OF REMAINING RESERVES
AS OF OCTOBER 1, 2000
MMCF, MBBL
Proved Proved Proved Total Probable
Producing Non-Producing Undeveloped Proved Additional Total
Crude Oil
Gross (1) 40,249 85 7,703 48,037 17,934 65,971
Net (2) 34,762 69 7,005 41,835 14,839 56,674
Natural Gas
Gross (1) 2,952 995 - 3,947 400 4,346
Net (2) 2,357 801 - 3,157 342 3,499
Natural Gas Liquids
Gross (1) 328 - 55 383 106 489
Net (2) 299 - 52 351 96 447
ESTIMATED COMPANY SHARE OF PRESENT WORTH VALUES BEFORE INCOME TAX
AS OF OCTOBER 1, 2000
$1000 (3) (4) (5) (6)
Discounted At
0% 10% 12% 15% 20%
Proved Developed Producing Reserves 962,412 477,418 436,262 387,812 329,861
Proved Developed Non-Producing 5,735 2,271 1,976 1,641 1,267
Reserves
Proved Undeveloped Reserves 212,063 120,061 109,498 96,339 79,604
Total Proved Reserves 1,180,210 599,749 547,735 485,792 410,732
Probable Additional Reserves
-Unrisked 441,136 126,679 107,873 87,341 65,105
Total Proved & Probable Reserves
-Unrisked 1,621,346 726,428 655,609 573,133 475,837
Probable Additional Reserves
-Risked (7) 220,568 63,340 53,937 43,671 32,553
Total Proved & Probable
Reserves-Risked (7) 1,400,778 663,089 601,672 529,463 443,285
(1) Gross reserves are defined as the aggregate of the Company's working
interest and royalty interest reserves before deductions of royalties payable to
others.
(2) Net reserves are gross reserves less all royalties payable to others.
(3) Financial matters such as prepayments, take or pay payments, general
obligations, etc. were not included.
(4) Based on "Constant Price" assumptions supplied by Company (see Price
Schedules).
(5) The Alberta Royalty Tax Credit was calculated based on the applicable
regulations in effect at October 1, 2000. The ARTC program was assumed to
continue indefinitely.
(6) No allowance was made for the Saskatchewan Corporation Capital Tax Resource
Surcharge in the present worth value estimates.
(7) Includes a 50 percent reduction in the probable present worth values to
account for the risk associated with the probable additional reserves.
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National Fuel Exploration Corp. Page 3
Constant Price Assumptions October 5, 2000
The Company's share of remaining reserves and present worth values are presented
on a total Company basis in the summary section of this report. The location of
the Company's major properties and a graphical summary of the forecast
production, net income and reserve distributions are also presented in this
section. Tables summarizing the reserves, production and revenues for the
various reserve classes are presented in Appendices 1 to 6. A summary of the
Company's interests and encumbrances in each property is presented in Appendix
7. Discussions of the assumptions and methodology employed to prepare the
reserve estimates and revenue forecasts are also contained in the "Evaluation
Methodology" section.
Detailed reserve estimates and revenue forecasts and other supporting data for
each of the properties that were reviewed in detail were provided in the
detailed property report. Property discussions and a detailed description of the
economic factors employed to derive the cash flow forecasts were also included
therein.
The extent and character of all factual information supplied by the Company
including ownership, well data, production, prices, revenues, operating costs,
contracts, and other relevant data were relied upon by us in preparing this
report and has been accepted as represented without independent verification. In
view of the generality of the assignment the opinions expressed are not intended
to provide a stand alone analysis of any specific property but to relate to an
overall Update of the reserves of the Company.
This report was prepared by McDaniel & Associates Consultants Ltd. for the
exclusive use of National Fuel Exploration Corp. and is not to be reproduced,
distributed or made available, in whole or in part, to any person, company or
organization other than National Fuel Exploration Corp. without the knowledge
and consent of McDaniel & Associates Consultants Ltd. We reserve the right to
revise any estimates provided herein if any relevant data existing prior to
preparation of this report was not made available or if any data provided was
found to be erroneous.
Sincerely,
McDANIEL & ASSOCIATES CONSULTANTS LTD.
"signed by P. A. Welch"
_____________________________ PERMIT TO PRACTICE
P. A. Welch, P. Eng. McDANIEL & ASSOCIATES CONSULTANTS LTD.
Signature_______________________
Date Thursday, October 05, 2000
"signed by F. Schorning"
_____________________________ PERMIT NUMBER: P 3145
F. Schorning, P. Geol. The Association of Professional Engineers,
Geologists and Geophysicists of Alberta
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National Fuel Exploration Corp. Page 4
Constant Price Assumptions October 5, 2000
CERTIFICATE OF QUALIFICATION
I, Fred Schorning, Petroleum Geologist of 2200, 255 - 5th Avenue, S.W., Calgary,
Alberta, Canada hereby certify:
1. That I am a Vice President of McDaniel & Associates Consultants Ltd. Which
Company did prepare, at the request of National Fuel Exploration Corp., the
report entitled "National Fuel Exploration Corp., Evaluation of Oil & Gas
Reserves, Based on Constant Price Assumptions, As of October 1, 2000", dated
October 5, 2000, and that I was involved in the preparation of this report.
2. That McDaniel & Associates Consultants Ltd., its officers or employees, have
no direct or indirect interest, nor do they expect to receive any direct or
indirect interest in any properties or securities of National Fuel Exploration
Corp., any associate or affiliate thereof.
3. That I attended McMaster University in the years 1960 to 1964, graduating
with a Bachelor of Arts degree in Geology; that I am a member of the Canadian
Society of Petroleum Geologists; that I am a registered Professional Geologist
in the province of Alberta and that I have in excess of thirty years experience
in oil and gas reservoir studies.
4. That the aforementioned report was not based on a personal field examination
of the properties in question, however, such an examination was not deemed
necessary in view of the extent and accuracy of the information available on the
properties in question.
5. That the basic data employed in preparing the said report was obtained from
the files of National Fuel Exploration Corp., our own files and the published
information available from regulatory authorities. No claim of title for the
properties was discussed and the description furnished by National Fuel
Exploration Corp. was taken and accepted as given.
"signed by F. Schorning"
----------------------------
F. Schorning, P. Geol.
Calgary, Alberta
Dated: October 5, 2000
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National Fuel Exploration Corp. Page 5
Constant Price Assumptions October 5, 2000
CERTIFICATE OF QUALIFICATION
I, Philip Arthur Welch, Petroleum Engineer of 2200, 255 - 5th Avenue, S.W.,
Calgary, Alberta, Canada hereby certify:
1. That I am a Senior Vice President of McDaniel & Associates Consultants Ltd.
Which Company did prepare, at the request of National Fuel Exploration Corp.,
the report entitled "National Fuel Exploration Corp., Evaluation of Oil & Gas
Reserves, Based on Constant Price Assumptions, As of October 1, 2000", dated
October 5, 2000; and that I was involved in the preparation of this report.
2. That McDaniel & Associates Consultants Ltd., its officers or employees, have
no direct or indirect interest, nor do they expect to receive any direct or
indirect interest in any properties or securities of National Fuel Exploration
Corp., any associate or affiliate thereof.
3. That I attended the University of British Columbia in the years 1980 to 1987
and that I graduated with Bachelor of Applied Science and Master of Applied
Science degrees in Mechanical Engineering, that I am a registered Professional
Engineer in the province of Alberta; that I am a member of the Canadian
Institute of Mining and Metallurgy and that I have in excess of eleven years
experience in oil and gas reservoir studies and evaluations.
4. That the aforementioned report was not based on a personal field examination
of the properties in question, however, such an examination was not deemed
necessary in view of the extent and accuracy of the information available on the
properties in question.
5. That the basic data employed in preparing the said report was obtained from
the files of National Fuel Exploration Corp., our own files and the published
information available from regulatory authorities. No claim of title for the
properties was discussed and the description furnished by National Fuel
Exploration Corp. was taken and accepted as given.
"signed by P. A. Welch"
----------------------------
P. A. Welch, P. Eng.
Calgary, Alberta
Dated: October 5, 2000
<PAGE>
NATIONAL FUEL EXPLORATION CORP.
Update of Oil & Gas Reserves
Based on Constant Price Assumptions
As of October 1, 2000
Evaluation Methodology
INTRODUCTION
Estimates of the crude oil, natural gas and natural gas products reserves and
the associated present worth values before income taxes attributable to the
Canadian properties of the Company have been presented in this update as of
October 1, 2000. Reserve estimates were prepared for approximately 280
individual properties in which the Company was indicated to have an interest in
Western Canada based on detailed studies of the reservoir and performance
characteristics as well as historical revenues and costs.
The basic information employed in the preparation of this report was obtained
from the Company's files, published sources and from our own files. Detailed
reserve estimates and revenue forecasts and other supporting data for each of
the properties that were reviewed in detail were provided in the detailed
property report. Property discussions and a detailed description of the economic
factors employed to derive the cash flow forecasts were also included therein.
The effective date of this update is October 1, 2000. The reserve estimates
presented herein were based on advancing our April 1, 2000 report to October 1,
2000 by subtracting the estimated production for the six months from April 1,
2000 to October 1, 2000. A brief review of the methodology employed in arriving
at the reserves and present worth value estimates contained in our April 1, 2000
report is presented in this section.
RESERVE ESTIMATES
Crude Oil
The crude oil reserve estimates presented in this report were based on a study
of the volumetric data and performance characteristics of the individual wells
and reservoirs in question. The oil-in-place estimates were based on individual
well pore volume interpretations, geological studies of pool configurations as
well as unitization studies and published estimates. In those cases where
indicative oil production decline and/or increasing gas-oil and water-oil ratio
trends were evident, the remaining reserves were determined by extrapolating
these trends to economic limiting conditions. Where definitive production
information was not yet available, the reserve estimates were based on analogy
with similar wells or
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National Fuel Exploration Corp. Page 2
Constant Price Assumptions October 5, 2000
reservoirs or on theoretical studies of recovery efficiencies. The cumulative
production figures were taken from published sources or from records of the
Company and estimated for those recent periods where such data was not
available.
Natural Gas and Products
The natural gas reserve estimates were based on a study of the volumetric data
and performance characteristics of the individual wells and reservoirs in
question. Volumetric estimates of the gas-in-place were based on individual well
pore volume interpretations, geological studies of the pools and areas and on
unitization studies and published estimates. Material balance estimates of the
gas-in-place were employed where such information was available. The reserves
recoverable from the currently producing properties were estimated from studies
of performance characteristics and/or reservoir pressure histories. In cases of
competitive drainage in multi-well pools the reserves were based on an analysis
of the relevant factors relating to the future pool depletion by existing and
possible future wells. The recovery factors for the non-producing properties
were estimated from a consideration of test rates, reservoir pressures and by
analogy with similar wells or reservoirs.
The natural gas products reserve estimates for the producing properties were
predicated on a study of historical and anticipated future recoveries of these
products from the natural gas reserves. The natural gas products recoveries from
the non-producing natural gas reserves were estimated from gas analyses, well
test information and from analogy with similar reservoirs. Natural gas products
reserves were only assigned to non-producing properties in those cases where, in
all likelihood the gas production would be processed through existing facilities
capable of extracting these products or where such a facility will be available
in the near future.
RESERVE CLASSIFICATION
The crude oil, natural gas and natural gas products reserves of the Company were
classified into proved and probable additional categories. A detailed
description of the proved and probable reserve categories is presented in the
"Reserve Definitions" at the end of this section.
The proved reserves have been further subdivided into proved producing, proved
non-producing and proved undeveloped categories. Reserves were considered to be
producing if these reserves are currently being produced or if definitive steps
are being taken to begin production of these reserves in the immediate future.
Reserves assigned to non-producing zones in producing wells were classified as
producing if the reserve quantities were estimated to be minor relative to the
Company's reserves in the area. Non-producing reserves recoverable from existing
wells that require relatively minor capital expenditures to produce were
classified as proved non-producing. Reserves expected to be recovered from new
wells on undrilled acreage or from existing wells where a relatively major
capital expenditure is required were classified as proved undeveloped.
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National Fuel Exploration Corp. Page 3
Constant Price Assumptions October 5, 2000
In all cases the crude oil and natural gas liquids reserves were expressed in
barrels being equal to 34.972 Imperial gallons. The natural gas reserves were
presented in thousands of standard cubic feet (MCF) and calculated at a base
pressure of 14.65 psia and a base temperature of 60 degrees Fahrenheit.
Company Share of Reserves
The Company's net share of reserves was obtained by employing the Company's
indicated gross working and royalty interests in the various properties in
question less all royalties owned by others. In estimating net reserves the
applicable Crown royalties were based on the regulations in effect as of October
1, 2000.
PRESENT WORTH VALUE ESTIMATES
The present worth values of the crude oil, natural gas and natural gas products
reserves were obtained by employing future production and revenue analyses. The
future crude oil production was in each instance predicated on a forecast of
allowable rates and/or anticipated performance characteristics of the individual
wells and reservoirs in question. The future natural gas production was
predicated on the provisions of the natural gas purchase contracts where such
contracts were available with consideration to the historical producing rates
and the estimated deliverability. In those areas where shut-in natural gas
reserves exist commencement of production was based on the proximity to a
pipeline connection and the relevant factors relating to the future marketing of
the reserves. The future production of gas-cap reserves was assumed to occur
near the end of the oil producing life. Solution gas production was based on the
forecast of the oil producing rates and producing gas-oil ratios. The natural
gas products production forecasts were based on the anticipated recoveries of
these products from the produced natural gas.
The Company's gross share of future crude oil revenue was derived by employing
the Company's gross share of production and the indicated Edmonton light crude
oil price less the historical quality and transportation price differential for
each respective field. The indicated natural gas prices with an adjustment for
the heating value of the gas were employed to calculate the gross share of
future natural gas revenues. The indicated Edmonton natural gas products prices
with adjustments to reflect historical price differentials realized by the
Company in each respective property were employed to calculate the gross share
of natural gas products revenues. Royalties and mineral taxes payable to the
Crown were estimated based on the methods in effect as of October 1, 2000.
Freehold and overriding royalties payable to others were estimated based on the
indicated applicable rates. In those cases where a proportionate share of the
natural gas gathering and processing charges were indicated to be payable by the
Crown or royalties owned by others, these charges have been deducted in
determining the net royalties payable.
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National Fuel Exploration Corp. Page 4
Constant Price Assumptions October 5, 2000
In all cases, estimates of the applicable capital expenditures and operating
costs with no allowance for inflation were deducted in arriving at the Company's
share of future net revenues. No allowance for future well abandonment costs was
made for any wells or facilities. The present worth values were then obtained by
employing 10, 12, 15 and 20 percent nominal annual discount rates compounded
annually.
No allowance was made for income tax or the Saskatchewan Corporation Capital Tax
Surcharge however an allowance was made for the Alberta Royalty Tax Credit. The
Alberta Royalty Tax Credit (ARTC) was included in Table A in the summary section
of this report and in Table 1 of the Appendices, however, no allowance was made
for the ARTC in any other tables. The ARTC was assumed to continue indefinitely.
The estimated present worth values of the proved plus probable additional
reserves were obtained by employing future production and revenue analyses on a
total proved plus probable reserve basis. All additional costs required to
recover the probable additional reserves were included in the revenue forecasts.
It should be pointed out that no allowance was made for any risk associated with
the probable reserves in this report other than in the present worth value
summary in the covering letter.
Summaries of the Company's share of remaining reserves together with forecast
future revenues, royalties, taxes, operating and capital costs, cash flow and
present worth values are presented in detailed tabulations in Appendices 1 to 6.
RESERVE DEFINITIONS
Crude Oil
A mixture, consisting mainly of pentanes and heavier hydrocarbons that may
contain sulphur compounds, that is liquid at the conditions under which its
volume is measured or estimated, but excluding such liquids obtained from the
processing of natural gas.
Synthetic Oil
Oil derived from the upgrading of crude bitumen or by chemical modification of
coal or other materials and which is largely interchangeable with conventional
crude oil as a refinery feedstock.
Natural Gas
The lighter hydrocarbons and associated non-hydrocarbon substances occurring
naturally in an underground reservoir, which under atmospheric conditions is
essentially a gas, but which may contain liquids. The natural gas reserve
estimates are reported on a marketable basis, that is the gas which is available
to a transmission line after removal of certain hydrocarbons and non-hydrocarbon
compounds present in the raw natural gas and which meets specifications for use
as a domestic, commercial or industrial fuel.
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National Fuel Exploration Corp. Page 5
Constant Price Assumptions October 5, 2000
Natural Gas Liquids
Those hydrocarbon components recovered from raw natural gas as liquids by
processing through extraction plants or recovered from field separators,
scrubbers or other gathering facilities. These liquids include the hydrocarbon
components ethane, propane, butanes and pentanes plus, or a combination thereof.
Sulphur
Elemental sulphur removed from the produced natural gas by processing through an
extraction plant.
Remaining Reserves
Remaining reserves are those quantities of crude oil, natural gas, natural gas
liquids and sulphur remaining after deducting those quantities produced up to
the reference date of the study.
Gross Reserves
The total of the Company's working interests and/or royalty interests share of
reserves before deducting royalties owned by others.
Net Reserves
The total of the Company's working interests and/or royalty interests share of
reserves after deducting the amounts attributable to the royalties owned by
others.
Royalties
The term royalties, as used in this report, refers to royalties paid to others.
The royalties deducted from the reserves are based on the royalty percentage
calculated by applying the applicable royalty rate or formula. In the case of
Crown sliding scale royalties which are dependent on selling price the price
forecasts for the individual properties in question has been employed.
Proved Reserves
Proved oil and gas reserves are the estimated quantities of crude oil, natural
gas, and natural gas liquids which geological and engineering data demonstrate
with reasonable certainty to be recoverable in future years from known
reservoirs under existing economic and operating conditions, i.e., prices and
costs as of the date the estimate is made. Prices include consideration of
changes in existing prices provided only by contractual arrangements, but not on
escalations based upon future conditions.
Reservoirs are considered proved if economic producibility is supported by
either actual production or conclusive formation test. The area of a reservoir
considered proved includes (A) that portion delineated by drilling and defined
by gas-oil and/or oil-water contacts, if any; and (B) the immediately adjoining
portions not yet drilled, but which can be reasonably judged as economically
productive on the basis of available geological and engineering data. In the
absence of information on fluid contacts, the lowest known structural occurrence
of hydrocarbons controls the lower proved limit of the reservoir.
Reserves which can be produced economically through application of improved
recovery techniques (such as fluid injection) are included in the "proved"
classification when successful testing by a pilot
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National Fuel Exploration Corp. Page 6
Constant Price Assumptions October 5, 2000
project, or the operation of an installed program in the reservoir, provides
support for the engineering analysis on which the project or program was based.
Estimates of proved reserves do not include the following: (A) oil that may
become available from known reservoirs but is classified separately as
"Indicated additional reserves"; (B) crude oil, natural gas, and natural gas
liquids, the recovery of which is subject to reasonable doubt because of
uncertainty as to geology, reservoir characteristics, or economic factors; (C)
crude oil, natural gas, and natural gas liquids, that may occur in undrilled
prospects; and (D) crude oil, natural gas, and natural gas liquids, that may be
recovered from oil shales, coal, gilsonite and other such sources.
Proved Producing Reserves
Those proved reserves that are actually on production, or if not producing, that
could be recovered from existing wells or facilities and where the reasons for
the current non-producing status is the choice of the owner. An illustration of
such a situation is where a well or zone is capable but is shut-in because its
deliverability is not required to meet contract commitments. Reserves assigned
to non-producing zones in producing wells were classified as producing if the
reserve quantities were estimated to be minor relative to the Company's reserves
in the area.
Proved Non-Producing Reserves
Those non-producing proved reserves recoverable from existing wells that require
relatively minor capital expenditures to produce.
Proved Undeveloped Reserves
Those reserves expected to be recovered from new wells on undrilled acreage or
from existing wells where a relatively major capital expenditure will be
required.
Probable Additional Reserves
Those reserves which analysis of drilling, geological, geophysical and
engineering data does not demonstrate to be proved under current technology and
existing economic conditions, but where such analysis suggests the likelihood of
their existence and future recovery. Probable additional reserves to be obtained
by the application of enhanced recovery processes will be the increased recovery
over and above that estimated in the proved category which can be realistically
estimated for the pool on the basis of enhanced recovery processes which can be
reasonably expected to be instituted in the future.
Comments:
1. The probable additional natural gas reserves are based on the potential
productive areas of the natural gas reservoirs in question which could not be
deemed proved at this time as well as those solution gas reserves commercially
recoverable from the probable additional crude oil reserves.
2. The probable additional reserves of natural gas liquids and sulphur were
considered to be those reserves recoverable from the probable additional natural
gas reserves.
3. Portions of the zones which have questionable potential based on well log
interpretations (or core analyses) and which have not been indicated productive
by conclusive tests are considered to be probable additional.
