El Paso Posts Proved Natural Gas, Oil Reserves for 2008
El Paso reported that its proved natural gas and oil reserves at December 31, 2008 totaled 2.5 Tcfe, including 222 Bcfe related to its 48.8 percent interest in Four Star.
"El Paso had a very good year in terms of reserve additions, percentage of reserves replaced and domestic reserve replacement costs, excluding the effects of significant price-related revisions at year-end," said Doug Foshee, president and chief executive officer of El Paso Corporation. "Extensions and discoveries were up 69 percent over 2007 results, which demonstrate significant improvement in our E&P business. And the $2.87 per Mcfe domestic reserve replacement costs, excluding price-related revisions, is our best performance since I joined El Paso in 2003. While a sharp drop in commodity prices had a significant impact on year-end reserves, it is important to note that the year-end reserve calculation assumed very little reduction in service costs, which have fallen since year end and continue to decline. If we had calculated our year-end reserves assuming a Henry Hub natural gas price of $7.00 per MMBtu, $70.00 per barrel WTI pricing and assuming no further reduction in service costs, El Paso's reserves, including our interest in Four Star, would have been approximately 3.0 Tcfe."
Approximately 74 percent of the December 31, 2008, proved reserves are proved developed, and 92 percent are natural gas.
Approximately 85 percent of price-related revisions are attributable to the decline in oil and NGL prices. Of the price-related revisions, approximately 300 Bcfe were domestic, the largest portion of which was related to the company's Altamont oil properties. In addition, El Paso did not book any reserves from the Camarupim (Bia) project in Brazil due to the sharp drop in oil prices.
El Paso E&P's oil and gas 2008 capital expenditures were approximately $1.7 billion, which includes approximately $50 million for acquisitions of producing properties and approximately $200 million for international expenditures.
El Paso Corporation expects to take a fourth quarter after-tax full-cost ceiling test charge of $1.9 billion and a $0.1 billion impairment of its investment in Four Star. Approximately $1.4 billion of the full-cost ceiling test charge is attributable to the domestic full-cost pool and $0.5 billion to the Brazilian full-cost pool. The company uses the full-cost method of accounting for its oil and natural gas properties. The carrying value of these assets, net of related deferred income taxes, is evaluated on a quarterly basis and is limited to the present value of estimated net revenues of proved reserves using a 10-percent discount rate based on prices and costs at the end of the quarter plus the cost of unevaluated oil and natural gas properties (i.e. a cost center ceiling). A ceiling test charge occurs when the carrying value of the natural gas and oil assets exceeds the cost center ceiling.
El Paso has derivative positions that are intended to manage the price risk of its natural gas and oil production for 2009 and beyond. They are recorded on a mark-to-market basis and therefore were not included in the ceiling test calculation. These positions had a net asset value of approximately $700 million at December 31, 2008.
The ceiling test and impairment charges are non-cash items that do not impact any of the covenants on the debt obligations of El Paso Corporation or its subsidiaries. Based on current reserves and the expected fourth quarter 2008 ceiling test charge, the company estimates its first quarter 2009 per-unit DD&A rate will decline by approximately $0.90 per Mcfe from the rate used in the fourth quarter of 2008 to approximately $2.30 per Mcfe.
27 Percent Increase in Non-Proved Resources
El Paso also reported today that at December 31, 2008, it had an estimated 3.5 Tcfe of net risked or 6.6 Tcfe of net unrisked non-proved resource potential in addition to its 2.5 Tcfe of proved natural gas and oil reserves. The company's risked non-proved resource potential rose 0.7 Tcfe, or 27 percent, from 2007 levels. The majority of the increase was primarily due to the addition of new opportunities in the Haynesville Shale, infill opportunities in the Altamont Field and the Raton Basin coal bed methane program. Non-proved resources include the company's proportionate share of Four Star.
Foshee added, "One of our key successes in 2008 was the expansion of our future drilling inventory. The 2009 E&P capital program will optimize our current investment opportunities while preserving the drilling inventory that we have worked hard to develop, most of which is operated by El Paso and held by production."
A breakout of non-proved resources (risked/unrisked) is as follows:
- Unconventional -- 1,080/1,560 Bcfe -- Unconventional resources primarily consist of the company's coal bed operations in the Raton, Black Warrior, and Arkoma Basins and its holdings in the New Albany and Haynesville shale plays.
- Conventional, low-risk (probability of geologic success greater than or equal to 40 percent) -- 1,770/2,300 Bcfe -- This consists of conventional resources in the Rockies, south Texas, and Brazil development programs. It also includes tight-sand drilling in the ArkLaTex area.
- Conventional, higher-risk (probability of geologic success less than 40 percent) -- 700/2,785 Bcfe -- This includes higher-risk exploration in the Gulf of Mexico, Texas Gulf Coast, and undrilled international exploration prospects in Brazil and Egypt.
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