SOURCE: Treaty Energy Corporation

January 13, 2010 11:53 ET

Treaty Energy Releases Reserve Report on Kansas Oil Lease

Synopsis of 'Reserve Report' on 57 Oil and Gas Leases Covering 7,788 Acres with 481 Active Producing Wells

HOUSTON, TX--(Marketwire - January 13, 2010) - Treaty Energy Corporation (OTCBB: TECO) today released a synopsis of the 'Reserve Report' that was prepared prior to the recent completion of the agreement to acquire 57 oil and gas leases in Kansas and Missouri, comprising 481 active producing wells over 7,788 acres.

Randall Newton, Chairman and CEO of Treaty Energy, stated, "We are very pleased that we can release this synopsis of the Reserve Report that was prepared for us as a part of the process in evaluating the Kansas and Missouri lease properties. It was used by Treaty Energy in making the final determination to go forward to acquire the Kansas and Missouri leases. We believe that this extensive release of information on the oil reserves on these leases will be highly beneficial to current and prospective investors as they consider adding TECO to their investment portfolios."

Mr. Newton added, "According to the reserve report issued by our independent reservoir engineer, the discounted cash flows over 20 years, discounted at 25%, are just a little above $12 million, and discounted at 10% are just under $23 million. These two numbers are significant for two different reasons. (See 'Present Worth Profile' at end of Reserve Report)

"The 10% discount number of $22.9 million is significant because it is the valuation used by the Securities and Exchange Commission to set a ceiling above which these leases cannot be valued on the balance sheet. Based on our purchase price, we will have approximately $6 million on the balance sheet. In fact, the maximum allowable carrying value of this investment at $80 per barrel would be almost four times the actual investment."

Mr. Newton added further, "The 25% discount number of $12 million is significant because it represents the benchmark used by many potential investors to place a value on the property for purposes of making an offer to a seller. As you can see, our purchase price of $6 million is half of that benchmark.

"We are very excited about our opportunities in Kansas because they represent stable, predictable cash flows with good returns on investment."

RESERVE REPORT

INTRODUCTION

This report, updated as of January 1, 2010, is a review of 57 oil leases in Johnson, Miami, Linn, Douglas, Franklin, Anderson, Wabaunsee and Morris Counties, Kansas, and Cass and Jackson Counties, Missouri - operated by Town Oil Company. Included in this review is a determination and evaluation of the Proved, Developed Producing (PDP) reserves for all leases meriting PDP classification. Other leases were further evaluated of Proved, Developed Non-producing (PDNP) and Proved Underdeveloped (PUD) reserves, where sufficient data were available. If sufficient data were not available to substantiate Proved reserves, Probable reserves are assigned.

LOCATION

The oil properties reviewed in the report are located in eight eastern Kansas counties; Anderson, Douglas, Franklin, Johnson, Linn, Miami, Morris and Wabaunsee; and in extreme western Missouri in Cass and Jackson Counties. Geologically, the properties are situated in the Forest City Basin and, with a couple of exceptions, produce from wells less than 1000 feet deep.

The following table is a General Lease Information sheet consisting of basic lease data. All Kansas leases are located in South townships and East ranges.

                                           NET REVENUE      PRODUCTION
LEASE NAME                COUNTY     ACRES   INTEREST        RATE BOPD
                       ------------- ----- ------------  ------------------
ALBERTI                    Miami, KS   160        80.00%               2.33
                       ------------- ----- ------------  ------------------
ASHBURN                Wabaunsee, KS   560        78.74%               2.92
                       ------------- ----- ------------  ------------------
ASJES                       Cass, MO    80        80.00%               0.83
                       ------------- ----- ------------  ------------------
AYERS                      Miami, KS   160        80.00%               0.52
                       ------------- ----- ------------  ------------------
BALDWIN UNIT             Douglas, KS   160        80.00%               4.23
                       ------------- ----- ------------  ------------------
BARTLETT                   Miami, KS    80        80.00%               0.23
                       ------------- ----- ------------  ------------------
BAUMAN                   Jackson, MO   240        80.00%               0.10
                       ------------- ----- ------------  ------------------
BEARY                       Cass, MO    25        80.00%               3.31
                       ------------- ----- ------------  ------------------
BELL, FRED               Douglas, KS    40        80.00%               0.14
                       ------------- ----- ------------  ------------------
BELL, JIM                Douglas, KS    40        80.00%               0.14
                       ------------- ----- ------------  ------------------
BELL, MARY               Douglas, KS    80        80.00%               1.26
                       ------------- ----- ------------  ------------------
BIVINS                  Franklin, KS    80        80.00%               0.37
                       ------------- ----- ------------  ------------------
BROCKER                    Miami, KS   160        80.00%               0.38
                       ------------- ----- ------------  ------------------
BROWN                   Franklin, KS   160        80.00%               0.68
                       ------------- ----- ------------  ------------------
CARTER, E&W                Miami, KS   160        80.00%               0.16
                       ------------- ----- ------------  ------------------
CARTWRIGHT                 Miami, KS   240        80.00%               0.63
                       ------------- ----- ------------  ------------------
CRAIG                       Linn, KS    80        80.00%               0.40
                       ------------- ----- ------------  ------------------
DARBY                    Douglas, KS   100        80.00%               0.38
                       ------------- ----- ------------  ------------------
DIXON                    Jackson, MO    25        80.00%               0.67
                       ------------- ----- ------------  ------------------
EVERSMEYER              Franklin, KS   120        80.00%               5.35
                       ------------- ----- ------------  ------------------
FIEHLER, S.             Franklin, KS    80        80.00%               2.08
                       ------------- ----- ------------  ------------------
FINNERTY                 Douglas, KS    80        80.00%               2.39
                       ------------- ----- ------------  ------------------
FLAKE, ED                  Miami, KS   160        80.00%               0.16
                       ------------- ----- ------------  ------------------
FLAKE, JOHN                Miami, KS    80        80.00%               0.14
                       ------------- ----- ------------  ------------------
GAGE, FRANK              Douglas, KS    80        80.00%               1.07
                       ------------- ----- ------------  ------------------
GAGE,JOHN                Douglas, KS   100        80.00%               1.13
                       ------------- ----- ------------  ------------------
GARDNER                    Miami, KS   120        80.00%               0.00
                       ------------- ----- ------------  ------------------
GOETZ                      Miami, KS    65        80.00%               5.65
                       ------------- ----- ------------  ------------------
GOETZ, E.                  Miami, KS   400        80.00%               1.14
                       ------------- ----- ------------  ------------------
GUETTERMAN               Johnson, KS   240        80.00%               2.19
                       ------------- ----- ------------  ------------------
JOHNSON                  Douglas, KS   160        80.00%               7.10
                       ------------- ----- ------------  ------------------
KITCHEN                    Miami, KS   160        80.00%               1.43
                       ------------- ----- ------------  ------------------
KRAMER, B.               Johnson, KS   160        80.00%               1.36
                       ------------- ----- ------------  ------------------
KRAMER, J.               Johnson, KS    25        80.00%               0.28
                       ------------- ----- ------------  ------------------
LAWSON                   Douglas, KS    40        80.00%               1.66
                       ------------- ----- ------------  ------------------
MADL                     Douglas, KS    80        80.00%               0.67
                       ------------- ----- ------------  ------------------
McCANN                     Miami, KS   320        80.00%               5.65
                       ------------- ----- ------------  ------------------
McCLINTOCK               Jackson, MO   280        80.00%               0.09
                       ------------- ----- ------------  ------------------
NUTT                       Miami, KS    80        80.00%               2.70
                       ------------- ----- ------------  ------------------
O'BRIEN                    Miami, KS   100        80.00%               7.15
                       ------------- ----- ------------  ------------------
OLSON                     Morris, KS    80        75.00%               1.53
                       ------------- ----- ------------  ------------------
OWEN                       Miami, KS    90        80.00%               3.67
                       ------------- ----- ------------  ------------------
PEARSON                  Douglas, KS    80        80.00%               2.16
                       ------------- ----- ------------  ------------------
POSS                    Anderson, KS   103        80.00%               5.61
                       ------------- ----- ------------  ------------------
ROSS                        Linn, KS   160        80.00%               2.00
                       ------------- ----- ------------  ------------------
SCHMITT                    Miami, KS   160        80.00%               0.69
                       ------------- ----- ------------  ------------------
SCHUKNECHT                 Miami, KS   160        80.00%               0.53
                       ------------- ----- ------------  ------------------
SPINDLE                    Miami, KS   200        80.00%               0.59
                       ------------- ----- ------------  ------------------
TRIAN                      Miami, KS   320        80.00%               0.67
                       ------------- ----- ------------  ------------------
VAN HORN                Franklin, KS    80        80.00%               0.68
                       ------------- ----- ------------  ------------------
WADDLE, E&W                Miami, KS   200        80.00%               1.51
                       ------------- ----- ------------  ------------------
WALTON                      Cass, MO    60        80.00%              16.70
                       ------------- ----- ------------  ------------------
WILLIAMS                Franklin, KS   160        80.00%               1.73
                       ------------- ----- ------------  ------------------
WILLIAMS-RICE            Jackson, MO    15        80.00%               1.71
                       ------------- ----- ------------  ------------------
WILLIAMSON                 Miami, KS    80        80.00%               0.31
                       ------------- ----- ------------  ------------------
WISE                     Johnson, KS    80        80.00%               0.26
                       ------------- ----- ------------  ------------------
ZIMMERMAN                   Linn, KS   200        80.00%               1.08
                       ------------- ----- ------------  ------------------

                             Totals:  7788                           110.50
                       ============= ===== ============  ==================

DETERMINATION OF PROVED, PRODUCING RESERVES

Proved reserves, as defined by the Society of Petroleum Engineers: "reserves of crude oil ...are estimated quantities as of a specific date, which geological and engineering data demonstrate with a reasonable certainty to be recoverable in the future from known reservoirs under existing economic conditions and current technology."

PDP reserves are those reserved estimated to be recovered from existing wells currently operating.

Since reserve estimates are a function of oil price and operating economics, the stated estimates are based upon January 2010 oil prices. Significantly different production prices may result in significantly different reserve estimates and corresponding values.

Many of the less significant leases were not included in this evaluation. Primarily, leases producing less than 0.5 BOPD were excluded. Although, this does not necessarily mean they are operation at a loss, their total effect, at this time, is not significant.

Leases presently operation at a loss will develop a value of "zero." In these cases, the leases are expected to possess reserves in Proved, Developed Non-Producing; Proved Undeveloped, or Probable categories. Consequently, values on the PDP summary sheet reflect only producing rates and monetary amounts from the properties exhibiting positive values.

PROVED, DEVELOPED PRODUCING RESERVES

Proved, Developed Producing reserves were determined by extrapolation of lease production decline curves to the lease's economic limit. Individual property decline curves, with indicated production projections are included in the report. In addition, individual lease cash flow analyses are included. The following parameters were applied to the Proved, Developed Producing reserves:

    Working Interest Evaluated                        100%

    Net Interest Evaluated                 80%; exceptions indicated

    Operating Expenses; oil wells                $225/well-month

    Operating Expenses; deeper oil wells     $750 - $850/well-month

    Severance Tax                                Not applicable

    Ad Valorem Tax                                     1%

    Net Oil Price (Jan 1, 2010)                    $80.00/stb
                                            $85.00/stb, after 1 year
                                           $90.00/stb, after 2 years

In summary, the Proved, Developed Producing reserves are ("Net" indicates the interest of Treaty Energy Corporation):

    GROSS RESERVES; stb                            424,559

    NET RESERVES; stb                              339,300

    FUTURE NET CASH FLOW                         $14,341,107

    DISCOUNTED (8%) FNCF                          $8,518,021

    stb = Stock-tank barrel

PROVED, DEVELOPED NON-PRODUCING RESERVES

PDNP reserves are assigned to leases which possess one of more of the following:

    1. Reactivation of idle producing wells.

    2. Expansion of commercial waterflood, or other proven method
       of enhanced recovery, to portions of leases presently not being
       affected.

    3. Reactivation of waterflood utilizing existing infrastructure.

These reserves have been reviewed and analyzed for the following significant leases:

    ALBERTI & McCANN                BALDWIN UNIT

    JOHNSON                         NUTT

    OWENS                           WALTON, BEARY & ASJES

In summary, the Proved, Developed Non-Producing reserves are ("Net" indicates interest of Treaty Energy Corporation):

    GROSS RESERVES; stb                            217,800

    NET RESERVES; stb                              174,240

    FUTURE NET CASH FLOW                         $11,770,537

    DISCOUNTED (8%) FNCF                          $7,168,245

IMPORTANT NOTE: In addition, many of the remainder of the leases have undrilled locations and merit application of waterflooding, but due to time constraints were not analyzed in the report (see "Probable Reserves" and "Overview of Individual Leases").

PROVED UNDEVELOPED RESERVES

Proved Undeveloped reserves are assigned to undrilled locations which offset existing wells producing at commercial rates, and/or which are expected to be recovered from expanded or increased waterflooding operations. In a few cases, reserves were assigned to well locations which are not direct offsets of existing wells, but prior drilling has proved the existence of commercial reservoir. Proved Undeveloped reserves were estimated by utilizing volumetric oil-in-place calculation, or by analogy to existing similar production.

Volumetric calculations were determined from core analyses and well log data - net sand thickness, porosity, water saturation. The data was transferred to an isopach map, planimetered, and oil-in-place volumes determined.

In addition to the parameters utilized in evaluation Proved Producing reserves, the following were applied to the undeveloped category:

    Drilling Cost - Oil well           $30,000/well

    Drilling Cost - Injector           $20,000/well

Development of these reserves is scheduled to occur from 2010 through early 2012.

Operating costs utilized in the analyses are $335/well-month, in most cases.

PUD reserves have been evaluated on several of the major leases:

    DARBY & GAGE (WAKARUSA)         EAST & WEST GOETZ

    GUETTERMAN                      JOHNSON

    KITCHEN & BARTLETT              O'BRIEN

    WILLIAMS

Nearly all of the leases possess undrilled locations. However, for the purposes of this report, analyses were limited to the more significant properties.

In summary, the Proved Undeveloped (PUD) reserves are ("Net" indicates interest of Treaty Energy Corporation):

    GROSS RESERVES; stb                            409,952

    NET RESERVES; stb                              327,961

    FUTURE NET CASH FLOW                         $17,021,716

    DISCOUNTED (8%) FNCF                          $9,881,472

SUMMARY OF PROVED RESERVES

The summarized result of all three Proved reserve catergories (PDP, PDNP, and PUD) is:

    GROSS RESERVES; stb                           1,052,311

    NET RESERVES; stb                              841,501

    FUTURE NET CASH FLOW                         $43,133,360

    DISCOUNTED (8%) FNCF                         $25,567,738

PROBABLE RESERVES

Probable reserves are assigned to those leases which for some reason do not fit the criteria necessary to be classified as Proved. Leases have been assigned to this category for one, or more of the following reasons:

    1. A lack of geological, operational, or engineering data necessary
       to confirm the existence of Proved reserves.

    2. The requirement of substantial additional expenses.

    3. The occurrence of a significant event, such as, execution of a
       contract, etc.

Each of these leases possesses upside development potential and will need to be thoroughly reviewed.

                                NET PROBABLE    ESTIMATED
LEASE                         RESERVES - BRLS     VALUE
                               -------------- ------------

BELL (2 leases)                        12,000 $    120,000

BIVINS, BROWN, & VAN HORN              60,000 $    448,000

CARTWRIGHT                             40,000 $    320,000

DIXON & WILLIAMS-RICE                  60,000 $    600,000

EVERSMEYER                             60,000 $    450,000

FIEHLER, SOUTH                         90,000 $    400,000

FINNERTY                               60,000 $    540,000

KRAMER (2 leases)                      60,000 $    600,000

MADL                                   30,000 $    300,000

McCLINTOCK                            800,000 $  8,000,000

PEARSON                                50,000 $    450,000

POSS                                  100,000 $  1,000,000

SCHMITT                                60,000 $    600,000

SCHUKNECHT                              8,000 $     80,000

SPINDLE & BROCKER                      45,000 $    480,000

TRIAN                                  60,000 $    600,000

WADDLE                                 75,000 $    750,000

WILLIAMSON                             16,000 $    128,000
                               -------------- ------------

              TOTAL:                1,686,000 $ 15,866,000

Probable reserves were assigned for the SOUTH FIEHLER and EVERSMEYER leases. The EVERSMEYER will need considerable plugging and redrilling and it is questionable if adequate reserves exist to merit the redevelopment, however, it does appear to be a possible redevelopment candidate. It is the opinion of Treaty Energy and its expert consultants that this rework will be economically successful and will recover considerable oil. Further testing and evaluation is necessary on both the EVERSMEYER, and the adjoining SOUTH FIEHLER prior to classifying reserves as Proved.

Other leases are assigned Probable reserves as they lack the criteria necessary to be classified as PDNP or PUD. These properties were not evaluated because of a lack of adequate data to perform meaningful evaluation, and the time involved in acquiring data and evaluating leases was not available. Potential future oil recovery is estimated by analogy to similar Kansas production.

                PRESENT WORTH PROFILE

DISC        PW of NET    DISC     PW of NET
RATE (%)    BTAX, M$   RATE (%)   BTAX, M$
           ---------- ---------- ----------
0.0        43,133,360       30.0 10,193,468
2.0        37,218,837       35.0  8,723,867
5.0        30,512,199       40.0  7,554,867
8.0        25,567,738       45.0  6,607,394
10.0       22,952,120       50.0  5,827,390
12.0       20,743,364       60.0  4,627,612
15.0       18,016,448       70.0  3,757,451
18.0       15,821,381       80.0  3,104,975
20.0       14,584,787       90.0  2,602,584
25.0       12,083,610      100.0  2,207,260

CONCLUSION

Analysis of the Reserve Report will show that the estimated value to Treaty Energy is quite substantial. The "PROBABLE RESERVES" of $15,886,000 (a deeply discounted number), when added to the "SUMMARY OF PROVED RESERVES" - Future Net Cash Flow of $43,133,360, brings the potential estimated cash flow value to $58,999,360. It should also be noted that this Report was based on a starting point of 110 barrels per day, but production has recently been increased to approximately 150 barrels per day.

About Treaty Energy Corporation

Treaty is engaged in the acquisition, development and production of oil and natural gas. Treaty acquires and develops oil and gas leases which have "proven but undeveloped reserves" at the time of acquisition. These properties are not strategic to large exploration-oriented oil and gas companies. This strategy allows Treaty to develop and produce oil and natural gas with tremendously decreased risk, cost and time involved in traditional exploration. The company's headquarters are located in Houston, Texas. For more information, please visit our website at: www.treatyenergy.com

Forward-Looking Statements:

Statements herein express management's beliefs and expectations regarding future performance and are forward-looking and involve risks and uncertainties, including, but not limited to, raising working capital and securing other financing; responding to competition and rapidly changing technology; and other risks. These risks are detailed in the Company's filings with the Securities and Exchange Commission. Actual results may differ materially from such forward-looking statements.

Contact Information

  • Contact:
    Osprey Partners
    Tel: 732-292-0982
    Fax: 732-528-9065
    investors@treatyenergy.com

    Investor Relations:
    Equiti-trend Advisors LLC
    (800) 953-3350 toll-free
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