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El Paso Reports 12% Drop in '04 Reserves, Stronger Forecast for '05

El Paso Corp. on Tuesday cited negative reserve revisions, poor drilling results in the first six months of 2004 and asset sales for a 12% drop in total oil and natural gas reserves in 2004, compared with 2003. However, with a new deep shelf discovery in the Gulf of Mexico and stronger drilling results, CEO Doug Foshee said the company was "already a long way" toward replacing expected 2005 production.

Following the completion of a reserve estimate for 2004 with Ryder Scott Co. independently evaluating 88% of the properties, El Paso put proved reserves as of Dec. 31, 2004 at 2.2 Tcfe. Ryder Scott's estimate was within 4% of the one calculated by El Paso's internal reserves group.

The total reserves estimate included stronger drilling results in the last half of 2004, when the company added 205 Bcfe. In addition, El Paso had 173 Bcfe of negative reserve revisions that it said were largely performance-driven. The company also sold all of its Canadian production and Indonesian reserves, and moved Hungarian reserves to discontinued operations during 2004, which resulted in the loss of another 161 Bcfe.

Approximately 71% of the 2004 proved reserves are developed and 82% are natural gas. The company used a year-end natural gas price of $6.22/MMBtu and a year-end oil price of $43.45/bbl to determine its present value calculations.

"While we have made significant improvements throughout our production business, overall 2004 drilling and reserve replacement results did not meet our expectations," said CEO Doug Foshee in a written statement. "Much of our effort in the second half of 2004 was directed at moving proved undeveloped reserves into the producing category. This is reflected in the overall increase of proved developed reserves to more than 70% of total proved reserves."

Foshee said that "going into 2005, we have high expectations" for the E&P segment. He cited El Paso's acquisition of 124 Bcfe of reserves already this year, and the news Tuesday of a new deep shelf discovery at West Cameron Block 75 in the Gulf of Mexico.

The well, located 15 miles offshore Louisiana in about 35 feet of water, was spudded in August 2004. El Paso logged more than 40 net feet of gas in the Lower Miocene formation, and the well was drilled to a total measured depth of 22,824 feet. El Paso Production Holding Co. operates the well and owns a 36% working interest and an approximate 30% net revenue interest. Production is expected to begin in 4Q2005 after the facilities are installed.

El Paso's January 2005 average daily production rate was 754 MMcfe/d, compared with 779 MMcfe/d in 4Q2004. The output included approximately 6 MMcfe/d of production from a South Texas acquisition. The rate does not include a pending East Texas acquisition, which is expected to close during 1Q2005, adding 21 MMcfe/d. The Onshore, Gulf of Mexico and International divisions "are all on target; however, well failures, performance, and drilling results have lowered the Texas Gulf Coast production by 16 MMcfe/d from fourth quarter levels," the company said.

Although its current output is below expectations, 2005 production is expected to average "800 MMcfe/d or more." More guidance is expected at an analyst meeting scheduled March 17.

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