Production shortfalls in South Texas assets and high natural gas prices forced El Paso Corp. to slash its proved oil and gas reserves by 41% following an independent review, which will lead to a fourth quarter pre-tax ceiling test charge of at least $1 billion, the company said Tuesday.

The loss is based on a $6/MMBtu Henry Hub natural gas price used for the calculations, and followed news earlier this month that the Houston-based company expected to make a “material negative revision” to its reserve estimates (see Daily GPI, Feb. 3).

Production volumes in the fourth quarter averaged 1 Bcfe/d, while volumes in January were down, averaging 960 MMcfe/d. Based on expected results from a planned $850 million 2004 capital program, El Paso said in a statement that it believes it can achieve 850-950 MMcfe in daily production.

“We are committed to turning around our production business, and this is the first step,” said CEO Doug Foshee of the reserve revisions. “The next steps include completing the reorganization of this business under Lisa Stewart’s leadership, reviewing our drilling inventory by region and reallocating capital where appropriate. I remain confident that we are on track to deliver the goals of our long-range plan.”

Last year, El Paso became a 30% partner in a joint drilling agreement with two third parties. The drilling program was divided into two packages, with subsidiary El Paso CGP receiving approximately $230 million for drilling and subsidiary El Paso Production Co. (EPPH) receiving $270 million. “While the drilling results of the EPPH program have been satisfactory, the El Paso CGP program results have not met expectations. El Paso is evaluating potential options for the El Paso CGP package.”

During the reserve auditing process, Ryder Scott reviewed approximately 90% of the company’s reserve base. In its audit letter, Ryder Scott cited a difference of less than 2% with the company’s internal reserve analysis, which it considered insignificant.

El Paso’s 2003 reserve report “supports approximately 715 MMcfe of average daily production for 2004 from its existing proved developed producing reserves,” the company said. “This expected production rate is consistent with the range of 680-750 MMcfe of average daily production utilized in the company’s long-range plan.”

According to Ryder Scott estimates, El Paso Corp.’s proved reserves were revised downward 1,824 Bcfe to stand at 2,635 Bcfe at the end of 2003. The revisions included a loss of 427 Bcfe in production, but the majority of the loss was 799 Bcfe from net sales. The corporation also added 452 Bcfe to its proved reserve base last year.

EPPH numbers were revised downward by 865 Bcfe to stand at 1,541 Bcfe at the end of 2003. Production figures fell 226 Bcfe. The unit sold 424 Bcfe, and added 232 Bcfe last year.

El Paso CGP’s numbers were revised downward by 951 Bcfe to stand at 1,094 Bcfe at the end of 2003. Its production was revised downward by 194 Bcfe while net sales dropped the numbers another 267 Bcfe. It also added 220 Bcfe.

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