UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

FORM 10-K

(Mark One)

Commission File No.: 1-10762

HARVEST NATURAL RESOURCES, INC.

Registrant’s telephone number, including area code: (281) 899-5700

15835 Park Ten Place Drive, Suite 115
Houston, Texas 77084
(Former name, former address and former fiscal year, if changed since last report)

Securities registered pursuant to Section 12(b) of the Act:

Securities registered pursuant to Section 12(g) of the Act:

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o

Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2). Yes þ No o

State the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold, or the average bid and asked price of such common equity as of the last business day of the registrant’s most recently completed second fiscal quarter, June 30, 2004: $535,652,892.

Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practical date. Class: Common Stock, par value $0.01 per share, on February 11, 2005, shares outstanding: 37,596,464.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrant’s Proxy Statement for the 2005 Annual Meeting of Stockholders to be filed with the Securities and Exchange Commission, not later than 120 days after the close of the registrant’s fiscal year, pursuant to Regulation 14A, are incorporated by reference into Items 10, 11, 12, 13 and 14 of Part III of this annual report.

HARVEST NATURAL RESOURCES, INC.

FORM 10-K

TABLE OF CONTENTS

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PART I

Harvest Natural Resources, Inc. (“Harvest” or the “Company”) cautions that any forward-looking statements (as such term is defined in the Private Securities Litigation Reform Act of 1995) contained in this report or made by management of the Company involve risks and uncertainties and are subject to change based on various important factors. When used in this report, the words “budget”, “guidance”, forecast”, “anticipate”, “expect”, “believes”, “goals”, “projects”, “plans”, “anticipates”, “estimates”, “should”, “could”, “assume” and similar expressions are intended to identify forward-looking statements. In accordance with the provisions of the Private Securities Litigation Reform Act of 1995, we caution you that important factors could cause actual results to differ materially from those in the forward-looking statements. Such factors include our concentration of operations in Venezuela, the political and economic risks associated with international operations (particularly those in Venezuela), the anticipated future development costs for our undeveloped proved reserves, the risk that actual results may vary considerably from reserve estimates, the dependence upon the abilities and continued participation of certain of our key employees, the risks normally incident to the operation and development of oil and gas properties, the permitting and drilling of oil and natural gas wells, the availability of materials and supplies necessary to projects and operations, the price for oil and natural gas and related financial derivatives, changes in interest rates, basis risk and counterparty credit risk in executing commodity price risk management activities, the Company’s ability to acquire oil and gas properties that meet its objectives, changes in operating costs, overall economic conditions, political instability, civil unrest, acts of terrorism, currency and exchange risks, currency controls, changes in existing or potential tariffs, duties or quotas, changes in taxes, changes in governmental policy, availability of sufficient financing, changes in weather conditions, and ability to hire, retain and train management and personnel. See Risk Factors included in Item 7 – Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Item 1. Business

Executive Summary

     Harvest Natural Resources, Inc. is an independent energy company engaged in the acquisition, development, production and disposition of oil and gas properties since 1989, when it was incorporated under Delaware law. Over our history, we have acquired and developed significant interests in the Bolivarian Republic of Venezuela (“Venezuela”) and the Russian Federation (“Russia”) and have undeveloped acreage offshore China. Currently, our producing operations are conducted through our 80 percent-owned Venezuelan subsidiary, Harvest Vinccler, C.A. (“Harvest Vinccler”, formerly Benton Vinccler, C.A.), which operates the South Monagas Unit in Venezuela.

     In September 2004, we announced the redemption on November 1, 2004 of all $85 million of our 9.375 percent senior unsecured notes due November 1, 2007 (the “2007 Notes”). In August and September 2004, we purchased West Texas Intermediate (“WTI”) crude oil puts covering 10,000 barrels of oil per day for calendar year 2005 to protect our 2005 cash flow. These puts cost a total of $14.9 million, have an average strike price of $42.20 per barrel and, due to our pricing structure for our Venezuelan oil, have the economic effect of hedging approximately 20,800 barrels of oil per day. During 2004, we drilled ten new wells and re-entered and completed an additional six wells in the South Monagas Unit. Our daily crude oil and natural gas sales on December 31, 2004, were 29,000 barrels of oil and 77 million cubic feet of gas. See Item 7 – Management’s Discussion and Analysis of Financial Conditions and Results of Operations for a complete description of these and other events during 2004.

     As of December 31, 2004, we had total estimated Proved Reserves in the South Monagas Unit, net of minority interest, of 84.4 million barrels of oil equivalent (“MMBoe”), and a standardized measure of discounted future net cash flow, before income taxes, for total Proved Reserves of $802 million.

     As of December 31, 2004, we had total assets of $367.5 million. We had cash in the amount of $84.6 million and no long-term debt. We had total revenues of $186.1 million and net cash provided by operating activities of $74.1 million. For the year ended December 31, 2003, we had cash in the amount of $138.7 million and $96.8 million in long-term debt. We had total revenues of $106.1 million and net cash provided by operating activities of $38.5 million.

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Our business strategy is to identify, acquire, develop and produce large discovered oil and gas fields in Venezuela and Russia. We have more than twelve years of experience in Venezuela and Russia, and have established organizations in both countries. We seek additional opportunities in these two countries and would consider investments in other countries that meet our criteria. In executing our business strategy, we will strive to sustain the current balance sheet strength through:

	•	maintaining financial prudence and rigorous investment criteria;
	•	maximizing cash flows from existing operations in order to invest in new opportunities;
	•	using our experience, skills and cash on hand to acquire new projects; and
	•	keeping our organizational capabilities in line with our rate of growth.

     In Venezuela, we seek to deliver maximum operating cash flow through the efficient management of our capital expenditure programs and cost structure. The year 2004 represented our first full year of natural gas production, which allowed us to diversify our revenues and cash flow. Our Venezuelan producing properties generate net cash from operating activities in excess of projected capital expenditures.

     We have significant financial flexibility and substantial cash flow supported by current oil prices and current production levels for both oil and gas. We believe this provides us with the ability to pursue growth opportunities while at the same time maintaining a strong balance sheet. However, we have recently experienced difficulties in Venezuela with getting our budgets approved and obtaining permits from the Ministry of Energy and Petroleum (“MEP”, formerly Ministry of Energy and Mines) and Ministry of Environment, as required, which are critical to our ability to fully execute our drilling program. A continuation of these difficulties or a curtailment of production in Venezuela could adversely affect our production and our ability to pursue growth opportunities.

     While we cannot predict the degree to which we will be successful, we continue to evaluate properties in both Venezuela and Russia to find opportunities which meet our focused acquisition criteria. We expect our cash generating capacity to be supported by our new gas production, lower operating expenses and our expected future Uracoa and Bombal drilling programs.

     Our ability to successfully execute our strategy is subject to significant risks including, among other things, operating risks, political risks, legal risks and financial risks. See Item 7 – Management’s Discussion and Analysis of Financial Conditions and Results of Operations and other information set forth elsewhere in this Form 10-K for a description of these and other risk factors.

Available Information

     We file annual, quarterly and current reports, proxy statements and other documents with the Securities and Exchange Commission (“SEC”) under the Securities Act of 1934. The public may read and copy any materials that we file with the SEC at the SEC’s Public Reference Room at 450 Fifth Street, NW, Washington, DC 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. Also, the SEC maintains an Internet website that contains reports, proxy and information statements, and other information regarding issuers, including us, that file electronically with the SEC. The public can obtain any documents that we file with the SEC at http://www.sec.gov.

     We also make available, free of charge on or through our Internet website (http://www.harvestnr.com), our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and if applicable, amendments to those reports filed or furnished pursuant to Section 13(a) of the Exchange Act as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC. Forms 3, 4 and 5 filed with respect to our equity securities under Section 16(a) of the Securities Act of 1934 are also available on the website. In addition, we have adopted a Code of Business Conduct and Ethics that applies to all of our employees, including our chief executive officer, principal financial officer and principal accounting officer. The text of the Code of Business Conduct and Ethics has been posted on the Governance section of our website. We intend to post on our website any amendments to, or waivers from, our Code of Business Conduct and Ethics applicable to our senior officers. Additionally, the Code of Business Conduct and Ethics is available in print to any person who requests the information. Individuals wishing to obtain this printed material should submit a request to Harvest Natural Resources, Inc., attention Investor Relations.

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Operations

     The following table summarizes our Proved Reserves, drilling and production activity, and financial operating data by principal geographic area at the end of each of the years ending December 31, 2004, 2003 and 2002. All Venezuelan reserves are attributable to an operating service agreement between Harvest Vinccler and Petroleos de Venezuela S.A. (“PDVSA”) under which all mineral rights are owned by the Government of Venezuela. We own 80 percent of Harvest Vinccler. The reserve information presented below is net of a 20 percent deduction for the minority interest in Harvest Vinccler. Drilling and production activity and financial data are reflected without deduction for minority interest. Reserves include production projected through the end of the operating service agreement in 2012. The Venezuelan national civil work stoppage required Harvest Vinccler to shut-in production for approximately two months. We believe the two months representing this delay will be added to the original term of the operating service agreement pursuant to the force majeure provisions of the agreement.

     We disposed of our Russian investments partly in 2002 and partly in 2003. LLC Geoilbent (“Geoilbent”) and Arctic Gas Company (“Arctic Gas”) were accounted for under the equity method and were included at their respective ownership interests in our consolidated financial statements for the periods in which we owned such investments. Our year-end financial information contains results from our Russian operations based on a twelve-month period ending September 30. Accordingly, our results of operations for the years ended December 31, 2003 and 2002 reflect results from Geoilbent until it was sold on September 25, 2003, and for the twelve months ended September 30, 2002, and from Arctic Gas, until it was sold on April 12, 2002.

     We owned 34 percent of Geoilbent, which we accounted for under the equity method. The following table presents our proportionate share of Geoilbent’s Proved Reserves (at September 30 for each respective year), drilling and production activity, and financial operating data for the period until it was sold on September 25, 2003, and for the twelve months ended September 30, 2002.

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     We owned, free of any sale and transfer restrictions, until it was sold on April 12, 2002, 39 percent of the equity interests in Arctic Gas, which we accounted for under the equity method. The following table presents our proportionate share, free of sale and transfer restrictions, of Arctic Gas’s financial operating data for the period.

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South Monagas Unit, Venezuela (Harvest Vinccler)

General

     In July 1992, we and Venezolana de Inversiones y Construcciones Clerico, C.A., a Venezuelan construction and engineering company (“Vinccler”), signed a 20-year operating service agreement with Lagoven, S.A., an affiliate of PDVSA, to reactivate and further develop the Uracoa, Tucupita and Bombal fields. These fields comprise the South Monagas Unit. We were the first U.S. company since 1976 to be granted such an oil field development contract in Venezuela.

     The oil and natural gas operations in the South Monagas Unit are conducted by Harvest Vinccler, our 80 percent-owned subsidiary. The remaining 20 percent of the outstanding capital stock of Harvest Vinccler is owned by Vinccler. Through our majority ownership of stock in Harvest Vinccler, we make all operational and corporate decisions related to Harvest Vinccler, subject to certain super-majority provisions of Harvest Vinccler’s charter documents related to:

		Ÿ mergers;
		Ÿ consolidations;
		Ÿ sales of substantially all of its corporate assets;
		Ÿ change of business; and
		Ÿ similar major corporate events.

     Vinccler has an extensive operating history in Venezuela. It provided Harvest Vinccler with initial financial assistance and significant construction services. Vinccler provided assistance with construction projects, governmental relations and labor relations during 2004 and 2003.

     Under the terms of the operating service agreement, Harvest Vinccler is a contractor for PDVSA. Harvest Vinccler is responsible for overall operations of the South Monagas Unit, including all necessary investments to reactivate and develop the fields comprising the South Monagas Unit. The Venezuelan government maintains full ownership of all hydrocarbons in the fields. In addition, PDVSA maintains full ownership of equipment and capital infrastructure following its installation.

     The operating service agreement provides for Harvest Vinccler to receive an operating fee for each barrel of crude oil delivered. It also provides Harvest Vinccler with the right to receive a capital recovery fee for certain of its capital expenditures, provided that such operating fee and capital recovery fee cannot exceed the maximum total fee per barrel set forth in the agreement. The operating fee is subject to quarterly adjustments to reflect changes in the special energy index of the U.S. Consumer Price Index. The maximum total fee is subject to quarterly adjustments to reflect changes in the average of certain world crude oil prices. Since 1992, the maximum total fee received by Harvest Vinccler has approximated 48 percent of West Texas Intermediate crude oil (“WTI”) price.

     In September 2002, Harvest Vinccler and PDVSA signed an amendment to the operating service agreement, providing for the delivery of up to 198 Bcf of natural gas through July 2012 at a price of $1.03 per Mcf. For 2004, natural gas sales averaged 85 million cubic feet (“MMcf”) per day. In addition, Harvest Vinccler agreed to sell to PDVSA 4.5 million barrels of oil stipulated as additional volumes resulting from the gas production (“Incremental Crude Oil”). Incremental Crude Oil is sold at a price of $7.00 per barrel with the quarterly volume of such sales based on quarterly natural gas sales multiplied by the ratio of 4.5 MMBbls to 198 Bcf.

     At the end of each quarter, Harvest Vinccler prepares an invoice to PDVSA based on barrels of oil accepted by PDVSA during the quarter, using quarterly adjusted contract service fees per barrel. At the end of each quarter, Harvest Vinccler also prepares invoices for natural gas sales and Incremental Crude Oil. Payment is due under the invoices by the end of the second month after the end of the quarter. Invoice amounts and payments are denominated in U.S. Dollars. Payments are wire transferred into Harvest Vinccler’s account in a commercial bank in the United States.

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     Harvest Vinccler has constructed a 25-mile oil pipeline from its oil processing facilities at Uracoa to PDVSA’s storage facility, the custody transfer point. The operating service agreement specifies that the oil stream may contain no more than one percent base sediment and one percent water. Quality measurements are conducted both at Harvest Vinccler’s facilities and at PDVSA’s storage facility.

     In 2003, we built and completed a 64-mile pipeline with a normal capacity of 70 MMcf of natural gas per day and a design capacity of 90 MMcf of natural gas per day, a gas gathering system, upgrades to the UM-2 plant facilities and new gas treatment and compression facilities. Harvest Vinccler borrowed $15.5 million under a project loan for the gas pipeline and related facilities and the remainder of the project costs were funded from existing cash balances and internally generated cash flow. The operating service agreement contains requirements for the measurement and quality of the natural gas delivered to PDVSA.

     In August 1999, Harvest Vinccler sold its power generation facility located in the Uracoa and Tucupita Fields. Concurrently with the sale, Harvest Vinccler entered into a long-term power purchase agreement with the purchaser of the facility to provide for the electrical needs of the field throughout the remaining term of the operating service agreement. Harvest Vinccler has entered into long-term agreements for the leasing of compression and the operation and maintenance of the gas treatment and compression facilities.

Risk Factors

     Currently, the production from the South Monagas Unit represents all of our production. This production may be reduced by actions of the Venezuelan government. In addition, political uncertainty in Venezuela increases our exposure to production disruptions and project execution risk. These risk factors and other risk factors are discussed in Item 7, Risk Factors.

Location and Geology

     The South Monagas Unit extends across the southeastern part of the state of Monagas and the southwestern part of the state of Delta Amacuro in eastern Venezuela. The South Monagas Unit is approximately 51 miles long and eight miles wide and consists of 157,843 acres, of which the fields comprise approximately one-half of the acreage. At December 31, 2004, Proved Reserves attributable to our Venezuelan operations were 105.5 MBoe (84.4 MBoe net to Harvest). This represented 100 percent of our Proved Reserves at year end. Harvest Vinccler has been primarily developing the Oficina sands in the Uracoa Field. The Uracoa Field contains 66 percent of the South Monagas Unit’s Proved Reserves.

Drilling and Development Activity

     Harvest Vinccler drilled ten oil wells and re-entered an additional six wells in 2004 and had 124 wells on production in all fields at year end 2004 in the Uracoa Field.

Uracoa Field

     Harvest Vinccler has been developing the South Monagas Unit since 1992, beginning with the Uracoa Field. There are currently 90 oil and gas producing wells in the field.

     Harvest Vinccler processes the oil, water and natural gas in the Uracoa central processing unit and ships the processed oil via pipeline to the PDVSA custody transfer point. Harvest Vinccler treats and filters produced water, then reinjects it into the aquifer to assist the natural water drive. Harvest Vinccler had reinjected produced natural gas into the natural gas cap primarily for storage conservation until November 2003, at which time it began selling the natural gas. The major components of the state-of-the-art process facility were designed in the United States and installed by Harvest Vinccler. This process design is commonly used in heavy oil production in the United States, but was not previously used extensively in Venezuela to process crude oil of similar gravity or quality. The current production facility has capacity to handle 60 thousand barrels (“MBbls”) of oil per day, 130 MBbls of water per day and injection capacity of 46 MMcf of natural gas per day and storage of up to 75 MBbls of crude oil. All gas presently being sold by Harvest Vinccler is produced from the Uracoa Field.

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Tucupita Field

     There are currently 30 oil producing wells and five water injection wells at Tucupita. The current production facility has capacity to handle 30 MBbls of oil per day, 125 MBbls of water per day and storage for up to 60 MBbls of crude oil. The oil is transported through a 31-mile, 20 MBbl per day capacity oil pipeline constructed in 2001 from Tucupita to the Uracoa plant facilities.

     Harvest Vinccler reinjects produced water from Tucupita into the aquifer to aid the natural water drive, and we utilize a portion of the associated natural gas to operate a power generation facility to supply our power needs.

Bombal Field

     The East Bombal Field was drilled in 1992, and the wells were suspended until gas sales could take place. There are currently four oil producing wells in the West Bombal Field. Portable separation, pumping and storage for 7.5 MBbl of crude oil are maintained at the field. The crude oil is pumped via a pipeline and tied into the 31-mile Tucupita oil pipeline to the Uracoa plant facilities. Harvest Vinccler began engineering and design studies in late 2004 with first gas sales expected in 2005. Gas from this field will be used to supplement gas production from Uracoa as production there declines.

Customers and Market Information

     Under the operating service agreement, all oil and natural gas produced is delivered to PDVSA for a fee. While we have substantial cash reserves, a prolonged loss of sales could have a material adverse effect on our financial condition.

Employees and Community Relations

     Harvest Vinccler has a highly skilled staff of 219 local employees and two expatriates. Harvest Vinccler has invested in a Social Community Program that includes medical programs in ophthalmologic and dental care, as well as additional social investments including the purchase of medicines and medical equipment for local communities within the South Monagas Unit.

Health, Safety and Environment

     Harvest Vinccler’s health, safety and environmental policy is an integral part of its business. Harvest Vinccler continually improves its policy and practices related to personnel safety, property protection and environmental management. These improvements can be directly attributed to its efforts in accident prevention programs and the training and implementation of a comprehensive Process Safety Management System.

North Gubkinskoye and South Tarasovskoye, Russia (Geoilbent)

     In September 2003, we sold our 34 percent minority equity investment in Geoilbent to Yukos Operational Holding Limited for $69.5 million plus $5.5 million for the repayment of intercompany loans and accounts receivable. See Note 8 – Russian Operations.

East Urengoy, Russia (Arctic Gas Company)

     Arctic Gas Company was sold in April 2002. See Note 8 – Russian Operations.

WAB-21, South China Sea (Benton Offshore China Company)

General

     In December 1996, we acquired Crestone Energy Corporation, subsequently renamed Benton Offshore China Company. Its principal asset is a petroleum contract with China National Offshore Oil Corporation (“CNOOC”) for the WAB-21 area. The WAB-21 petroleum contract covers 6.2 million acres in the South China Sea, with an option for an additional 1.25 million acres under certain circumstances, and lies within an area which is

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the subject of a territorial dispute between the People’s Republic of China and Vietnam. Vietnam has executed an agreement on a portion of the same offshore acreage with another company. The territorial dispute has lasted for many years, and there has been limited exploration and no development activity in the area under dispute. As part of a review of our assets, a third-party conducted an evaluation of the WAB-21 area. Through that evaluation and our own assessment, we recorded a $13.4 million impairment charge in the second quarter of 2002. No further impairment of the property is currently required.

Location and Geology

     The WAB-21 contract area is located approximately 50 miles southeast of the Dai Hung (Big Bear) Oil Field. The block is adjacent to British Petroleum’s giant natural gas discovery at Lan Tay (Red Orchid) and 100 miles north of Exxon’s Natuna Discovery. The contract area covers several similar structural trends, each with potential for hydrocarbon reserves in possible multiple pay zones.

Drilling and Development Activity

     Due to the sovereignty issues between China and Vietnam, we have been unable to pursue an exploration program during phase one of the contract. As a result, we have obtained license extensions, with the current extension in effect until May 31, 2005. While no assurance can be given, we believe we will continue to receive license extensions so long as the sovereignty issues persist.

Domestic Operations

     We acquired a 100 percent interest in three California State offshore oil and gas leases (“the California Leases”) and a parcel of onshore property from Molino Energy Company, LLC. In June 2004, we sold our California onshore property, which had a zero carrying value, for net proceeds of $0.6 million. We and other parties may be responsible to the State of California for any remediation costs associated with the onshore property and the related offshore oil and gas leases.

Activities by Area

     The following table summarizes our consolidated activities by area. Total Assets represents all assets, including long-lived assets accounted for under the equity method:

Reserves

     Estimates of our Proved Reserves as of December 31, 2004 and 2003 were prepared by Ryder Scott Company, L.P., independent petroleum engineers. The following table sets forth information regarding estimates of Proved Reserves at December 31, 2004, which are all Venezuelan. The information includes reserve information net of a 20 percent deduction for the minority interest in Harvest Vinccler. All reserves are attributable to an operating service

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agreement between Harvest Vinccler and PDVSA under which all mineral rights are owned by the Government of Venezuela.

          Estimates of commercially recoverable oil and natural gas reserves and of the future net cash flows derived therefrom are based upon a number of variable factors and assumptions, such as:

	•	historical production from the subject properties;
	•	comparison with other producing properties;
	•	the assumed effects of regulation by governmental agencies; and
	•	assumptions concerning future operating costs, municipal taxes, abandonment costs, development costs, and workover and remedial costs, all of which may vary considerably from actual results.

          All such estimates are to some degree speculative and various classifications of reserves are only attempts to define the degree of speculation involved. For these reasons, estimates of the commercially recoverable reserves of oil and natural gas attributable to any particular property or group of properties, the classification, cost and risk of recovering such reserves and estimates of the future net cash flows expected therefrom, prepared by different engineers or by the same engineers at different times may vary substantially. The difficulty of making precise estimates is accentuated by the fact that 44 percent of our total Proved Reserves were undeveloped as of December 31, 2004. The cost to develop the Proved Undeveloped Reserves is expected to be $102.8 million over the next three years.

          Reserve estimates are not constrained by the availability of the capital resources required to finance the estimated development and operating expenditures. In addition, actual future net cash flows will be affected by factors such as:

	•	actual production;
	•	oil and natural gas sales;
	•	supply and demand for oil and natural gas;
	•	availability and capacity of gathering systems and pipelines;
	•	changes in governmental regulations, policies or taxation; and
	•	the impact of inflation on costs.

          The timing of actual future net oil and natural gas sales from Proved Reserves as well as the year-end price, and thus their actual present value, can be affected by the timing of the incurrence of expenditures in connection with development of oil and gas properties. The 10 percent discount factor required by the SEC to be used to calculate present value for reporting purposes is not necessarily the most appropriate discount factor based on interest rates in effect from time to time, risks associated with the oil and natural gas industry and the political risks associated with operations in Venezuela. Discounted present value, regardless of what discount rate is used, is materially affected by assumptions as to the amount and timing of future production, which assumptions may, and often do, prove to be inaccurate. For the period ending December 31, 2004, we reported $1,003 million ($802 million net to us) of discounted future net cash flows before income taxes from Proved Reserves based on the SEC’s required calculations.

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Production, Prices and Lifting Cost Summary

          In the following table we have set forth by country our net production, average sales prices and average operating expenses for the years ended December 31, 2004, 2003 and 2002. The presentation for Venezuela includes 100 percent of the production, without deduction for minority interest. Geoilbent (34 percent ownership) and Arctic Gas (39 percent ownership not subject to any sale or transfer restrictions at December 2001), which are accounted for under the equity method, have been included at their respective ownership interest in the consolidated financial statements based on a fiscal period ending September 30 and, accordingly, our results of operations for the years ended December 31, 2004, 2003 and 2002 reflect results from Geoilbent until it was sold on September 25, 2003, and for the twelve months ended September 30, 2002 and from Arctic Gas until it was sold on April 12, 2002.

Regulation

General

          Our operations are affected by political developments and laws and regulations in the areas in which we operate. In particular, oil and natural gas production operations and economics are affected by:

	•	change in governments;
	•	civil unrest;
	•	price and currency controls;
	•	limitations on oil and natural gas production;
	•	world demand for crude oil;
	•	tax, environmental, safety and other laws relating to the petroleum industry;
	•	changes in such laws;
	•	changes in administrative regulations and the interpretation and application of such rules and regulations; and
	•	changes in contract interpretation and policies of contract adherence.

          In any country in which we may do business, the oil and natural gas industry legislation and agency regulation are periodically changed for a variety of political, economic, environmental and other reasons. Numerous governmental departments and agencies issue rules and regulations binding on the oil and natural gas industry, some

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of which carry substantial penalties for the failure to comply. The regulatory burden on the oil and natural gas industry increases our cost of doing business.

Venezuela

          On February 5, 2003, Venezuela imposed currency controls and created the Commission for Administration of Foreign Currency with the task of establishing the detailed rules and regulations and generally administering the exchange control regime. These controls fix the exchange rate between the Venezuelan Bolivar and the U.S. Dollar and restrict the ability to exchange Venezuelan Bolivars for U.S. Dollars and vice versa. Initially the exchange rate was set at 1,600 Venezuelan Bolivars for each U.S. Dollar. On February 6, 2004, the official exchange rate was adjusted to 1,920 Venezuelan Bolivars for each U.S. Dollar. Oil companies such as Harvest Vinccler are allowed to receive payments for oil sales in U.S. Dollars and pay U.S. Dollar-denominated expenses from those payments. We have substantial cash reserves and do not expect the Venezuelan currency conversion restriction to adversely affect our ability to meet short-term loan obligations and operating requirements for the next twelve months.

          Venezuela requires environmental and other permits for certain operations conducted in oil field development, such as site construction, drilling and seismic activities. As a contractor to PDVSA, Harvest Vinccler submits capital budgets to PDVSA for review, including capital expenditures to comply with Venezuelan environmental regulations. No capital expenditures to comply with environmental regulations were required in 2003 or 2004. Harvest Vinccler also submits requests for permits for drilling, seismic and operating activities to PDVSA, which then obtains such permits from the MEP and Ministry of Environment, as required. Harvest Vinccler is also subject to income, municipal and value-added taxes, and must file certain monthly and annual compliance reports with the national tax administration and with various municipalities.

Drilling and Undeveloped Acreage

          For acquisitions of leases and producing properties, development and exploratory drilling, production facilities and additional development activities such as workovers and recompletions, we spent approximately (excluding our share of capital expenditures incurred by equity affiliates) $39.2 million, $58.3 million and $50.6 million in 2004, 2003 and 2002, respectively. Included in these numbers is $33.5 million, $43.6 million and $44.3 million for the development of Proved Undeveloped Reserves in 2004, 2003 and 2002, respectively.

          We have drilled or participated through our equity affiliate in the drilling of wells as follows: