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v2.4.0.6
Oil and Gas Producing Activities
12 Months Ended
Dec. 31, 2010
Oil and Gas Producing Activities  
Oil and Gas Producing Activities

NOTE 15—Oil and Gas Producing Activities (Unaudited)

 

Overview

 

All of our reserve information related to crude oil, condensate, and natural gas liquids and natural gas was compiled based on estimates prepared and reviewed by our engineers. The technical persons primarily responsible for overseeing the preparation of the reserves estimates meet the requirements regarding qualifications. The reserves estimation is part of our internal controls process subject to management's annual review and approval. These reserves estimates are evaluated and audited by Netherland, Sewell & Associates, Inc. ("NSAI"), our independent reserve engineers consulting firm, as of December 31, 2010, 2009 and 2008. A report of NSAI is filed in Exhibit 99.1. All of the subject reserves are located in the continental United States, primarily in Texas and Louisiana.

 

Many assumptions and judgmental decisions are required to estimate reserves. Quantities reported are considered reasonable but are subject to future revisions, some of which may be substantial, as additional information becomes available. Such additional knowledge may be gained as the result of reservoir performance, new geological and geophysical data, additional drilling, technological advancements, price changes, and other factors.

 

Regulations published by the SEC define proved oil and gas reserves as those quantities of oil and gas which, by analysis of geoscience and engineering data can be estimated with reasonable certainty to be economically producible from a given date forward, from known reservoirs, and under existing economic conditions, operating methods, and government regulation before the time at which contracts providing the right to operate expire, unless evidence indicates that renewal is reasonably certain, regardless of whether the estimate is a deterministic estimate or probabilistic estimate. Proved developed oil and gas reserves are proved reserves that can be expected to be recovered through existing wells with existing equipment and operating methods or in which the cost of the required equipment is relatively minor compared with the cost of a new well or through installed extraction equipment and infrastructure operational at the time of the reserves estimates if the extraction is by means not involving a well.

 

In December 2008, the SEC issued a final rule adopting revisions to its oil and gas reporting disclosures. The revisions are intended to provide investors with more meaningful and comprehensive information related to the determination and disclosure of oil and gas reserves information. In January 2010, the FASB issued an update to accounting standards for oil and gas reserve estimations and disclosures. The provisions of both SEC final rule and FASB accounting update are effective for fiscal years ending on or after December 31, 2009. We adopted both SEC final rule and FASB accounting update on their effective date of December 31, 2009. The rule changes, including those related to pricing and technology, are included in our reserves estimates as of December 31, 2010 and 2009. Our reserves estimates as of December 31, 2008 were prepared under the previous rules.

 

Prices we used to value our reserves are based on the twelve-month un-weighted arithmetic average of the first-day-of-the-month price for the period January through December 2010. For oil volumes, the average WTI spot price of $75.96 per barrel is adjusted by lease for quality, transportation fees, and regional price differentials. For gas volumes, the average Henry Hub spot price of $4.38 per MMBtu is adjusted by lease for energy content, transportation fees, and regional price differentials.

 

Capitalized Costs

 

The table below reflects our capitalized costs related to our oil and gas producing activities at December 31, 2010, and 2009 (in thousands):

 

     2010     2009  

Proved properties

   $ 1,162,017      $ 1,305,694   

Unproved properties

     55,874        37,931   
                
     1,217,891        1,343,625   

Less accumulated depreciation, depletion and amortization

     (682,056     (671,352
                

Net oil and gas properties

   $ 535,835      $ 672,273   
                

 

Costs Incurred

 

Costs incurred in oil and gas property acquisition, exploration and development activities, whether capitalized or expensed, are summarized as follows (in thousands):

 

     Year Ended December 31,  
     2010      2009      2008  

Property Acquisition

        

Unproved

   $ 33,456       $ 15,264       $ 54,657   

Proved

             579         7,751   

Exploration

     33,580         35,378         44,765   

Development (1)

     218,342         193,130         315,030   
                          
   $ 285,378       $ 244,351       $ 422,203   
                          

(1) Includes asset retirement costs of $1.3 million in 2010, $3.7 million in 2009 and $7.4 million in 2008.

 

The following table sets forth our net proved oil and gas reserves at December 31, 2010, 2009 and 2008 and the changes in net proved oil and gas reserves during such years:

 

     Natural Gas (MMcf)     Oil (MBbls)  
     2010     2009     2008     2010     2009     2008  

Proved reserves at beginning of period

     415,301        390,449        346,930        877        1,983        1,810   

Revisions of previous estimates (1)

     1,383        (264,928     (62,616     88        (1,441     (137

Extensions, discoveries and improved recovery (2)

     102,751        318,699        126,350        820        487        470   

Purchases of minerals in place

                   2,988                      15   

Sales of minerals in place

     (32,431     (28     (14     (17            (1

Production

     (32,815     (28,891     (23,189     (150     (152     (174
                                                

Proved reserves at end of period

     454,189        415,301        390,449        1,618        877        1,983   
                                                

Proved developed reserves:

            

Beginning of period

     162,935        150,174        108,077        431        387        282   

End of period

     187,417        162,935        150,174        746        431        387   

 

     Natural Gas Equivalents (MMcfe)  
     2010     2009     2008  

Proved reserves at beginning of period

     420,561        402,349        357,792   

Revisions of previous estimates (1)

     1,916        (273,577     (63,438

Extensions, discoveries and improved recovery (2)

     107,670        321,622        129,170   

Purchases of minerals in place

                   3,078   

Sales of minerals in place (3)

     (32,532     (28     (20

Production

     (33,716     (29,805     (24,233
                        

Proved reserves at end of period

     463,899        420,561        402,349   
                        

Proved developed reserves:

      

Beginning of period

     165,519        152,496        109,769   

End of period

     191,893        165,519        152,496   

(1) Revisions of previous estimates in 2008 and 2009 were negative due primarily to significant pricing decreases in 2008 and 2009 which caused a number of our vertical proved undeveloped locations in Northwest Louisiana and East Texas areas to become uneconomic at those lower price levels.
(2) Extensions and discoveries were positive on an overall basis in all three periods presented, primarily related to our continued drilling activity on existing and newly acquired properties in the Northwest Louisiana, East Texas and South Texas areas. We recognized reserve adds of 108 Bcfe in 2010 related to extensions and discoveries, of which approximately 80 Bcfe is attributed to the Haynesville Shale Trend, approximately 25 Bcfe is attributed to the Cotton Valley Taylor Sand and approximately 3 Bcfe is attributed to the Eagle Ford Shale Trend.
(3) In December 2010, we sold approximately 33 Bcfe attributed to our shallow rights in several fields in East Texas and Northwest Louisiana retaining ownership of all the deep rights including the Haynesville Shale Trend formations.

 

Standardized Measure

 

The standardized measure of discounted future net cash flows relating to proved oil and natural gas reserves as of year-end is shown below (in thousands):

 

     2010     2009     2008  

Future revenues

   $ 1,835,800      $ 1,267,712      $ 2,052,735   

Future lease operating expenses and production taxes

     (424,560     (420,687     (816,941

Future development costs (1)

     (513,252     (422,042     (675,787

Future income tax expense

     (10,172     (3,384     (6,907
                        

Future net cash flows

     887,816        421,599        553,100   

10% annual discount for estimated timing of cash flows

     (529,138     (274,375     (385,657
                        

Standardized measure of discounted future net cash flows

   $ 358,678      $ 147,224      $ 167,443   
                        

Index price used to calculate reserves (2)

      

Natural gas (per Mcf)

   $ 4.38      $ 3.87      $ 5.71   

Oil (per Bbl)

   $ 75.96      $ 57.65      $ 41.00   

(1) Includes cumulative asset retirement obligations of $16.1 million, $18.3 million and $13.8 million in 2010, 2009 and 2008, respectively.
(2) These index prices, used to estimate our reserves at these dates, are before deducting or adding applicable transportation and quality differentials on a well-by-well basis.

 

We believe with reasonable certainty that we will be able to obtain such capital in the normal course of business. The estimated future net cash flows are then discounted using a rate of 10 percent per year to reflect the estimated timing of the future cash flows. The standardized measure of discounted cash flows is the future net cash flows less the computed discount.

 

Changes in the Standardized Measure

 

The following are the principal sources of change in the standardized measure of discounted net cash flows for the years shown (in thousands):

 

     Year Ended December 31,  
     2010     2009     2008  

Balance, beginning of year

   $ 147,224      $ 167,443      $ 284,117   

Net changes in prices and production costs related to future production

     113,068        (309,832     (68,643

Sales and transfers of oil and gas produced, net of production costs

     (108,242     (66,438     (167,516

Net change due to revisions in quantity estimates

     1,962        (181,646     (81,292

Net change due to extensions, discoveries and improved recovery

     153,509        89,811        105,257   

Net change due to purchases and sales of minerals in place

     (12,979     3        5,219   

Changes in future development costs

     35,173        473,897        3,426   

Previously estimated development cost incurred in period

     21,231        6,160        35,926   

Net change in income taxes

     (2,507     1,461        26,165   

Accretion of discount

     14,816        16,987        31,269   

Change in production rates (timing) and other

     (4,577     (50,622     (6,485
                        

Net increase (decrease) in standardized measures

     211,454        (20,219     (116,674
                        

Balance, end of year

   $ 358,678      $ 147,224      $ 167,443