Royale Energy Inc

Royale and its subsidiaries own wells, leases, and proved and non-proved reserves of oil and gas located mainly in Mitchell County and Ector County, Texas and in the Sacramento Basin and San Joaquin Basin in California, as well as in, Oklahoma. Royale also owns an overriding royalty interest in a discovery in Alaska. Royale usually sells a portion of the working interest in each well it drills or participates in to third-party participants and retains a portion of the prospect for its own account. Selling part of the working interest to others allows Royale to reduce its drilling risk by owning a diversified inventory of properties with less of its own funds invested in each drilling prospect, than if Royale owned all the working interest and paid all drilling and development costs of each prospect itself. Royale generally sells working interests in its prospects to accredited investors in exempt securities offerings. The prospects are typically bundled into multi-well investments, which permit the third-party investors to diversify their investments by investing in several wells at once instead of investing in single well prospects.

During its fiscal year ended December 31, 2023, Royale continued to explore and develop oil and natural gas properties with concentration in Texas. In 2023, Royale drilled and completed one well and participated in the drilling of three wells, two of which were commercially productive and one that was a dry hole. Royale’s estimated total reserves were approximately 1.8 and 3.4 BCFE (billion cubic feet equivalent) at December 31, 2023 and 2022, respectively. According to the reserve reports furnished by Netherland, Sewell & Associates, Inc., Royale’s independent petroleum engineers, the net reserve value of its proved developed and undeveloped reserves was approximately $10.7 million at December 31, 2023, based on the average Henry Hub natural gas price spot price of $2.637 per MCF and for oil volumes, the average West Texas Intermediate price of $78.21 per barrel as applied on a field-by-field basis. Netherland, Sewell & Associates, Inc. supplied reserve value estimates for the Company’s California, Texas, and Oklahoma properties.

Net reserve value does not represent the fair market value of our reserves on that date, and we cannot be sure what return we will eventually receive on our reserves. Net reserve value of proved developed and undeveloped reserves was calculated by subtracting estimated future development costs, future production costs and other operating expenses from estimated net future cash flows from our developed and undeveloped reserves.

Our standardized measure of discounted future net cash flows at December 31, 2023, was estimated to be $4,471,896. This figure was calculated by subtracting our estimated future income tax expense from the net reserve value of proved developed and undeveloped reserves, and by further applying a 10% annual discount for estimated timing of cash flows. A detailed calculation of our standardized measure of discounted future net cash flow is contained in Note 15 to our Financial Statements, Supplemental Information about Oil and Gas Producing Activities (Unaudited) – Changes in Standardized Measure of Discounted Future Net Cash Flow from Proved Reserve Quantities.

Royale reported a gain on turnkey drilling in connection with the drilling of wells on a “turnkey contract” basis in the amount of $2,107,500 for the year ended December 31, 2023. For the year ended December 31, 2022, Royale reported a gain on turnkey drilling in the amount of $1,726,414.

In addition to Royale’s own staff, Royale hires independent contractors to drill, test, complete and equip the wells that it drills. Approximately 98% of Royale’s total revenue for the year ended December 31, 2023, came from sales of oil and natural gas from production of its wells in the amount of $2,114,026. In 2022, this amount was $2,611,222, which represented 98.8% of Royale’s total revenues for the respective periods presented. See Note 2 to our Financial Statements.