Item 1. Business
Texland Drilling Program-1981, Ltd. (a Limited Partnership) was formed on July 20, 1981 with $12,125,000 in aggregate Limited Partnership subscriptions for the purpose of engaging in the exploration for oil and gas. Such exploration has taken place principally in the geological area known as the Texas Permian Basin. The Partnership’s drilling and exploration phase is complete. Development of the Partnership’s properties is also complete; except for possible occasional developmental drilling which may be undertaken to the extent necessary to insure the maximum commercial recovery of reserves. In 2006, the Partnership drilled 9 such developmental wells.
The Partnership has no plans to borrow funds or reinvest significant amounts of oil and gas revenues. To the extent that in-fill development is deemed advisable, however; such operations will be funded from available cash flow.
Sales to such purchasers are on a competitive basis on short-term contracts customarily used in the industry. Should sales to these purchasers become interrupted, management believes alternative purchasers would be immediately available on similar terms.
Purchasers, which accounted for 10% or more of the Partnership’s sales, were as follows:
Texland Petroleum, L.P. receives substantially all revenues directly from the purchasers and subsequently disburses these revenues to interest owners. Substantially all trade accounts receivable were due from Texland Petroleum, L.P. at December 31, 2006 and 2005.
The price of oil and gas is affected by world wide supply and demand beyond the Partnership’s control. The monthly average price during the past five years for West Texas Sour (adjusted for gravity and marketing costs), the primary type of Partnership oil, and for the widely available NYMEX benchmark West Texas Intermediate are as follows:
From January 1, 2007 to March 25, 2007, monthly average oil prices of WTS oil ranged from $48.01 to $51.61 and NYMEX ranged from $54.70 to $59.52.
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Item 2
Item 2 - Properties
The Partnership currently has an interest in 280 active gross oil and gas wells, representing 21.97 net wells. Two of the gross wells and 0.45 of the net wells are gas wells and the remainder are oil wells.
The Partnership currently has 272 oil wells included in 8 different enhanced recovery projects operated by Texland Petroleum, L. P. Such enhanced recovery projects are designed to pressurize the oil bearing reservoirs and increase the producing rates, property life and overall ultimate recovery of oil.
Item 3
Item 3 - Legal Proceedings
None
Item 4
Item 4 - Submission of Matters to a Vote of Security Holders
None
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PART II
Item 5
Item 5 - Market for Registrant’s Common Equity and Related Stockholder Matters
Omitted. Not applicable.
Item 6
Item 6 - Selected Financial Data
The following table presents selected financial data for each of the past five years ended December 31, 2006. The data has been derived from the audited financial statements:
TEXLAND DRILLING PROGRAM - 1981, LTD.
SELECTED FINANCIAL INFORMATION
FOR THE YEAR ENDED DECEMBER 31,
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Item 7
Item 7 - Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Risk Factors and Cautionary Statement for Purposes of the Safe Harbor Provisions of the Private Securities Litigation Reform Act of 1995
Certain information included in Items 1 and Items 7 of this report contain certain statements that may constitute forward-looking statements within the meaning of Securities and Exchange regulations. Such forward-looking statements are based upon the current expectations of Texland Drilling Program-1981, Ltd. and speak only as of the date made.
Where any forward-looking statement includes a statement of the assumptions or bases underlying such forward-looking statement, we caution that while we believe these assumptions or bases to be reasonable and to be made in good faith, assumed facts or bases almost always vary from actual results and the difference between assumed facts or bases and the actual results could be material, depending on the circumstances.
Factors that could cause our results to differ materially from the results discussed in such forward-looking statements include, but are not limited to, the following: production variance from expectations, volatility of oil and gas prices, the need to further develop reserves, the substantial capital expenditures required to fund operations, development risks, environmental risks, uncertainties about estimates of reserves, litigation, government regulation, political risks, costs and results of developmental drilling, and mechanical and other inherent risks associated with oil and gas production. All such forward-looking statements in this document are expressly qualified in their entirety by the cautionary statements in this paragraph, and the Partnership undertakes no obligation to publicly update or revise any forward-looking statements.
Critical Accounting Policies and Estimates
The Partnership’s discussion and analysis of its financial condition and results of operations are based upon financial statements which have been prepared in accordance with United States generally accepted accounting principles. The preparation of these financial statements requires the Partnership to make estimates and judgments that affect the amounts reported in the financial statements and related footnote disclosures. Application of certain of the Partnership’s accounting policies, including those related to oil and gas revenues, oil and gas properties, asset retirement obligations, and litigation require significant estimates. The Partnership bases its estimates on historical experience and various assumptions that are believed reasonable under the circumstances. Actual results may differ from these estimates. The Partnership believes the following critical accounting policies reflect its more significant judgments and estimates used in the preparation of its financial statements.
Property, Plant and Equipment
Proved reserves are defined by the U.S. Securities and Exchange Commission (“SEC”) as those volumes of crude oil, condensate, natural gas liquids and natural gas that geological and engineering data demonstrate with reasonable certainty are recoverable from known reservoirs under existing economic and operating conditions. Proved developed reserves are volumes expected to be recovered through existing wells with existing equipment and operating methods. Although the Managing General Partner’s engineers are knowledgeable of and follow the guidelines for reserves established by the SEC, the estimation of reserves requires a significant number of assumptions based on professional judgment. Reserve estimates are updated at least annually and consider recent production levels and other technical information. Estimated reserves are often subject to future revision, which could be substantial, based on the availability of additional information. Changes in oil and gas prices can lead to substantial revisions to reserve quantities.
Reserve revisions in turn may cause adjustments in the units-of-production depreciation and depletion rates, the estimates of potential impairment of carrying value, and the supplemental disclosure of standardized measure of discounted future net cash flows relating to oil and gas producing activities. The Partnership cannot predict what reserve revisions may be required in future periods.
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Asset Retirement Obligations
The Partnership has material obligations to remove tangible equipment and restore land at the end of oil and gas production operations. The Partnership’s removal and restoration obligations are primarily associated with plugging and abandoning onshore wells. Estimating the future asset removal costs is difficult and requires management to make estimates and judgments because most of the removal obligations are many years in the future and contracts and regulations often have vague descriptions of what constitutes removal. Asset removal costs are constantly changing, as well as related regulatory, political, environmental, and safety considerations.
Asset retirement obligations are not unique to the Partnership or to the oil and gas industry; accordingly, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 143, “Accounting for Asset Retirement Obligations,” (“SFAS 143”). The Partnership adopted this statement effective January 1, 2003. SFAS 143 significantly changed the method of accruing for costs an entity is legally obligated to incur related to the retirement of fixed assets (“asset retirement obligations” or “ARO”). Primarily, the new statement requires the Partnership to record a separate liability for the discounted present value of the Partnership’s asset retirement obligations, with an offsetting increase to the related oil and gas properties on the Partnership’s Balance Sheet.
Inherent in the present value calculation are numerous assumptions and judgments including the ultimate retirement costs, inflation factors, credit adjusted discount rates, timing of retirement, and changes in the legal and regulatory, environments. To the extent future revisions to these assumptions impact the present value of the existing ARO liability, a corresponding adjustment is made to the oil and gas property balance. In addition, increases in the discounted ARO liability resulting from the passage of time will be reflected as accretion expense in the Statement of Income.
SFAS 143 required a cumulative adjustment to reflect the impact of implementing the statement had the rule been in effect since inception. The Partnership, therefore, calculated the cumulative accretion expense on the ARO liability and the cumulative depletion expense on the corresponding property balance. The sum of this cumulative expense was compared to the depletion expense originally recorded.
Financial Results
Oil sales increased by 13% and gas sales decreased by 27% in 2006 as compared to 2005. The average price of Partnership oil increased by approximately 16% in 2006. The price of gas sold by the Partnership in 2006, which represents approximately 14% of total sales, decreased by approximately 18% in 2006. Gas volume sales decreased by 11% in 2006 as compared to 2005 primarily due to a decrease in the Partnership’s interest in the Partnership’s two major gas wells as a result of contractual provisions.
Oil sales increased by 28% and gas sales increased by 31% in 2005 as compared to 2004. The average price of Partnership oil increased by approximately 35% in 2005. The price of gas sold by the Partnership in 2005, which represents approximately 20% of total sales, increased by approximately 30% in 2005. Gas volume sales increased by less than 2% in 2005 as compared to 2004 in the Partnership’s two major gas wells.
Oil and gas sales increased by 24% in 2004 as compared to 2003. The average price of Partnership oil increased by approximately 30% in 2004. The price of gas sold by the Partnership in 2004, which represents approximately 19% of total sales, increased by approximately 15% in 2004.
In addition, normal and expected declines were experienced in the production of existing oil and gas wells in 2006, 2005 and 2004. These declines were somewhat offset by increased production from in-fill developmental oil wells drilled during 2006, 2005 and 2004.
Fees to the managing general partner decreased by 15% in 2006, and increased by less than 3% in 2005 due to discretionary changes in fees charged by the General Partner. Such changes are within the allowable fees specified by the provisions of the Partnership Agreement. Fees to the managing general partner increased by 31% in 2004.
Depreciation, depletion and amortization are calculated on the units-of-production method. Therefore, changes in these amounts are affected by upward or downward revisions in future oil and gas reserve estimates. In addition, such revisions are also caused by changes in current prices of oil and gas, which correspondingly affect the number of future years that oil and gas properties will remain economically viable.
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Depreciation, depletion and amortization for 2006, 2005, and 2004 were $142,225, $106,581 and $110,332. Changes in depreciation, depletion and amortization for the period 2006 through 2004, were due primarily to the effect that changes in oil and gas prices have on the calculation of estimated future economically recoverable oil and gas reserves; and due to normal expected declines in the recoverable reserves due to production.
On January 1, 2003, the Partnership adopted Statements of Financial Accounting Standard 143, “Accounting for Asset Retirement Obligations”. Accretion expense of $28,102, $10,925 and $13,779, respectively, was recorded for 2006, 2005, and 2004.
Production expenses increased by approximately 9% in 2006 as compared to 2005 due to increases in ad valorem taxes and workover activity. Production expenses increased by approximately 14% in 2005 as compared to 2004.
Changes in oil prices substantially impact the net income and cash flow of the Partnership. All oil produced by the Partnership is sold under short term contracts that are immediately affected by changes in oil prices. Since 1981, world oil supply and demand conditions have caused prices to rise and decline in an essentially unpredictable manner. It is not possible to predict whether the recent dramatic increase in oil prices will continue for the near or long term. No change in this price volatility is foreseeable.
Texland Drilling Program-1981, Ltd. has substantially completed all the exploration and development on the oil and gas properties in which it has an interest. No long-term debt will be incurred and no new properties will be acquired. Therefore, no future liquidity problems are anticipated by the Partnership.
Off-Balance Sheet Arrangements
The Partnership does not have any off-balance sheet arrangements.
Item 8
Item 8 - Financial Statements and Supplementary Data:
See Index to Financial Statements on Page 14 of this report.
Item 9
Item 9 - Changes in and Disagreements with Accountants on Accounting and Financial Disclosures.
On May 4, 2005, the accounting firm of Weaver and Tidwell L.L.P., was engaged as independent auditors for the fiscal year ending December 31, 2004. During the most recent year and subsequent interim periods, there were no disagreements on matters of accounting principles and practices, financial disclosure, or auditing scope or procedures between the Registrant and its’ previous independent auditors. At no time preceding May 4, 2005 has the Registrant (or anyone on behalf of the Registrant) consulted with Weaver and Tidwell L.L.P. on matters regarding either the application of accounting principles to a specified transaction, either completed or proposed, or the type of audit opinion that might be rendered on the Partnership’s financial statements
On May 4, 2005, Weinstein Spira & Company P.C. resigned as its independent auditor. There were no disagreements on matters of accounting principles and practices, financial disclosure, or auditing scope or procedures between the Registrant and Weinstein Spira & Company P.C.
On January 14, 2004, the Registrant engaged Weinstein Spira & Company P.C. as its independent auditors for the fiscal year ending December 31, 2003. At no time preceding January 14, 2004 has the Registrant (or anyone on behalf of the Registrant) consulted with Weinstein Spira & Company PC on matters regarding either the application of accounting principles to a specified transaction, either completed or proposed, or the type of audit opinion that might be rendered on the Partnership’s financial statements.
On January 14, 2004, the accounting firm of Sproles Woodard L.L.P., previously the certifying accountant for Texland Drilling Program 1981, Ltd., was engaged to assist the Partnership in the performance of certain internal audit functions. As a result, Sproles Woodard L.L.P. will no longer serve as the Partnership’s certifying accountant. There were no disagreements on matters of accounting principles and practices, financial disclosure, or auditing scope or procedures between the Registrant and Sproles Woodard L.L.P.
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Item 9A
Item 9A - Controls and Procedures
We use certain internal controls and procedures to help ensure that information we are required to disclose in reports that we file with the SEC is accurately accumulated, reported and communicated to our management. As of the end of the period covered by this Annual Report on Form 10-K, the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) promulgated under the Securities Exchange Act of 1934) were evaluated by management and based upon such evaluation have concluded that our disclosure controls and procedures are effective, as of the end of the period covered by this Annual Report on Form 10-K, for their intended purposes.
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PART III
Item 10
Item 10 - Directors and Executive Officers of the Registrant
The Partnership has no officers, employees or directors. The background of the General Partners is as follows:
R. J. Schumacher - Age 78, Vice President and Co-Owner of Texland Petroleum, L.P. since May, 1967, has been an independent oil operator involved in drilling and producing operations and the financing of oil and gas prospects, principally in West Texas, Oklahoma and Arkansas. He has served as an executive officer with Texland since its incorporation. For more than ten years prior to becoming an independent oil operator, Mr. Schumacher was the chief financial officer, contract drilling manager and land supervisor for an independent oil and gas drilling contractor and operator. He received a Bachelor of Science in Commerce degree from Texas Christian University in 1950 and a Master in Professional Accounting degree from the University of Texas in 1951.
J. N. Namy - Age 68, President and Chief Executive Officer of Texland Petroleum, L.P., was employed by Texland as a geologist in June 1978. From 1967 to 1970 he was employed by Pan American Petroleum Corp. in the Fort Worth Division. From 1970 to 1978 he taught at Baylor University achieving the rank of Associate Professor. During this time, he served as a consultant for several independent petroleum companies working on exploration and development projects in the Eastern Shelf and the Permian Basin of West Texas and New Mexico, as well as the southern Rockies of New Mexico and Colorado. He received his Bachelor and Master degrees from Western Reserve University in Cleveland, Ohio and his Ph. D. degree from the University of Texas at Austin in 1969. Mr. Namy is a member of the American Association of Petroleum Geologists, Geological Society of America and the Society of Economic Paleontologists and Mineralogists.
J. H. Wilkes - Age 51 President and Chief Operating Officer of Texland Petroleum, L.P., was employed by Texland as a reservoir engineer in August 1984. From 1978 to 1984, he was employed by Sun Exploration and Production Company in Midland and Abilene, Texas. The first three years he served as a production engineer and for the remaining three years he served as a reservoir engineer. He received a Bachelor of Science degree in Petroleum Engineering from Texas A&M University in 1978. He is a member of the Society of Petroleum Engineers, A.I.M.E. and is a registered professional engineer in Texas.
The Partnership has not adopted a formal code of ethics.
Item 11
Item 11 - Executive Compensation
See Item 13 of this report for information with respect to payments to the Managing General Partner.
Item 12
Item 12 - Security Ownership of Certain Beneficial Owners and Management
Omitted. Not applicable to Registrant.
Item 13
Item 13 - Certain Relationships and Related Transactions
Contributions by General Partners
Under terms of the Partnership agreement, Texland Properties - 1981 is charged for certain costs related to drilling and production operations, which are required to be capitalized for federal income tax purposes. These costs are treated as capital contributions. In addition, Texland Properties - 1981 and Texland Petroleum, L.P. currently hold 38.75 units and 6 units, respectively. These investments as a limited partner are reported with other limited partners’ capital in the accompanying financial statements.
Payments to Managing General Partner
The Partnership was charged $180,585 $191,787 and $191,272 in 2006, 2005 and 2004, respectively, for technical and accounting services performed by employees of the managing general partner. These charges are included in intangible development costs, production expenses and fees to managing general partner.
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Item 14
Item 14 - Principal Accountant Fees and Services
Sproles Woodard L.L.P. audited the Partnership’s financial statements for the three years ended December 31, 2002. Sproles Woodard L.L.P. performed audit and tax services for the Partnership during the period of their engagement. As described under Item 9 of this Annual Report on Form 10-K, Sproles Woodard L.L.P. resigned in January 2004, and at that time, the Partnership engaged Weinstein Spira & Company PC as our independent auditors. On May 4, 2005; Weinsten Spira & Company P.C. resigned and Weaver and Tidwell L.L.P. were engaged as our independent auditors.
Weaver and Tidwell L.L.P. and Weinstein Spira & Company P.C. were engaged to perform audit services only.
The following table sets forth the aggregate fees for professional services rendered to Texland Drilling Program-1981, Ltd. for the years 2006, 2005 and 2004 by the accounting firms of Weaver and Tidwell, LLP and Sproles Woodard L.L.P.
Type of Fee
Audit
20,700
22,800
15,336
Audit Related
7,650
12,801
8,800
Tax
6,010
6,190
3,800
Other
The General Partners of Texland Drilling Program-1981, Ltd. fulfill the responsibilities of an audit committee and have established policies and procedures for the approval of audit services and permitted non-audit services. The General Partners approved the engagement of Weaver and Tidwell L.L.P., and Sproles Woodard L.L.P. for the performance of audit and tax services for the years 2006, 2005, and 2004.
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Item 15
Item 15 - Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a)1 and (a)2 Financial Statement and Financial Statement Schedules
See Index to Financial Statements on Page 14 of this report.
(a)3 Item 601 (Reg. S-K) Exhibits:
None
(a) Exhibits:
(31) Certification by CEO & CFO Pursuant to Rule 13a-14(a)/15d-14(a).
(32) Certification by CEO & CFO Pursuant to 18 U. S. C. Section 1350, as Adopted Pursuant to Section 906 of Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K:
(c) Item 601 (Reg. S-K) Exhibits:
None
(d) Other Financial Statements and Financial Statement Schedules:
Not applicable.
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SIGNATURE
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following person on behalf of the registrant and in the capacities and on the dates indicated.
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Texland Drilling Program-1981, Ltd.
Fort Worth, Texas
Annual Financial Report
December 31, 2006
Texland Drilling Program-1981, Ltd.
REPORT OF INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM
To the Partners
Texland Drilling Program-1981, Ltd.
Fort Worth, Texas
We have audited the accompanying balance sheets of Texland Drilling Program-1981, Ltd. (the Partnership) as of December 31, 2006 and 2005, and the related statements of income, partners’ capital and cash flows for each of the three years in the period ended December 31, 2006. These financial statements are the responsibility of the Partnership’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the Standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Texland Drilling Program-1981, Ltd. as of December 31, 2006 and 2005, and the results of its operations and its cash flows for each of the three years in the period ended December, 31, 2006, in conformity with accounting principles generally accepted in the United States of America.
WEAVER AND TIDWELL, L.L.P.
Fort Worth, Texas
March 30, 2007
Texland Drilling Program-1981, Ltd.
Balance Sheets
December 31, 2006 and 2005
See accompanying notes to financial statements.
Texland Drilling Program-1981, Ltd.
Statements of Income
For the Years Ended December 31, 2006, 2005 and 2004
See accompanying notes to financial statements.
Texland Drilling Program-1981, Ltd.
Statements of Partners’ Capital
For the Years Ended December 31, 2006, 2005 and 2004
See accompanying notes to financial statements.
Texland Drilling Program-1981, Ltd.
Statements of Cash Flows
For the Years Ended December 31, 2006, 2005, and 2004
See accompanying notes to financial statements.
Texland Drilling Program-1981, Ltd.
Notes to Financial Statements
1. Organization and Summary of Significant Accounting Policies
Texland Drilling Program - 1981, Ltd. (the “Partnership”) was organized as a limited partnership on July 20, 1981, for the purpose of engaging in oil and gas exploration and production. Texland Properties - 1981, a general partnership, and Texland Petroleum, L.P. are the general partners. The managing general partner is Texland Petroleum, L.P. Partnership operations are conducted predominately in West Texas.
The Partnership shall continue in existence, unless terminated sooner through the occurrence of a final terminating event as defined by the Partnership agreement, until December 31, 2009, as extended through approval by the limited partners owning a majority of aggregate Partnership subscriptions.
Use of Estimates
The preparation of financial statements in accordance with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and reported revenues and expenses during the reporting period. Actual results could differ from those estimates. The estimation of oil and gas reserves is inherently imprecise and may change materially in the near term.
Basis of Accounting
The Partnership maintains its financial records on the income tax basis. The financial statements are presented in accordance with accounting principles generally accepted in the United States of America. The primary differences in accounting methods are identified in Note 8.
Revenue Recognition
Revenues associated with the production of oil and gas properties, in which we have an interest, are based on volumes produced during the period.
Property and Equipment
The Partnership uses the successful efforts method of accounting for oil and gas producing activities. Costs incurred for the acquisition of producing and non-producing leaseholds are capitalized. Costs of intangible development and lease and well equipment incurred to drill and equip successful exploratory and development wells are capitalized. Costs to drill and equip unsuccessful exploratory wells are charged to operations while costs of unsuccessful development wells remain capitalized. Costs to carry unproved properties and geophysical costs are expensed. Costs associated with uncompleted wells are capitalized as wells-in-progress.
On the sale or retirement of a complete unit of a proved property, the cost and the related accumulated depreciation, depletion, and amortization are eliminated from the property accounts, and the resultant gain or loss is recognized. On the retirement or sale of a partial unit of proved property, the cost is charged to accumulated depreciation, depletion, and amortization with a resulting gain or loss recognized in income.
Texland Drilling Program-1981, Ltd.
Notes to Financial Statements
Non-producing Leaseholds
Costs of non-producing properties are charged to expense at such time as they are deemed to be impaired, based upon periodic assessments of such costs.
Amortization and Depletion
Leasehold costs of producing properties are amortized on the unit-of-production method based on proved oil and gas reserves as estimated by the Partnership. Intangible development costs of producing properties are amortized on the unit-of-production method based on estimated proved developed oil and gas reserves.
Depreciation
Depreciation of equipment is provided by the unit-of-production method based on estimated proved developed oil and gas reserves.
Income Taxes
Income taxes have not been provided for by the Partnership, because the partners are liable for taxes on their respective shares of the Partnership’s taxable income.
Statement of Cash Flows
For purposes of these statements, the Partnership considers cash on deposits and highly liquid money market funds as cash and cash equivalents.
Net Income Allocation
Revenues and costs of the Partnership are allocated between the general and limited partners in accordance with the Partnership agreement.
Fair Values of Financial Instruments
The Partnership’s financial instruments consist of cash, accounts receivable and accounts payable. The carrying amount of each of these financial instruments reported in the accompanying statements of financial position approximates the instruments fair value.
Texland Drilling Program-1981, Ltd.
Notes to Financial Statements
2. Costs Incurred in Oil and Gas Producing Activities
The following summarizes the Partnership’s costs incurred in its oil and gas activities, all of which were conducted within the United States, for the years ended December 31:
3. Acquisition of Non-producing Properties
The Partnership acquired working interests in certain oil and gas properties through assignments from other Texland Drilling Program partnerships. These acquisitions involved no cost to the Partnership and are subject to retained nonworking interests by the assignor. Upon payout of these properties, the assignor has an option to convert the retained nonworking interest to a working interest.
4. Contributions by General Partners
Under terms of the Partnership agreement, Texland Properties - 1981 is charged for certain costs related to drilling and production operations, which are required to be capitalized for federal income tax purposes. These costs are treated as capital contributions. In addition, Texland Properties - 1981 and Texland Petroleum, L.P. currently hold 38.75 units and 6 units, respectively. These investments as a limited partner are reported with other limited partners’ capital in the accompanying financial statements.
5. Payments to Managing General Partner
The Partnership was charged $180,585, $191,787 and $191,272 in 2006, 2005 and 2004, respectively, for technical and accounting services performed by employees of the managing general partner. These charges are included in intangible development costs, production expenses and fees to managing general partner.
Supervisory fees charged to the Partnership by the managing general partner for drilling and operating the partnership wells were $194,876, $177,597 and $172,424 in 2006, 2005 and 2004, respectively, and are included in intangible development costs and production expenses.
These charges are allocated between the general and limited partners based upon applicable revenue and expense sharing rates.
Texland Drilling Program-1981, Ltd.
Notes to Financial Statements
6. Major Purchasers
Purchasers, which accounted for 10% or more of the Partnership’s sales, were as follows:
Texland Petroleum, L.P. receives substantially all revenues directly from the purchasers and subsequently disburses these revenues to interest owners. Substantially all trade accounts receivable were due from Texland Petroleum, L.P. at December 31, 2006, 2005 and 2004 for oil and gas sales to the above purchasers. Based on past experience, it is believed that all receivables are collectible.
7. Asset Retirement Obligations
On January 1, 2003, the Partnership adopted Statement of Financial Accounting Standards (SFAS) No. 143, “Accounting for Asset Retirement Obligations,” which addresses the financial accounting and reporting obligations and retirement costs related to the retirement of tangible long-lived assets. Among other things, SFAS No. 143 requires oil and gas companies to reflect asset retirement obligation liabilities on the face of the balance sheet at fair value on a discounted basis.
Consistent with industry practice, historically the Partnership had assumed the costs of plugging abandonment on its properties would be offset by salvage value received. SFAS 143 requires the Partnership to consider estimated salvage value in the calculation of depreciation, depletion and amortization. The general partner has received the benefit of the change in asset salvage value while the asset retirement obligation was allocated based on income allocation. The Partnership has no material assets that are legally restricted for purposes of settling its asset retirement obligation liabilities.
The following table describes the changes in the Partnership’s asset retirement obligations for the years ended 2006, 2005 and 2004:
The estimate of the asset retirement obligations may change materially in the near term.
Texland Drilling Program-1981, Ltd.
Notes to Financial Statements
8. Reconciliation of Book-Tax Reporting Differences
Although the Partnership’s financial statements are prepared in accordance with accounting principles generally accepted in the United States of America, its books and records are maintained on the basis of accounting used for federal income tax purposes. The following information is presented to assist the limited partners in reconciling the tax information provided to the information provided in these financial statements.
Texland Drilling Program-1981, Ltd.
Notes to Financial Statements
9. Supplemental Oil and Gas Information (Unaudited)
Proved Oil and Gas Reserves
The following table summarizes the Partnership’s net ownership interests in estimated quantities of proved oil and gas reserves and changes in net proved reserves, all of which are located in the continental United States. All proved reserves are classified as proved developed.
There are numerous uncertainties in estimating quantities of proved reserves believed to have been discovered and in projecting future rates of production and the timing of development expenditures, including many factors beyond the control of the Partnership. The reserve data set forth in this document are only estimates. Reserve estimates are inherently imprecise and may be expected to change as additional information becomes available. Furthermore, estimates of oil and natural gas reserves, of necessity, are projections based on engineering data, and there are uncertainties inherent in the interpretation of such data as well as the projection of future rates of production and the timing of development expenditures. Reservoir engineering is a subjective process of estimating underground accumulations of oil and natural gas that cannot be measured exactly, and the accuracy of any reserve estimate is a function of the quality of available data and of engineering and geological interpretation and judgment. Accordingly, estimates of the economically recoverable quantities of oil and natural gas attributable to any particular group of properties, classifications of such reserves based on risk of recovery 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. There also can be no assurance that the reserves set forth herein will ultimately be produced. It is possible that variances from the estimates will be material.
Standardized Measure of Discounted Future Net Cash Flows
The standardized measure of discounted future net cash flows is computed by applying year-end prices of oil and gas (with consideration of price changes only to the extent provided by contractual arrangements) to the estimated future production of proved oil and gas reserves less estimated future expenditures (based on year-end costs) to be incurred in developing and producing the proved reserves, discounted using a rate of 10% per year to reflect the estimated timing of the future cash flows. A federal income tax provision has not been calculated as the income of the Partnership is included in the individual federal income tax returns of the respective partners.
Texland Drilling Program-1981, Ltd.
Notes to Financial Statements
Discounted future cash flow estimates like those shown below are not intended to represent estimates of the fair value of oil and gas properties. Estimates of fair value should also consider anticipated future oil and gas prices, interest rates, changes in development and production costs and risks associated with future production. Because of these and other considerations, any estimate of fair value is necessarily subjective and imprecise.
The following table summarizes the Partnership’s standardized measure of discounted future net cash flows of its ownership interests in proved oil and gas reserves and changes in the standardized measure of discounted future net cash flows:
The following table summarizes the changes in the Partnership’s standardized measure of discounted future net cash flows:
Texland Drilling Program-1981, Ltd.
Notes to Financial Statements
10. Supplemental Oil and Gas Information (Unaudited)
The following is a summary of the quarterly results of operations for the years ended December 31, 2006 and 2005: