The tax basis of the assets of Southern NZ on the acquisition date exceeded the cash purchase price paid by SENZ to acquire this entity. To account for the future tax benefits of this additional basis, SENZ recorded a deferred tax asset of $4,944,786. Additionally, the Company recognized a currency exchange rate gain, primarily attributable to this acquired asset, in the amount of $632,389. The asset is being amortized over the period in which the tax amortization is deducted. The remaining asset value at December 31, 2002, is $4,753,044, of which $950,609 will be amortized in 2003. The total foreign carryover asset amount is $19,494,129, of which $7,807,407 is expected to reverse in 2003. The asset is attributable to cumulative New Zealand net operating losses with a $U.S. equivalent value of $59,073,129 (using the December 31, 2002, exchange rate) multiplied by the New Zealand tax rate of 33%. These net operating losses include the costs of drilling oil and gas wells classified as exploratory. Under New Zealand tax rules, such costs are deductible at the time the well is drilled, but are “clawed back” into revenue if and when the well establishes commercial production. After the clawback, the costs are then amortized as development expenditures. This clawback is expected to occur in 2003, but should be absorbed by the cumulative excess of tax amortization over book depreciation, depletion, and amortization. New Zealand tax net operating losses do not expire.

At December 31, 2002, the Company had alternative minimum tax credits of $1,979,399 that carry forward indefinitely. These credits are available to reduce future regular tax liability to the extent they exceed the related tentative minimum tax otherwise due.

The domestic deferred tax carryover items are attributable to expected future tax benefits in the amounts of $43,290,193 for federal net operating losses, $1,291,637 for State of Louisiana net operating losses, $6,574,726 for capital losses, and other items totaling $17,681. At December 31, 2002, cumulative federal net operating losses were $124 million, which will expire between 2018 and 2022. Louisiana net operating losses total $37 million and will expire between 2013 and 2017.

The Company has not recorded any valuation allowance against the deferred tax assets attributable to net operating loss carryovers at December 31, 2002 and 2001, as management estimates that it is more likely than not that these assets will be fully utilized before they expire. Significant changes in estimates caused by changes in oil and gas prices, production levels, capital expenditures, and other variables could impact the Company’s ability to utilize the carryover amounts.

In 2002 we recognized a capital loss of approximately $18.2 million as the result of the liquidation of our partnerships. This loss can only be utilized to offset capital gains and will expire in 2007. The Company plans to continue selling, in the ordinary course of business, a number of oil and gas properties over the next few years in order to optimize its portfolio of non-core oil and gas properties. To generate gains from these dispositions that can absorb the capital loss carryforward, the sales proceeds must exceed the Company’s total investment in the properties before depreciation, depletion, and IDC deductions and amortization. Company management has identified several qualified properties to sell which have estimated current market values in excess of the total original costs. Management believes that it is more likely than not that the Company will fully utilize the capital loss carryover. If the Company is unable to complete the sale of these properties at the prices it has estimated to be the fair market value, then a significant portion of the capital loss carryover could expire before it is utilized.