Reconciliations of income taxes computed using the U.S. Federal statutory rate to the effective income tax rates are as follows:

As noted in the above table, the most significant contributor to the difference between the federal statutory rate and the effective rate for 2004 and 2003 is attributed to currency exchange impact on the foreign income tax calculation. The Company’s New Zealand subsidiaries use the U.S. Dollar as their functional currency for financial reporting purposes, but income taxes are calculated from New Zealand Dollar financial statements and re-measured into U.S. Dollars. Volatility in exchange rates creates variable results when computing income in different currencies. The most significant difference in the relative income computations for 2004 and 2003 was attributable to depreciation, depletion, and amortization (DD&A). Because of the relative strengthening of the New Zealand Dollar vs. the U.S. Dollar, the value of the tax DD&A deduction reflects the relative appreciation in the New Zealand Dollar tax basis of amortizable assets vs. the historical U.S. Dollar investment costs. As a result, taxable income (and accordingly income tax expense) computed in New Zealand Dollars and then converted to U.S. Dollars at the average exchange rates for each respective year was significantly less than net income computed in the subsidiaries’ U.S. Dollar financial statements. Additionally, the deferred tax asset is revalued at the ending exchange rate for each period. This revaluation also resulted in favorable adjustments for 2004, 2003, and 2002. In aggregate, the Company recognized foreign exchange benefits to tax expense in the amounts of $2.5 million, $2.9 million, and $0.2 million for 2004, 2003, and 2002, respectively. If exchange rates remain volatile in the future significant fluctuations in the impact on the Company’s effective tax rate are likely to continue.

In addition to the exchange impact, the Company also had a favorable adjustment in 2004 from a correction in the tax basis of the TAWN assets. The majority of these adjustments were discovered when preparing the 2002 New Zealand tax returns which were due and filed in March 2004. Additionally, the basis adjustments resulted in an increase in the acquired deferred tax asset balance of $1.1 million.

The primary unfavorable differences between the federal statutory and the effective rate are attributable to state income taxes (computed net of the offsetting federal benefit), which were $1.1 million, $0.4 million and $0.3 million for 2004, 2003, and 2002, respectively. Additional, the Company recorded adjustments to the cumulative Louisiana deferred tax liability in the amounts of $0.9 million and $1.2 million during 2004 and 2003, respectively due to its increased level of business activity in Louisiana. The Company calculates its Louisiana income tax using the “apportionment” accounting method. Under apportionment accounting, total federal taxable income is allocated based on the proportional level of U.S. business activity within the state. Due to the relative increase in the Company’s Louisiana activity, the Company increased its estimate of future Louisiana taxable income that will result from the reversal of prior years’ timing differences. The 2004 increase was primarily due to acquisitions and development activities in Lake Washington. The 2003 increase was primarily due to development activities in Lake Washington.

The New Zealand statutory rate is 33%, which resulted in differences of $0.3 million, $0.2 million, and $0.1 million for 2004, 2003, and 2002 respectively vs. the U.S. statutory rate. The 2004 favorable rate impact is more than offset by a $0.6 million accrual for taxes expected to be incurred on a planned dividend from the Company’s New Zealand subsidiaries. Except for a limited dividend tied to a cost of capital computation, the Company does not compute a provision for U.S. taxes on the undistributed earnings of our New Zealand subsidiaries as management has plans to reinvest such earnings outside of the United States indefinitely. If, in the future, these earnings are distributed into the U.S. in the form of dividends or otherwise, we may be subject to U.S. income taxes and New Zealand withholding taxes. It is not practical, however, to estimate the amount of taxes that may be payable if such remittances occur. Presently, there are no foreign tax credits available to reduce the U.S. taxes on such amounts if repatriated.

The Company is currently evaluating the possibility of utilizing a special one-time tax deduction relating to the repatriation of foreign earnings created by the American Jobs Creation Act of 2004. To be eligible the Company would need to develop a qualified domestic reinvestment plan. As of this date the Company has not yet completed this evaluation or developed a reinvestment plan. However, as of December 31, 2004 the Company is in a cumulative tax loss position with respect to its foreign operations. The Company believes the maximum available deduction would be limited to the 2005 taxable earnings of its foreign subsidiaries, if any. The Company will not be in a position to make a reasonable estimate until later in the year as to how much, if any, income will be available to repatriate at the reduced rate.

The tax effects of temporary differences representing the net deferred tax liability (asset) at December 31, 2004 and 2003, were as follows:

The total change in the net deferred liability from 2003 to 2004 was $29.8 million. Increases in the liability were attributable to deferred tax expense of $32.5 million plus $0.4 million for the tax effect of unrealized hedging gains. Unrealized hedging gains and losses are recorded net of tax as other comprehensive income (loss) adjustments to equity. Reductions were made to the net liability for the tax benefit of stock compensation deductions of $2.0 million, which are recorded as additions to paid-in-capital, and $1.1 million for an adjustment to the foreign acquired deferred tax asset.

The tax basis of the assets of Southern Petroleum (NZ) Exploration Limited (“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 $4.9 million. The asset is being amortized over the period in which the tax amortization is deducted. The remaining asset value at December 31, 2003, was $3.8 million. During 2004 the deferred tax asset was increased by $1.1 million as noted previously. Amortization during 2004 was $1.5 million. The other foreign carryover asset is attributable to cumulative New Zealand net operating losses of $114.7 million. New Zealand tax net operating losses do not expire.

At December 31, 2004, the Company had alternative minimum tax credits of $2.6 million that carry forward indefinitely. These credits are available to reduce future regular tax liability to the extent they exceed the alternative minimum tax otherwise due.

The domestic deferred tax carryover items are attributable to expected future tax benefits in the amounts of $40.0 million for federal net operating losses, $1.6 million for State of Louisiana net operating losses and $6.0 million net for capital losses. The gross capital loss asset is $6.5 million less a $.5 million impairment. At December 31, 2004, cumulative estimated federal net operating losses were $113.9 million, which will expire between 2018 and 2023. Louisiana estimated net operating losses total $44.8 million and will expire between 2013 and 2018.

The Company has not recorded any valuation allowance against the deferred tax assets attributable to net operating loss carryovers at December 31, 2004 and 2003, 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 $18.6 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 sell one or more of its oil and gas properties during the next few years that will generate sufficient capital gains to utilize the loss carry over. To generate capital gains from these dispositions, the sales proceeds must exceed the Company’s total investment in the properties. Company management has identified several qualified properties that have estimated current market values well 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. During 2004 the Company recorded a valuation allowance of $0.5 million, primarily for incremental state income tax expenses that it expects to incur as a result of the planned property dispositions.