Risk Factors
Investments in the development of oil and gas leases as described herein involve
inherent risks that all potential investors should be aware of in determining the
suitability of this investment. The following risk factors should be carefully considered:
(1) Shut-Ins: Although it has not happened in a number of years, nor does the managing
general partner anticipate it happening, there is a possibility that the utility companies
which purchase natural gas may shut-in the wells for a period of time each year because of
an oversupply of natural gas in the market that the proposed wells will supply. Also,
production of natural gas from these wells may be curtailed or subject to allocations,
thereby resulting in a reduction of gas sold to the utilities during the periods that the
wells are allowed to produce. The price for which the gas is sold may be subject to change
based on market conditions and could be significantly reduced.
(2) Natural Gas Prices: The managing general partner anticipates that the primary economic
product of the partnership will be natural gas. Many factors, including weather, storage
field capacities, oversupplies of natural gas and oil, a decrease in consumer demand, or
various economic or government considerations may cause a reduction in the sale price of
natural gas and/or oil.
(3) Risk of Oil and Gas Drilling and Development: Drilling for oil and natural gas
involves potential risk and is a speculative investment. The proposed activity of the
partnership involves primarily development drilling whereby the greatest risk is drilling
wells which do produce oil and or gas but not in sufficient quantities to return a profit
on the investment.
(4) Partner's Liability: Investors in the drilling program can elect to become either
general partners or limited partners. All potential investors are encouraged to consult
their tax advisor concerning this status election and the specific tax considerations of
each option. All investors electing general partner status are jointly and severally
liable for all partnership debts and liabilities. In addition to the classification of
general partner, all investors are also classified as "Non-Operators".
Therefore, all investors will be granted blanket coverage under the Operator's General
Liability Insurance Policy, as specified by managing general partner's insurance carrier.
Note: Upon request, Operator will provide a certificate of insurance to all non-operators
reflecting "automatic blanket coverage" for investors regarding their specific
investment. However, at the partner's option, after one year he may elect to become, and
henceforth be treated as, a limited partner. If such an election is made, the partner may
exchange his general partnership interest for the same amount of limited partnership
interest. The electing partner shall pay legal and other costs necessary to affect the
exchange. The electing partner shall retain all liability actual and contingent that he
was liable for while he was general partner. At the time of election to become a limited
partner, the liability arising from that point forward would be limited in nature and
would continue to be covered under the aforementioned automatic blanket coverage. The
managing general partner intends to operate the partnership in such a manner that will
establish and maintain limited liability for all electing limited partners. However, there
can be no assurance that limited liability can be maintained.
(5) Significance of Income Tax Laws to Purchasers of Units: The income tax consequences of
an investment in units are significantly different from investments in securities of a
corporation. The tax treatment available with respect to oil and gas drilling and
production may be a material factor in determining the investment merit of this offering.
Prospective investors should, however, be aware that certain provisions of recent tax
legislation have modified and restricted certain tax aspects and deductions available to
oil and gas businesses. These include the availability of deductions based upon percentage
depletion, the rate and determination of the "minimum tax on tax preferences",
the recapture of intangible losses, depreciation of well equipment and other aspects
available to purchasers of units.
(6) Depletion: Percentage depletion will be allowable to investors who qualify as
independent producers. See tax aspects for more details and limitations on percentage
depletion. No assurance can be given that percentage depletion will be available to
investors in the partnership under either federal or state law, or that if percentage
depletion is allowable under federal law, it will also be allowable under the law of a
particular state. Investors should consult their own tax advisor with respect to these tax
matters.
(7) Changing Tax Laws: There can be no assurance that present laws governing the taxation
of the partnership will not be modified by legislative, judicial, or administrative
actions with adverse tax consequences to purchasers of units.
(8) Passive Activity Losses: The managing general partner is of the opinion that the term
passive activity, as defined by the general rule of the applicable tax code, does not
include any working interest in any oil or gas property that the taxpayer holds either
directly or through an entity that does not limit his liability with respect to this
interest. Therefore, under this assumption the activity of this partnership would not be a
passive activity. The liability of the general partners is not limited and material
participation is not a prerequisite of this non-passive activity determination. An
electing limited partner shall not be exempted from the passive activity loss rules of the
tax code.
Generally, the code provides that losses from passive activities may not be deducted
against non-passive income. Therefore, a loss from a passive activity that would otherwise
be available to the taxpayer is deferred or carried over to another year in which the
taxpayer has income from a passive activity. The loss from the passive activity that was
being carried over may be used as a deduction to offset the passive activity income.
There are many exceptions and special computations involved in the passive activity
loss rules and potential partners should be aware of the tax aspects associated with the
passive activity loss rules. The managing general partner suggests that potential partners
consult with their tax advisors on this and other tax related matters.
(9) Markets: The market for any oil or gas discovered will depend upon the proximity of
the partnership's wells to collection lines and numerous factors beyond the control of the
partnership, including capacity and pressure of such gas pipelines, and the effect of
state and federal regulation of gas production, and federal regulation of gas sold in
interstate and intrastate commerce. The partnership's leases are, in general, accessible
to natural gas collection lines of major public utilities, though right-of-ways for gas
collection lines may not be secured in advance of drilling or completing a well.
(10) State Regulations: The production of gas is subject to regulation by the appropriate
state regulatory authorities. In general, these regulatory authorities are empowered to
make and enforce regulations regarding exploration for, and production of, oil and natural
gas. The partnership will also be subject to state pollution and environmental control
agencies in states in which it conducts operations. It may be anticipated that the various
local and state environmental control agencies will have an increasing impact on gas
operations.
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