| TEL OFFSHORE TRUST Item 1A Risk Factors |
| Although risk factors are described elsewhere in this Form 10-K together with specific forward-looking statements, the following is a summary of the principal risks associated with an investment in Units in the Trust |
| Natural gas and oil prices fluctuate due to a number of factors, and lower prices will reduce net proceeds available to the Trust and distributions to Trust Unit holders |
| The Trust’s quarterly distributions are highly dependent upon the prices realized from the sale of natural gas and oil |
| Natural gas and oil prices can fluctuate widely on a month-to-month basis in response to a variety of factors that are beyond the control of the Trust and the Working Interest Owners |
| Factors that contribute to price fluctuation include, among others: · political conditions worldwide, in particular political disruption, war and other armed conflict in oil producing regions such as Iraq; · worldwide economic conditions; · weather conditions; · the supply and price of foreign natural gas; · the level of consumer demand; · the price and availability of alternative fuels; · the proximity to, and capacity of, transportation facilities; and · the effect of worldwide energy conservation measures |
| Moreover, government regulations, such as regulation of natural gas and oil transportation and price controls, can affect product prices in the long term |
| 29 ______________________________________________________________________ Lower natural gas and oil prices may reduce the amount of natural gas and oil that is economic to produce and reduce net profits available to the Trust |
| The volatility of energy prices reduces the predictability of future cash distributions to Unit holders |
| A significant percentage of the natural gas and natural gas liquids produced from the Royalty Properties is currently being sold to various third party purchasers under a mix of term and spot agreements by ChevronTexaco Natural Gas |
| A majority of crude oil produced by the Royalty Properties is being sold to subsidiaries of ChevronTexaco in competitive bidding or based on pricing bulletins |
| Increased production and development costs for the Royalty will result in decreased Trust distributions |
| Production and development costs attributable to the Royalty are deducted in the calculation of the Trust’s share of net proceeds |
| Accordingly, higher or lower production and development costs, without concurrent increases in revenues, directly decrease or increase the amount received by the Trust for the Royalty |
| During 2005, Hurricane Katrina and Hurricane Rita caused significant damage to various platforms and third-party transportation systems |
| The extensive damage caused by these hurricanes has led to significant demand for services and supplies for repairs in the offshore Gulf of Mexico |
| These incurred costs may reduce Royalty income |
| If development and production costs of the Royalty exceed the proceeds of production from the Royalty Properties, the Trust will not receive net proceeds for those properties until future proceeds from production exceed the total of the excess costs plus accrued interest during the deficit period |
| Development activities may not generate sufficient additional revenue to repay the costs |
| Trust reserve estimates depend on many assumptions that may prove to be inaccurate, which could cause both estimates of reserves and estimated future revenues to be too high or too low |
| The value of the Units depends upon, among other things, the amount of reserves attributable to the Royalty and the estimated future value of the reserves |
| Estimating reserves is inherently uncertain |
| Ultimately, actual production, revenues and expenditures for the underlying properties will vary from estimates and those variations could be material |
| Petroleum engineers consider many factors and make assumptions in estimating reserves |
| Those factors and assumptions include: · historical production from the area compared with production rates from similar producing areas; · the assumed effect of governmental regulation; and · assumptions about future commodity prices, production and development costs, severance and excise taxes, and capital expenditures |
| Changes in these assumptions can materially change reserve estimates |
| The reserve quantities attributable to the Royalty and revenues are based on estimates of reserves and revenues for the underlying properties |
| The method of allocating a portion of those reserves to the Trust is complicated because the Trust, indirectly through the Partnership, holds an interest in the Royalty and does not own a specific percentage of the natural gas reserves |
| The Trustee also relies entirely on reserve estimates and related information prepared by Chevron and the independent reserve engineer engaged by the Trust |
| While the Trustee has no reason to believe the reserve estimates included in this report are not accurate, to the extent additional information exists that could affect their reserve estimates, the estimated reserves in these reports could also be too low |
| 30 ______________________________________________________________________ Operating risks for the Working Interest Owners’ interests in the Royalty Properties can adversely affect Trust distributions |
| The occurrence of drilling, production or transportation accidents and other natural disasters at any of the Royalty Properties will reduce Trust distributions by the amount of uninsured costs |
| These occurrences include blowouts, cratering, explosions and other environmental damage |
| Offshore activities are also subject to a variety of additional operating risks, such as hurricanes and other weather disturbances |
| These accidents may result in personal injuries, property damage, damage to productive formations or equipment and environmental damages |
| Any uninsured costs would be deducted as a production cost in calculating net proceeds payable to the Trust |
| As described in this report, Hurricanes Katrina and Rita caused significant damage during 2005 |
| Even if platforms and facilities on the Royalty Properties are restored in a timely manner during 2006, delays in repairs on third-party transportation systems may continue to limit production and Royalty income from the Royalty Properties |
| The operators of the working interests are subject to extensive governmental regulation |
| Offshore oil and gas operations have been, and in the future will be, affected by federal, state and local laws and regulations and other political developments, such as price or gathering rate controls and environmental protection regulations |
| These regulations and changes in regulations could have a material adverse effect on Royalty income payable to the Trust |
| None of the Trustees, the Trust nor its Unit holders control the operation or development of the Royalty Properties and have little influence over operation or development |
| Neither the Trustees nor the Unit holders can influence or control the operation or future development of the underlying properties |
| The Royalty Properties are owned by independent Working Interest Owners |
| The Working Interest Owners manage the underlying properties and handle receipt and payment of funds relating to the Royalty Properties and payments to the Trust for the Royalty |
| Information regarding operations provided by the Working Interest Owners has been subject to errors and adjustments, some of which have been significant |
| Accordingly, the Trustees cannot assure Unit holders that other errors or adjustments by Working Interest Owners, whether historical or future, will not affect future Royalty income and distributions by the Trust |
| The current Working Interest Owners are under no obligation to continue operating the properties |
| Neither the Trustees nor the Unit holders have the right to replace an operator |
| The Trustee relies upon the working interests owners and managing general partner for information regarding the Royalty Properties |
| The Trustee relies on the working interest owners and managing general partner for information regarding the Royalty Properties |
| The working interest owners alone control (i) historical operating data, including production volumes, marketing of products, operating and capital expenditures, environmental and other liabilities, effects of regulatory changes and the number of producing wells and acreage, (ii) plans for future operating and capital expenditures, (iii) geological data relating to reserves, as well as related projections regarding production, operating expenses and capital expenses used in connection with the preparation of the reserve report, (iv) forward-looking information relating to production and drilling plans and (v) information regarding the Royalty Properties responsive to litigation claims |
| While the Trustee requests material information for use in periodic reports as part of its disclosure controls and procedures, the Trustee does not control this information and relies entirely on the working interest owners to provide accurate and timely information when requested for use in the Trust’s periodic reports |
| The Trustee also relies on the managing general partner of the Partnership to collect certain information 31 ______________________________________________________________________ from the working interest owners and does not have any direct contact with the working interest owners other than the managing general partner |
| Under the terms of the Trust Indenture, the Trustee is entitled to rely, and in fact relies, on certain experts in good faith |
| While the Trustee has no reason to believe its reliance on experts is unreasonable, this reliance on experts and limited access to information may be viewed as a weakness as compared to the management and oversight to entity forms other than trusts |
| The owner of any Royalty Property may abandon any property, terminating the related Royalty |
| The Working Interest Owners may at any time transfer all or part of the Royalty Property to another unrelated third party |
| Following any transfer, the Royalty Properties will continue to be subject to the Royalty, but the net proceeds from the transferred property would be calculated separately and paid by the transferee |
| The transferee would be responsible for all of the obligations relating to calculating, reporting and paying to the Trust the Royalty on the transferred portion of the Royalty Properties, and the current owner of the Royalty Properties would have no continuing obligation to the Trust for those properties |
| The current Working Interest Owners or any transferee may abandon any well or property if it reasonably believes that the well or property can no longer produce in commercially economic quantities |
| This could result in termination of the Royalty relating to the abandoned well |
| The Royalty can be sold and the Trust can be terminated |
| The Trust will be terminated and the Trustees must sell the Royalty if holders of a majority of the Units approve the sale or vote to terminate the Trust, or if the total future net revenues attributable to the Royalty, determined by the independent reserve engineer as of December 31 of the prior year, are less than dlra2 million |
| Following any such termination and liquidation, the net proceeds of any sale will be distributed to the Unit holders and Unit holders will receive no further distributions from the Trust |
| We cannot assure you that any such sale will be on terms acceptable to all Unit holders |
| For a more complete description of these matters, see “—Termination of the Trust” under Item 1 of this Form 10 K Trust assets are depleting assets and, if the Working Interest Owners or other operators of the Royalty Properties do not perform additional development projects, the assets may deplete faster than expected |
| The net proceeds payable to the Trust are derived from the sale of depleting assets |
| Accordingly, the portion of the distributions to Unit holders attributable to depletion may be considered a return of capital |
| The reduction in proved reserve quantities is a common measure of depletion |
| Future maintenance and development projects on the Royalty Properties will affect the quantity of proved reserves |
| The timing and size of these projects will depend on the market prices of natural gas |
| If operators of the Royalty Properties do not implement additional maintenance and development projects, the future rate of production decline of proved reserves may be higher than the rate currently expected by the Trust |
| For federal income tax purposes, depletion is reflected as a deduction, which is dependent upon the purchase price of a Units |
| Please see the section entitled “—Description of the Units—Federal Income Tax Matters” under Item 1 of this Form 10-K Unit holders have limited voting rights Voting rights as a Unit holder are more limited than those of stockholders of most public corporations |
| For example, there is no requirement for annual meetings of Unit holders or for an annual or other periodic re-election of the Trustees |
| Unlike corporations which are generally governed by boards of directors elected by their equity holders, the Trust is administered by a Corporate Trustee and three 32 ______________________________________________________________________ Individual Trustees in accordance with the Trust Agreement and other organizational documents |
| The Trustees have extremely limited discretion in their administration of the Trust |
| Unit holders have limited ability to enforce the Trust’s rights against the current or future owners of the Royalty Properties |
| The Trust Agreement and related trust law permit the Trustees and the Trust to sue the Working Interest Owners to compel them to fulfill the terms of the Conveyance of the Royalty |
| If the Trustees do not take appropriate action to enforce provisions of the Conveyance, the recourse of a Unit holder would likely be limited to bringing a lawsuit against the Trustees to compel the Trustees to take specified actions |
| Unit holders probably would not be able to sue the Working Interest Owners directly |