THE
RESERVE PETROLEUM COMPANY
6801
N. Broadway, Suite 300
Oklahoma
City, Oklahoma 73116-9092
October
3, 2007
United
States Securities and Exchange Commission
Washington,
D.C. 20549-7010
Attention:
Karl Hiller, Branch Chief
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Re:
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Comment
letter dated September 20, 2007 from SEC’s review
of
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The
Reserve Petroleum Company’s 12-31-2006 Form 10-KSB
and
06-30-2007 Form 10-QSB SEC File No.
0-8157
Dear
Mr.
Hiller:
This
letter is in response to the above
referenced comment letter. As the Principal Financial Officer of The Reserve
Petroleum Company, (the “Company”), I want to first offer the following
information to perhaps better explain the nature and description of our business
and how we differ from the typical independent oil and gas company. I will
then
address the specific items in the comment letter.
The
Company owns mineral interests
located in nine different states in the north and south central United States.
Most independent oil and gas companies do not own the mineral interests on
which
they conduct operations. Instead they usually lease the mineral interests
from
the mineral owners. As the owner of the mineral interest, the Company has
more
options relating to the exploration and development of oil and gas properties.
We can elect to participate in the drilling of a proposed well as a working
interest owner and pay our proportionate share of the well costs to the well
operator. Or we can lease our mineral interest and retain a royalty interest
in
the proposed well, which we usually do. Our election to participate with
our
working interest is made only after evaluating the risks and economics of
each
well proposed by a third party operator.
In
most instances, our mineral
interests represent a very small percentage or portion of the total well
site
acreage of the proposed well. This is readily apparent from the disclosure
in
Part 1 of the above referenced 10-KSB, where the Company’s mineral ownership
resulted in an average royalty interest of about 2.1% for the 43 wells completed
as producing wells in 2006. Because our individual royalty interests are
so
small, the Company has very little control of the timing or extent of the
operations conducted on our owned mineral interest properties.
The
Company’s exploration and
development activities more closely resemble the activities of the typical
independent oil and gas company. The Company evaluates prospects from
independent third parties and may or may not elect to participate. If we
decide
to participate, we negotiate to acquire an interest in the prospect. We then
pay
our share of the leased minerals and any other prospect costs incurred such
as
geological and geophysical costs. The Company only participates with a
non-operated working interest and never acts as the operator for any well
in
which it has a working interest.
Our
response to the specific items in
the comment letter follows.
Form
10-KSB for the fiscal year ended December 31, 2006
Item
1. Description of Business, page 3
Most
of
the information above describing the nature of our business is already included
in Item 1. of the Company’s 2006 10-KSB. Hopefully, the above information
clarifies our business description. In future Company Form 10-K filings,
we
could change the current heading “Mineral Property Management” to “Owned Mineral
Property Management” if this would help clarify the disclosure in Item
1.
Item
2. Description of Property, page 6
While
the
Company has no “individual properties of major significance”, we will expand our
disclosures under Item 2. for future Form 10-K filings to include the following
information:
The
Company has interests in approximately 500 producing properties, with one-fourth
of them being working interest properties and the remaining three-fourths
being
royalty interest properties. About 94% of these properties are located in
Oklahoma and Texas and account for approximately 89% of our annual oil and
gas
sales. About 5% of the properties are located in Kansas and South Dakota
and
account for approximately 10% of our annual oil and gas sales. No individual
property provides more than 10% of our annual oil and gas sales. See discussion
of revenues from Robertson County, Texas royalty interest properties in Item
6.
“Operating Revenues” for additional information about significant
properties.
Management’s
Discussion and Analysis or Plan of Operation, page 8
Results
of Operations, page 14
The
two
development wells expensed as dry holes should have been more accurately
classified as exploratory wells rather than development wells. While they
were
in the same area as other productive wells which the Company has a working
interest, they did not meet the criteria of a development well as defined
by
SFAS 19. The total dry hole costs charged to expense for these two
wells was $71,123 which was less than 10% of the Company’s 2006 exploration
expenses.
Financial
Statements, page 20
Note
2
– Summary of Accounting Policies, page 28
Asset
Retirement Obligation, page 30
Since
SFAS 143 became effective, the Company annually has made a calculation of
the
financial impact this accounting standard would have on its financial position
and results of operations. This calculation is prepared in February each
year,
after the reservoir engineer’s year end annual reserve report estimating
remaining reserves for all producing working interest properties is completed.
The calculation involves listing each producing working interest property,
the
estimated remaining production life of each property and the Company’s working
interest decimal in each property. An estimated gross plugging cost of $10,000
is multiplied by the working interest decimal to calculate the Company’s share
of the future asset retirement obligation for each property. This obligation
amount is then discounted at 4% over the remaining estimated production life
of
the property. The discounted obligation (asset carrying amount for each well)
is
then divided by the remaining years of production to obtain an estimated
annual
amortization expense amount by property. The sums of the estimated expense
amounts for all properties for 2004, 2005 and 2006 were $14,535, $8,217 and
$10,826 respectively. These expense amounts are less than 1% of the Company’s
pre-tax net income for each of the respective years. The asset carrying amount
for each of the above years is less than 1% of the total oil and gas properties
balance. A copy of the annual calculation is also provided to our outside
auditors for their review.
Additionally,
the majority of the Company’s working interest properties are less than 10,000
feet in depth. Historically, the gross costs for plugging wells in recent
years
have usually been less than $5,000 per well.
Based
on
the Company’s historical experience and the annual estimated expense
calculations described above, we feel the impact is immaterial to our financial
statements.
Please
let me know if the above information and responses do not adequately address
the
comments. In addition, I acknowledge as the principal financial officer of
the
Company, I am responsible for the adequacy and accuracy of the disclosures
in
the above referenced filings as well as all other SEC filings made by the
Company. I acknowledge SEC staff comments or changes to the Company’s
disclosures in response to these comments do not foreclose the SEC from taking
any action with respect to these filings. I also acknowledge the Company
may not
assert staff comments as a defense in any proceeding initiated by the SEC
or any
person under the federal securities laws of the United States.
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Sincerely,
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/s/
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James
L. Tyler
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James
L. Tyler
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Secretary
/ Treasurer
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