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The following is an excerpt from a 10-K/A SEC Filing, filed by GREKA ENERGY CORP on 5/16/2001.
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GREKA ENERGY CORP - 10-K/A - 20010516 - BUSINESS

Item 1. Description of Business

Overview of GREKA Energy Corporation

GREKA Energy Corporation, a Colorado corporation ("GREKA" or the "Company") is an independent integrated energy company committed to creating shareholder value by capitalizing on consistent cash flow protected from oil price fluctuations within vertically integrated operations, exploiting E&P opportunities and penetrating new niche markets utilizing proprietary technology. GREKA has oil and gas production, exploration and development activities in North America and the Far East, with primary areas of activity in California, Louisiana and China. In addition, GREKA owns and operates an asphalt refinery in California through a wholly-owned subsidiary. GREKA's operations are primarily conducted through our wholly owned subsidiaries established as business segments to allow for concentrated operations by region and/or markets.

As of December 31, 2000, the Company had estimated net proved reserves of approximately 15,662 MBOE with a PV-10 value before tax of $163.9 million. During 2000, the Company added an estimated net proved producing reserves of 2,154 MBOE. During 2000, the throughput at the Company's asphalt refinery averaged approximately 3,300 BBL per day with the Company's present goal of reaching optimum plant capacity by year-end 2002. Of this throughput, the Company's subsidiaries supplied an average of approximately 33%, or 1,090 BBL per day, from their production in California, and we plan to focus on increasing our feedstock during 2001. Also in 2000, our gas exploitation on our leasehold at Potash Field, Plaquemines Parish, Louisiana yielded record production, after we successfully recompleted three wells during our ongoing workover operation which began earlier in the year.

Our principal offices are located at 630 Fifth Avenue, Suite 1501, New York, New York 10111 and our telephone number is (212) 218-4680.

Business Strategy

GREKA's objective is to build shareholder value through consistent economic growth both in the increased throughput at our asphalt refinery and in the growth of our reserves and production, thereby creating an increase in net asset value per share, cash flow per share and earnings per share. We are focused on a balanced program of low to medium risk exploitation and development of our existing reserves utilizing its proprietary technology. This is balanced by rapid growth through the acquisition of synergistic businesses. All asset and capital investment decisions are measured and ranked by their risk-adjusted impact on per share value.

We have established a three-prong strategy that capitalizes on our asset base to enhance shareholder value as follows:

Integrated Operations

Operations of GREKA are planned to focus on the integration of our subsidiaries' Santa Maria (California) assets, including an asphalt refinery and interest in heavy oil fields. The hedged operations are targeted to capitalize on the stable asphalt market in California by providing a balance of equity and third party feedstock (heavy oil) into the refinery. The integration of the refinery (100% owned) with the interests in the heavy oil producing fields (100% working interest) has successfully provided a stable ongoing hedge to GREKA on

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each equity barrel since June 1999. GREKA's strategy in these integrated assets is to proceed with acquisitions that enhance the long-term feedstock supply to the refinery and to cost-efficiently boost production rates from the potential drilling locations identified in the Santa Maria Valley area of central California. We anticipate that the profitability from these integrated operations will not be affected by volatile oil prices. It is also anticipated that, by using our equity barrels to supply the refinery, working capital requirements should be lower and cash flow should be enhanced. The continued stability of the price of asphalt, coupled with reduced costs for processing and lifting, should create substantial value for GREKA's shareholders.

Exploitation, Exploration & Production

GREKA is focusing on return to production ("RTP") work. Such RTP work has enhanced and is expected to continue to enhance the current production levels and capitalize on current oil and gas prices. We plan to specifically focus on our existing concessions in strategic locations, such as China, where GREKA believes there is a significant, long-term demand for energy and a niche advantage for the Company.

GREKA plans to continuously pursue new, emerging opportunities in the energy business to identify and evaluate niche markets for our proprietary drilling technology. Two specific niche targets are coal bed methane projects and gas storage. These opportunities should provide significant upside from the use of short radius horizontal laterals.

Business Development of GREKA

GREKA Energy Corporation was formed in 1988 as a Colorado corporation under the name of Kiwi III, Ltd. On May 13, 1996, GREKA, then known as Petro Union, Inc., filed a voluntary petition for relief pursuant to Chapter 11 of the United States Bankruptcy Code. Current GREKA management acquired Petro Union, Inc. and simultaneously procured on August 28, 1997, an order confirming Petro Union's First Amended Plan of Reorganization from the Bankruptcy Court for the Southern District of Indiana. The bankruptcy court approved the final accounting and closed the bankruptcy proceedings on March 26, 1998.

During 1998, our management focused substantially all of its efforts on corporate restructuring, recapitalization and acquisition efforts and an investment in a horizontal drilling pilot program in the Cat Canyon field in California that all were part of implementing its strategic niche growth plan. During the latter part of 1998 and early 1999, management was primarily focused on the acquisition of Saba, which had substantial reserves suited to exploitation by GREKA's horizontal drilling technology, and considerable expenses were incurred in connection with the Saba transactions in the first quarter of 1999.

On March 22, 1999, the Company, then known as Horizontal Ventures, Inc., changed its name to GREKA Energy Corporation. Effective March 24, 1999, GREKA acquired Saba Petroleum Company as a wholly owned subsidiary.

Immediately subsequent to the completion of the Saba acquisition, management commenced its strategy to reverse the decline in value of the Saba assets which included securing bank financing of up to $47.0 million, reducing Saba debt by $27.2 million, assuming full operation of our asphalt refinery which significantly increased operating cash flows, selling our non-core assets in Colombia while maintaining our repurchase option, acquiring all of the shares we did not already own of Beaver Lake Resources Corporation ("Beaver Lake"), and signing a production sharing contract with the China United Coalbed Methane Corporation Ltd. to jointly exploit coalbed methane (CBM) resources in China. During December 1999, GREKA commenced trading on the Nasdaq National Market System.

Year 2000 Highlights

Highlights announced during 2000 include the following:

o In March 2000, we announced that our proved reserves rose 1196% valued at $71.0 million (approximately $16.90 per share).

o In March, GREKA exercised its option to repurchase its Colombian assets for an estimated cost of $12.0 million resulting in the Company's receipt of assets with a PV-10 value of approximately $65.0 million at December 31, 1999 (approximately $12.22 per share outstanding). (See Item 3, "Legal Proceedings").

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o In June 2000, GREKA closed with Canadian Imperial Bank of Commerce the financing of up to $47.5 million. A portion of the credit facility proceeds were paid to reduce the current debt of the Company which resulted in the complete elimination of all Bank One debt of Saba.

o In August 2000, GREKA announced that its daily production increased over 22%, with an 18% increase in oil production and a 34% increase in gas production since December 1999. The Company further highlighted the concentration of its E&P Americas segment on increasing gas production which had risen 66% in June compared to March, through a continuous workover program.

o In August 2000, GREKA completed the sale of its Canadian subsidiary, Beaver Lake, resulting in the Company's disposition of all its non-core oil and gas assets in Canada.

o In August 2000, GREKA entered into a comprehensive settlement agreement with Capco Resources, Ltd. ("Capco") and its related parties. As a result of the settlement GREKA repurchased and cancelled 840,000 shares of the Company's common stock for a total consideration of $5.2 million. We also gained voting control through December 31, 2002 of the 514,500 shares of the Company's common stock remaining with Capco.

o In September 2000, GREKA announced that it was ranked fourth out of 131 companies positioned in the U.S. Oil E&P industry with a "Strong Buy" ranking by Zacks.com Investment Research, a supplier of financial data to Yahoo! The recommendation was based on the conglomeration of analyst coverage that GREKA had enjoyed in 2000, including a "Long Term Strong Buy" recommendation in August with a target price of $17.50 from C.K. Cooper & Company and a "Buy" recommendation in September with a 12-month target price of $24.60 from Friedman Billings & Ramsey.

o In September 2000, GREKA announced that its gas exploitation yielded record production, as it successfully recompleted three wells during the third quarter in its ongoing workover operation which began earlier in 2000 on its leasehold at Potash Field, Plaquemines Parish, Louisiana substantially increasing production and demonstrating management's flexibility to adjust our E&P assets to maximize production in line with dynamic changes in market conditions.

o In November 2000, GREKA declared the payment of a 5% stock dividend to our shareholders of record at close of market on December 31, 2000.

o In November 2000, GREKA completed a spot secondary public offering of 472,500 shares of the Company's common stock at $13.10 per share. The option to purchase an additional 70,875 shares to cover over allotments closed in December, 2000. The underwritten offering was lead by Friedman, Billings, Ramsey and Co., Inc. and co-managed by Sanders Morris Harris.

Acquisition Activities

Re-Purchase of Colombian Assets

In 1999, we sold our Colombian assets subject to a look-back provision and valuation threshold which, by our calculation, had been met as announced in February 2000. In March 2000, we exercised our option to re-purchase the Colombian assets valued at approximately $65.0 million (PV-10) at December 31, 1999 in exchange for payment of $12.0 million, reassignment of certain California assets acquired from the buyer, and adjustments for related capital expenditures. The June 2000 closing on the option was extended to July 2000 to enable interested third parties sufficient time to approve the repurchase transaction. The buyer refused to close in July as required. In view of our belief that the buyer has engaged in continued breaches of the agreement, we obtained a temporary restraining order in July 2000 and then an injunction in August 2000 securing and protecting our rights to the assets and related cash flow through trial. (See Item 3-"Legal Proceedings")

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Divestiture Activities

Sale of Non-Core Canadian Assets

In June and July 2000, our Canadian subsidiary sold a portion of its non-producing oil and gas assets for an aggregate contract price of $0.9 million. This was followed in August 2000 by the sale of Beaver Lake for a net price of $0.6 million resulting in the disposition of all of our non-core oil and gas assets in Canada.

Financing & Debt Restructuring Activities

Bank Financing

In June 2000, GREKA's subsidiary entered into a credit and guarantee agreement with Canadian Imperial Bank of Commerce ("CIBC") and CIBC World Markets Corp. The agreement provided that GREKA's subsidiary may borrow up to $47.5 million. A portion of the proceeds were paid to reduce the current debt of GREKA, which payment resulted in the complete elimination of all Bank One debt ($3.0 million) of Saba. The facility, secured by GREKA's subsidiary's interest in certain North American oil and gas properties, specifically provided the financing required to close GREKA's option to re-purchase the Colombian assets. In December 2000, the facility was amended to extend the maturity date from December 1, 2000 to February 28, 2001 and fix the maximum available amount of the facility pending repayment.

In March 2001, GREKA's subsidiary entered into a credit and guarantee agreement with the Bank of Texas, N.A. ("Bank of Texas"). The agreement provides that GREKA's subsidiary may borrow up to $75 million. GREKA closed a revolving credit line of $16 million with an initial advance of $13.2 million against the line secured by GREKA's subsidiary's interest in certain North American oil and gas properties. A portion of the proceeds were paid to reduce the current debt of GREKA, which payment resulted in the complete elimination of all obligations owed to CIBC.

In February 2001, the credit facility secured by GREKA's subsidiaries' interests in certain California oil and gas properties and real estate was increased for a third time by GMAC Commercial Credit LLC ("GMAC"). The transaction provides additional financing of up to $46 million by increasing the principal amount of the term loan from $25 million to $36 million, and $10 million for working capital. Modifications to the terms of the credit agreement include the extension of the credit facility to a term up to November 30, 2005.

IPH Loan

Effective January 1, 2000, two prior loans from GREKA's then affiliate, International Publishing Holding ("IPH"), which matured December 31, 1999 in the aggregate amount of $2 million were consolidated into one loan with a maturity date of June 30, 2000, bearing interest at the rate of 9% per annum from January 1, 2000 payable quarterly, with monthly installment payments of $100,000. We paid $180,000 in consideration of the loan extension. The terms of the extension provided that if the entire unpaid principal and/or accrued interest was not paid at maturity, the amount of principal owed and rate of interest shall increase by $390,000 and 6%, respectively. At December 31, 2000, we owed IPH $2,569,250 of principal and accrued interest. The loan, which matures December 31, 2002, is collateralized by all of the issued and outstanding shares of capital stock of a subsidiary.

Debentures

On February 1, 2001, GREKA paid its 15% convertible senior subordinated debentures in the principal amount of $1 million, and the security of GREKA's subsidiary's interest in limestone deposits was released. There were no conversions by debenture holders into GREKA common stock at the conversion price of $20.00 per share.

In June 2000, GREKA exchanged $3.3 million of Saba 9% senior subordinated convertible debentures for GREKA debentures. The GREKA debentures are convertible to Company common stock at the option of the holders of the debentures at any time prior to the due date of the debenture (December 31, 2005), unless previously redeemed. Upon the receipt of a duly executed notice of election to convert the GREKA debenture, the Company will convert the debenture to GREKA common stock based upon a per share conversion price equal to 95% of the average closing bid price of its common stock for 30 consecutive trading days ending one day prior to the receipt of the notice of election to convert except that the conversion price shall in no case be less than $8.50 per share nor greater than $12.50 per share. We also have the right to redeem the GREKA debenture by providing 30 days written notice of our intent to redeem during which time the debenture holder may convert his or her debenture. At December 31, 2000, $0.5 million debentures had been converted into 43,534 shares of GREKA

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common stock and $0.1 million debentures had been redeemed, with a resulting debenture balance of $2.7 million.

GREKA's Horizontal Drilling Technology

Horizontal drilling has become widely accepted as a standard option for exploiting oil & gas resources. The principle advantage of horizontal drilling is that it results in a substantially greater surface area for drainage, and thus extraction of the oil from the reservoir. In industry terms this is referred to as communicating zones of permeability. The unique method of reentering a well and horizontal drilling patented by BP Amoco and licensed to GREKA allows for turning while drilling, which can cause a vertical well to be horizontal in as little as 25 feet. Thus this technology provides considerable flexibility to the geologists and engineers in designing their well plans around geological formation and reservoir constraints to achieve maximum performance. Furthermore, this technique facilitates multi-laterals off an existing well bore, which avoids costly drilling of new wells, and has considerable advantages in shallow reservoirs where the traditional horizontal tools cannot be utilized due to their larger radius requirements and related economics.

Marketing

Marketing of Asphalt Refinery Production

Our asphalt refinery in Santa Maria, California produces light naphtha, kerosene distillate, gas oils and numerous cut-back, paving and emulsion asphalt products. Historically, we have focused marketing efforts on the asphalt products which are sold to various users, primarily in the Central and Northern California areas. Distillates are readily marketed to wholesale purchasers. No one customer who, if lost, would be material to the Company's continued operations, accounted for more than ten percent of the Company's sales of North American refinery production during 2000.

GREKA regards the refinery as a valuable adjunct to its production of crude oil in the Santa Maria Valley and surrounding areas. Generally, the crude oil produced in these areas is of low gravity and makes an excellent asphalt. Prices for asphalt exceed market prices for crude and costs of operating the refinery. GREKA believes that as road building and repair increase in California and surrounding western states, the market for asphalt will expand significantly.

We market two principal products from our refinery: liquid asphalt and light-end products (gas oil, naphtha and distillates). Liquid asphalt, which accounted for approximately 65% of total refinery production in 2000, is marketed primarily in California. While liquidate asphalt is principally used for road paving and manufacturing roofing products, all of the liquid asphalt sold by GREKA's subsidiary is used for pavement applications. Paving grade liquid asphalt is sold by GREKA's subsidiary to hot mix asphalt producers, material supply companies, contractors and government agencies.

These customers further treat the liquid asphalt which is used for road paving. In addition to conventional paving grade asphalt, our subsidiary also produces modified and cutback asphalt products. Modified asphalt is a blend of recycled plastics, rubber and polymer materials with liquid asphalt, which produces a more durable product that can withstand greater changes in temperature. Cutback asphalt is a blend of liquid asphalt and lighter petroleum products and is used primarily to repair asphalt road surfaces. Additionally, some of the paving grade and modified asphalts we produce are sold as base stocks for emulsified asphalt products that are primarily used for pavement maintenance.

Because the chemical footprint unique to the heavy crude oil indigenous to the Santa Maria Valley readily blends, we are particularly well positioned to supply the asphalt specifications in accordance with the standards established by the National Highway and Transportation Administrations Strategic Highway Research Program (SHRP) or set by the American Association of State Highway and Transportation Officials.

Demand for liquid paving asphalt products is primarily affected by federal, state and local highway spending, as well as the general state of the California economy, which drives commercial construction. Another factor is weather, as asphalt paving projects are usually shut down in cold, wet weather conditions. All of these demand factors are beyond our control. Government highway spending provides a source of demand which has been relatively unaffected by normal business cycles but is dependent on appropriations. During 2000, approximately 80% of liquid asphalt sales were ultimately funded by the public sector as compared to approximately 70% in 1999.

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Private asphalt demand rebounded slightly in 1997 and continued to improve through 1998 and 1999 due to the improvement in the California economy. The California economy continued to improve in 2000, fueled by growth in foreign trade as well as growth in high technology, tourism and entertainment. This growth in business activity resulted in increases in road construction and repair activity in both the private and public sectors. Forecasts for California in 2001 are mixed, as growth rates measured by growth in jobs, personal income, consumer spending and construction are presently in flux as the economy deteriorates. Growth in the California economy generally means well for the Company, as increased business activity results in increased construction activity, including increased new road construction and increased repair efforts on existing roads in both the public and private sectors. A slowing economy could negatively impact sales or pressure pricing.

As our asphalt refinery and principal markets are located in California, the following discussion focuses on government highway funds available in California.

Federal Funding

Federal funding of highway projects is accomplished through the Federal Aid Highway Program. The Federal Aid Highway Program is a federally-assisted, state-administered program that distributes federal funds to the states to construct and improve urban and rural highway systems. The program is administered by the Federal Highway Administration (FHWA), an agency of the Department of Transportation. Nearly all federal highway funds are derived from gasoline user taxes assessed at the pump.

In June 1998, the $217 billion federal highway bill, officially known as the Transportation Equity Act for the 21st Century or TEA-21 was enacted. The bill is estimated to increase transportation-related expenditures by $850 million a year in California alone over a six fiscal year period beginning October 1, 1997. This will equate to a 51% increase over previous funding levels. The average California apportionment over the six year period ending in October 2003 is estimated to be $2.50 billion per year or a total of $15 billion. Of this amount, approximately $4.65 billion has been designated for Interstate Maintenance and the National Highway System while another $4.56 Billion has been designated for the Surface Transportation and the Congestion Mitigation and Air Quality Improvement programs, which concentrate on state and local roadways. However, while management of GREKA's subsidiary believes it has benefited from and should benefit in the future from such funding increases there can be no guarantee that it will in fact do so in the future.

State and Local Funding

In addition to federal funding for highway projects, states individually fund transportation improvements with the proceeds of a variety of gasoline and other taxes. In California, the California Department of Transportation (CALTRANS) administers state expenditures for highway projects. According to the Department of Finance for the State of California, funding available from the State Highway Account is estimated to average $1.13 billion per year over the next 10 years excluding the Seismic Retrofit Bond Fund. This compares to an average of $0.36 billion over the previous ten years.

Marketing of our Oil and Gas Production

The prices obtained for oil and gas are dependent on numerous factors beyond our control, including domestic and foreign production rates of oil and gas, market demand and the effect of governmental regulations and incentives. Substantially all of our North American crude oil production is sold at the wellhead at posted prices under short term contracts, as is customary in the industry. Other than production from the Company's Integrated Operations Division which is transported to our refinery, no one customer who, if lost, would be material to the Company's continued operations, accounted for more than ten percent of the Company's sales of North American oil and gas production during 2000.

The market for heavy crude oil produced by GREKA from its Central Coast Fields in California differs substantially from the remaining domestic crude oil market, due principally to GREKA's sale to the market of asphalt, naphtha and distillates rather than hydrocarbons. GREKA's Santa Maria refinery uses essentially all of its Central Coast Fields' crude oil, in addition to third party crude oil, to produce asphalt, among other products. Ownership and operation of the refinery gives us a steady and stable market for its local crude oil which is not enjoyed by other producers.

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Competition

Competition in the oil and gas business is intense, particularly with respect to the acquisition of producing properties, proved undeveloped acreage and leases. Major and independent oil and gas companies actively bid for desirable oil and gas properties and for the equipment and labor required for their operation and development. We believe that the locations of our leasehold acreage, our exploration, drilling and production capabilities and the experience of our management and that of our industry partners generally enable us to compete effectively. Many of our competitors, however, have financial resources and exploration, development and acquisition budgets that are substantially greater than ours, and these may adversely affect GREKA's ability to compete, particularly in regions outside of GREKA's principal producing areas. Because of this competition, GREKA cannot assure that it will be successful in finding and acquiring producing properties and development and exploration prospects.

Our management believes we have an advantage over our competition due to our acquired license from BP Amoco of the Short Radius Horizontal Drilling technology, our level of field expertise in applying the proprietary technology and our ability to apply these drilling techniques at a fraction of the cost compared to conventional drilling techniques utilized by our competition. Although BP Amoco has provided licenses to others, GREKA feels that its strategy to apply the proprietary technology to its own oil and gas properties and to penetrate new niche markets utilizing the proprietary technology is within an entirely different market segment than any of the other licensees who are concentrating on providing contract drilling services to non-owned properties within their respective geographical area. We have not felt any competitive pressure relative to our acquisition strategy focused on the unique application of our niche, short-radius horizontal drilling technology.

Governmental Regulation

The following discussion of regulation of the oil and gas industry is necessarily brief and is not intended to constitute a complete discussion of the various statutes, rules, regulations or governmental orders to which operations of GREKA and its subsidiaries may be subject.

Federal Regulation of First Sales and Transportation of Natural Gas

The sale and transportation of natural gas production from properties owned by our subsidiaries may be subject to regulation under various federal and state laws including, but not limited to, the Natural Gas Act and the Natural Gas Policy Act, both of which are administered by the Federal Regulatory Commission. The provisions of these acts and regulations are complex. Under these acts, producers and marketers have been required to obtain certificates from FERC to make sales, as well as obtaining abandonment approval from FERC to discontinue sales. Additionally, first sales have been subject to maximum lawful price regulation. However, the NGPA provided for phased-in deregulation of most new gas production and, as a result of the enactment on July 26, 1989 of the Natural Gas Wellhead Decontrol Act of 1989, the remaining regulations imposed by the NGA and the NGPA with respect to "first sales" were terminated by no later than January 1, 1993. FERC jurisdiction over transportation and sales other than "first sales" has not been affected.

Because of current market conditions, many producers, including GREKA, are receiving contract prices substantially below most remaining maximum lawful prices under the NGPA. Our management believes that most of the gas to be produced from GREKA's properties is already price-deregulated. The price at which such gas may be sold will continue to be affected by a number of factors, including the price of alternate fuels such as oil. At present, two factors affecting prices are gas-to-gas competition among various gas marketers and storage of natural gas. Moreover, the actual prices realized under GREKA's current gas sales contracts also may be affected by the nature of the decontrolled price provisions included therein and whether any indefinite price escalation clauses in such contracts have been triggered by federal decontrol.

The economic impact on GREKA and gas producers generally of price decontrol is uncertain, but it currently appears to be resulting in higher gas prices. Currently, there is a shortage of deliverable gas in most areas of the United States and, accordingly, it remains possible that gas prices may remain at relatively high levels. This is in sharp contrast to even recent pricing which has been depressed for some time since deregulation. Producers such as GREKA or resellers may be required to reduce prices in the future in order to

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assure continued sales. It is also possible that gas production from certain properties may be shut-in altogether for lack of an available market.

Commencing in the mid-1980's, FERC promulgated several orders designed to correct market distortions and to make gas markets more competitive by removing the transportation barriers to market access. These orders have had a profound influence upon natural gas markets in the United States and have, among other things, fostered the development of a large spot market for gas. The following is a brief description of the most significant of those orders and is not intended to constitute a complete description of those orders or their impact.

On April 8, 1992, FERC issued Order 636, which is intended to restructure both the sales and transportation services provided by interstate natural gas pipelines. The purpose of Order 636 is to improve the competitive structure of the pipeline industry and maximize consumer benefits from the competitive wellhead gas market. The major function of Order 636 is to assure that the services non-pipeline companies can obtain from pipelines is comparable to the services pipeline companies offer to their gas sales customers. One of the key features of the Order is the "unbundling" of services that pipelines offer their customers. This means that pipelines must offer transportation and other services separately from the sale of gas. The Order is complex and faces potential challenges in court. GREKA is not able to predict the effect the Order might have on its business.

FERC regulates the rates and services of "natural-gas companies", which the NGA defines as persons engaged in the transportation of gas in interstate commerce for resale. As previously discussed, the regulation of producers under the NGA is being gradually phased out. Interstate pipelines, however, continue to be regulated by FERC under the NGA. Various state commissions also regulate the rates and services of pipelines whose operations are purely intrastate in nature, although generally sales to and transportation on behalf of other pipelines or industrial end-users are not subject to material state regulation.

There are many legislative proposals pending in Congress and in the legislatures of various states that, if enacted, might significantly affect the petroleum industry. It is impossible to predict what proposals will be enacted and what effect, if any, such proposals would have on GREKA and its subsidiaries.

State and Local Regulation of Drilling and Production

State regulatory authorities have established rules and regulations requiring permits for drilling, drilling bonds and reports concerning operations. The states in which GREKA'S subsidiaries operate also have statutes and regulations governing a number of environmental and conservation matters, including the unitization and pooling of oil and gas properties and establishment of maximum rates of production from oil and gas wells. A few states also pro-rate production to the market demand for oil and gas.

Environmental Regulations

Our operations are subject to numerous laws and regulations governing the discharge of materials into the environment or otherwise relating to environmental protection. These laws and regulations may require the acquisition of a permit before drilling commences, prohibit drilling activities on certain lands lying within wilderness and other protected areas and impose substantial liabilities for pollution resulting from drilling operations. Such laws and regulations may also restrict air or other pollution resulting from GREKA's operations. Moreover, many commentators believe that the state and federal environmental laws and regulations will become more stringent in the future. For instance, proposed legislation amending the federal Resource Conservation and Recovery Act would reclassify oil and gas production wastes as "hazardous waste". If such legislation were to pass, it could have a significant impact on the operating costs of GREKA, as well as the oil and gas industry in general. State initiatives to further regulate the disposal of oil and gas wastes are also pending in certain states, including states in which our subsidiaries have operations, and these various initiatives could have a similar impact on GREKA.

Operational Hazards and Insurance

GREKA's subsidiaries' operations are subject to the usual hazards incident to the drilling and production of oil and gas, such as blowouts, cratering, explosions, uncontrollable flows of oil, gas or well fluids, fires, pollution, releases of toxic gas and other environmental hazards and risks. These hazards can cause personal injury and loss of life, severe damage to and

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destruction of property and equipment, pollution or environmental damage and suspension of operations.

GREKA and its subsidiaries have up to $11 million of general liability insurance. GREKA's insurance does not cover every potential risk associated with the drilling, production and processing of oil and gas. In particular, coverage is not obtainable for certain types of environmental hazards. The occurrence of a significant adverse event, the risks of which are not fully covered by insurance, could have a material adverse effect on GREKA's financial condition and results of operations. Moreover, no assurance can be given that GREKA will be able to maintain adequate insurance in the future at rates it considers reasonable.

Employees

As of May 3, 2001, GREKA and its subsidiaries had 108 full-time employees. None of GREKA's employees is subject to a collective bargaining agreement. GREKA considers its relations with its employees to be satisfactory.

Shareholders Rights Plan

We have a shareholder rights plan in order to preserve the long-term value of the Company for GREKA's shareholders. Under the shareholder rights plan, one right will be distributed for each outstanding share of GREKA common stock. Each right will entitle the holder to buy one share of GREKA common stock for an initial exercise price of $57.14 per share. The rights will initially trade with common shares and will not be exercisable unless certain takeover events occur. The plan generally provides that if a person or group acquires or announces a tender offer for the acquisition of 12% (amended from 33% by approval of GREKA's Board of Directors in December 2000) or more of GREKA common stock without approval of the Board of Directors, the rights will become exercisable and the holders of the rights, other than the acquiring person or group, will be entitled to purchase shares of GREKA common stock (or under certain circumstances stock of the acquiring entity) for 50% of its current market price. The rights may be redeemed by GREKA for a redemption price of $.01 per right.

Retirement Plan

The Company sponsors a defined contribution retirement savings plan
(401(k) Plan) to assist all eligible U.S. employees in providing for retirement or other future financial needs. We currently provide matching contributions equal to 50% of each employee's contribution, subject to a maximum of 8% of their eligible contribution.

Net Profit Sharing Plan

The Company has a net profit sharing plan ("NPSP") for employees that fulfill certain qualification requirements. The NPSP provides for an equal disbursement of 10% of the Company's pretax income, excluding extraordinary gains. Such disbursement is planned to follow the filing of the annual audited financial statements of the Company. The NPSP could be suspended at the discretion of our Board of Directors for any specific year.

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