Estimated future production of Proved Reserves and estimated future production and development costs of Proved Reserves are based on current costs and economic conditions. Future income tax expenses are computed using the appropriate year-end statutory tax rates applied to the future pre-tax net cash flows from proved coalbed methane reserves, less the tax basis of Far East Energy. All wellhead prices are held flat over the forecast period for all reserve categories. The estimated future net cash flows are then discounted at a rate of 10%.
NPV10% for proved reserves may be considered a non-GAAP financial measure as defined by the SEC and is derived from the standardized measure of discounted future net cash flows for proved reserves, which is the most directly comparable US GAAP financial measure. NPV10% is computed on the same basis as the standardized measure of discounted future net cash flows for proved reserves but without deducting future income taxes. As of December 31, 2012, our estimated discounted future income taxes were $0 and, accordingly, our standardized measure of after-tax discounted future net cash flows for Proved Reserves was also $40.4 million. We believe NPV10% is a useful measure for investors for evaluating the relative monetary significance of our coalbed methane properties. We further believe investors may utilize our NPV10% as a basis for comparison of the relative size and value of our proved reserves to other companies because many factors that are unique to each individual company impact the amount of future income taxes to be paid. Our management uses this measure when assessing the potential return on investment related to our coalbed methane properties and acquisitions. However, NPV10%is not a substitute for the standardized measure of discounted future net cash flows. Our NPV10% and the standardized measure of discounted future net cash flows do not purport to present the fair value of our proved coalbed methane gas reserves.
NPV10% for probable and possible reserve amounts above represent the present value of estimated future revenues to be generated from the production of probable or possible reserves, calculated net of estimated lease operating expenses, production taxes and future development costs, using costs as of the date of estimation without future escalation and using 12-month average prices, without giving effect to non-property related expenses such as general and administrative expenses, debt service and depreciation, depletion and amortization, or future income taxes and discounted using an annual discount rate of 10%. With respect to NPV10% amounts for probable or possible reserves, there do not exist any directly comparable US GAAP measures, and such amounts do not purport to present the fair value of our probable and possible reserves.
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