8-K

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 8-K

CURRENT REPORT
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

Date of Report (date of earliest event reported): March 6, 2006

CARRIZO OIL & GAS, INC.

(Exact name of registrant as specified in its charter)

Texas
(State or other jurisdiction of
incorporation) 000-29187-87
(Commission
File Number) 76-0415919
(I.R.S. Employer
Identification No.)

1000 Louisiana Street
Suite 1500
Houston, Texas
(Address of principal executive offices) 77002
(Zip code)

Registrant’s telephone number, including area code: (713) 328-1000

Not applicable
(Former name or former address, if changed since last report.)

Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions:

o     Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)

o      Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)

o      Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))

o      Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))

Item 2.02 Results of Operations and Financial Condition.

     The press release dated March 9, 2006 announcing production, prices and other operational results of Carrizo Oil & Gas, Inc. (“Carrizo” or “we”) for the fourth quarter of 2005, furnished as Exhibit 99.1 to this report, is incorporated by reference herein.

     None of the information furnished in Item 2.02 and the accompanying exhibit will be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, nor will it be incorporated by reference into any registration statement filed by Carrizo under the Securities Act of 1933, as amended, unless specifically identified therein as being incorporated therein by reference. The furnishing of the information in this report is not intended to, and does not, constitute a determination or admission by Carrizo, that the information in this report is material or complete, or that investors should consider this information before making an investment decision with respect to any security of Carrizo.

Item 4.02(a) Non-Reliance on Previously Issued Financial Statements or a Related Audit Report or Completed Interim Review.

     On March 6, 2006, Carrizo concluded that it will restate its financial statements for the quarters ended March 31, June 30 and September 30, 2005 as a result of Carrizo’s investment in Pinnacle Gas Resources, Inc. (“Pinnacle”). Pinnacle has informed Carrizo that it will restate its financial statements for these periods to account for certain derivatives used by Pinnacle to hedge exposure to natural gas prices, which were previously accounted for using cash flow hedge accounting. These hedges will now be marked-to-market by Pinnacle using fair value hedge accounting. Because Carrizo’s interest in Pinnacle is accounted for using the equity method, Carrizo has determined that the effect of Pinnacle’s restatement of its financial statements will require Carrizo to, in turn, restate its own financial statements. The related net impact of these Pinnacle hedges to Carrizo’s 2005 earnings is estimated to be a non-cash, after-tax charge of $1.1 million for 2005, comprised of a $1.0 million first quarter charge, a $0.1 million second quarter benefit, a $1.5 million third quarter charge and a $1.3 million fourth quarter benefit, resulting in a restatement of Carrizo’s three previously reported quarters in 2005.

     The determination to restate was approved by the audit committee of Carrizo’s board of directors upon the recommendation of Carrizo’s senior management. Neither Pinnacle’s previously reported results nor the restated results reflect any cash impact to Carrizo. Management of Carrizo does not expect the restatement to have any material impact on Carrizo’s financial condition, nor is it expected to indicate a material weakness in Carrizo’s financial reporting controls.

     Accordingly, Carrizo currently estimates that the following captions in its statements of income will be restated as follows:

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• Equity in loss of Pinnacle for the quarters ended March 31, June 30 and September 30, 2005 of $1.3 million, $0.2 million and $1.9 million, respectively; and

• Net income (loss) for the quarters ended March 31, June 30 and September 30, 2005 of $1.6 million, $3.7 million and $(0.9) million, respectively.

     Although the Pinnacle hedges resulted in marked-to-market losses in the first and third quarters of 2005, Pinnacle has informed Carrizo that, as of March 8, 2006, the effect of accounting for the Pinnacle hedges on a marked-to-market basis would result in a gain in the first quarter of 2006 to Pinnacle of approximately $2.7 million, or a $0.9 million non-cash after-tax benefit to Carrizo’s equity investment in Pinnacle. The final amount of gain or loss for the first quarter of 2006, however, is likely to change and that change may be material. The final amount will not be determinable until after March 31, 2006 and will depend on commodity prices on such date. Pinnacle’s management is considering alternatives and procedures to qualify for cash flow hedge accounting on future derivatives.

     Although Carrizo currently owns approximately 16% of Pinnacle’s equity on a fully diluted basis, Carrizo owned 32.3% of the outstanding common stock of Pinnacle at December 31, 2005. As a result, Carrizo reports 32.3% of the changes in Pinnacle’s earnings as a line item on its income statement.

     Carrizo plans to complete its evaluation of these matters prior to the filing of its annual report on Form 10-K for the year ended December 31, 2005 (the “2005 Form 10-K”). Investors are cautioned not to rely on Carrizo’s historical financial statements for each of the quarterly periods in 2005 until such filing has been made. Particularly in light of the restatement, Carrizo expects to file with the Securities and Exchange Commission (the “SEC”) a Form 12b-25, stating that it will require additional time to complete and file the 2005 Form 10-K. Carrizo expects to release its earnings on or around March 20, 2006.

     Carrizo’s audit committee and management have discussed the matters described herein with Carrizo’s independent registered public accounting firm.

Item 8.01 Other Events.

     Carrizo is hereby filing the following discussion of its Camp Hill Project.

     Camp Hill Project. We own interests in approximately 800 gross acres in the Camp Hill field in Anderson County, Texas. We currently operate all of these leases. During the year ended December 31, 2005, the project produced an average of 46.7 Bbls/d of 19 API gravity oil. The wells produce from a depth of 500 feet and have utilized and plan to utilize a tertiary steam drive as an enhanced oil recovery process. Although efficient at maximizing oil recovery, the steam drive process is relatively expensive to operate because natural gas or produced crude is burned to create the steam injectant. Lifting costs during the year ended December 31, 2005 averaged

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$27.45 per barrel ($4.57 per Mcfe). The oil produced, although viscous, commands a comparable price to West Texas Intermediate crude (an average premium of $0.15 per Bbl to Koch WTI during the year ended December 31, 2005) due to its suitability as a lube oil feedstock.

     As of December 31, 2005, we had 7.1 MMBbls of proved oil reserves in this project, with 740 MBbls of oil reserves currently developed. The proved undeveloped reserves at the Camp Hill Field constitute 28.6% of our proved reserves and account for 26.0% of our present value of net future revenues from proved reserves as of December 31, 2005. We have an average working interest of approximately 92.1% in this field and an approximate net revenue interest of 71.0%.

     Prior to 2003, we estimated an ultimate recovery efficiency (i.e. the percentage of the oil in the ground that we would be able to produce economically) after steam drive of 45% of the original oil in place in the Camp Hill field. As of January 1, 2003, we raised our estimate to an ultimate recovery of 55% of the estimated original oil in place based upon our review of recovery efficiencies from prior projects by other companies in both the Camp Hill Field as well as in nearby projects that we considered to have similar geologic and hydrocarbon attributes. We have lowered our estimated recovery efficiency as of December 31, 2005 to 49% of the estimated original oil in place in the field. We believe this revised recovery efficiency is reasonable, particularly in light of the fact that a project that we have operated in the Camp Hill Field since 1993 has a current 48.7% recovery efficiency as of December 31, 2005 and is currently producing at a rate of approximately 0.8% of original oil in place per year, even without steam injection. Our estimated proved reserves for the Camp Hill Field as of year-end 2005 were adversely impacted by this revision in the recovery efficiency estimate; resulting in a reduction of 991,515 net Bbls oil as of December 31, 2005. We made other negative revisions to our December 31, 2005 Camp Hill reserves totaling 483,418 net Bbls of oil as a result of new well data and additional analysis.

     Although in 2005 we accelerated our development activities in the Camp Hill Field, this follows an extended period during which we deferred development in the field. We deferred development (1) to optimize returns by awaiting an economic entry point for developing a cogeneration plant as further explained below, (2) to pursue other opportunities in both our Gulf Coast and later, Barnett Shale areas with higher rates of return and (3) to continue increasing our net acreage position in the field in a competitive environment. Although we at all times believed that we could develop this field on a profitable basis, we nonetheless believed that we were optimizing our economic position by deferring development. We acquired our initial interests in the Camp Hill field in 1993. We performed remedial work on the existing wells and steam generators and began injecting steam in March 1994. From 1994 through 1998 and during the nine months of 2000, we injected steam in 31 patterns. In the fourth quarter of 2000, we suspended steam injection in response to high fuel gas prices and to pursue a lower steam cost solution through our cogeneration negotiations. Thereafter, we drilled one well in 2001 and seven wells in 2005.

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     The most important reason for our delay in both resuming steam injection and moving to full development was the potential for significantly improved profitability that would result from the construction of a nearby cogeneration plant. Cogeneration plants typically provided steam at less than half the cost of small steam generators. Steam costs are critical to the economics of the development of the field. Expected steam costs far outweigh the capital costs for the development of the Camp Hill Field. We currently estimate approximately $139 million in steam costs compared to $22 million for drilling and development capital that is needed to fully develop the proved undeveloped reserves in this field. Previously, our management believed that the demand for electricity in the East Texas area would increase in the future such that it would become lucrative for us or a third party to build a cogeneration plant in the area. In this cogeneration plant, a gas turbine would be used to generate electricity, and the waste heat would be used to produce steam. The steam would be captured for injection in the Camp Hill field, while the electricity would be sold into the Texas electric power grid. In 2000, we engaged in discussions with another party regarding the building of a cogeneration facility, but we ultimately did not reach acceptable terms with that party. We subsequently continued to explore the possibility of a cogeneration facility in the Camp Hill field and worked with electricity industry consultants in 2002 and 2005.

     During the time we were continuing to assess the relative attractiveness of building a cogeneration plant, and in light of relatively high fuel gas costs at that time, we pursued other exploration projects primarily along the onshore Gulf Coast and in the Barnett Shale, starting in 2003, that we believed offered us potentially higher rates of return. These other projects have been the primary focus of our operations over the last several years. Our timing of Camp Hill development has also been impacted by our leasing activities in the field by which we increased our working interest and net revenue interest in our leases in the field so that we would own a greater share of these properties when we later developed them. We believe that we were able to increase our interests on more favorable terms by deferring the full scale development of the field. The addition of working interests in the Camp Hill leases further improved the economics of the development of this field as well as favorably affected the development plan for the steam drive patterns in the field.

     In 2005, we continued to invest the majority of our budgeted capital expenditures in our Barnett Shale and onshore Gulf Coast areas where the rates of return are traditionally higher and our leases expire sooner, which gives these projects greater immediacy. We did, however, drill seven gross wells (7.0 net) on four leases in the Camp Hill field in 2005, all of which are apparent successes and currently producing.

     In mid-2005, we reengaged an electricity industry consultant with cogeneration experience to further investigate the feasibility of establishing a cogeneration plant in the area. After extensive discussions with the consultant, we concluded that there continues to be overcapacity of electricity in the regional market and that overcapacity is not likely to reverse itself in the near term and that the capital expenditures associated with building a cogeneration plant are not likely to be warranted for a period of several years. As a result, we determined that,

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rather than awaiting the construction of a cogeneration plant, we would instead further develop our Camp Hill properties with the existing steam generators.

     In August 2005, management proposed the acceleration of the Camp Hill development to our board of directors. Accordingly, a development plan was formally approved by the board for increased drilling activity in the Camp Hill field, beginning with an initial 60-well drilling program. In February 2006, our board of directors formally approved a multi-year plan to fully develop the entire Camp Hill field. In furtherance of this plan, we expect to drill between 35 and 40 gross wells (35 to 40 net) in this area at an estimated cost of $3.2 million during 2006. To fully develop the field, we expect to drill approximately 326 wells from 2006 through 2017, at a total cost of approximately $22 million and total operating costs including steam of approximately $175.0 million. The precise timing and amount of our expenditures on additional well drilling and increased steam injection to develop the proved undeveloped reserves in this project will depend on several factors including the relative prices of oil and natural gas.

     We have recently taken other steps to accelerate Camp Hill development. To implement our development plan, we have entered into a new fuel gas supply contact; we are upgrading the steam generator burners and burner controls; and we have obtained a 30-well drilling rig contract. This rig is expected to be in place in the field by March 17, 2006. We plan to recommence steam injection in the Camp Hill field in March 2006.

     Statements in this report, including but not limited to those relating to Carrizo’s or management’s intentions, beliefs, expectations, hopes, projections, assessment of risks, estimations, plans or predictions for the future, including the timing of the completion of the restatement, current and first quarter 2006 effect of Pinnacle hedges, any restated amounts, impact of the restatement, timing of filings with the SEC, timing of release of earnings, future Camp Hill development and drilling, future reserves, the potential effects or timing of cash flow and reserve growth, shareholder value, the expected timing of drilling of additional wells and use of steam injection, plans for the drilling program and other statements that are not historical facts are forward looking statements that are based on current expectations. Although Carrizo believes that its expectations are based on reasonable assumptions, it can give no assurance that these expectations will prove correct. Important factors that could cause actual results to differ materially from those in the forward looking statements include delays and uncertainties that may be encountered in connection with the restatement, final audits and reviews by Pinnacle, Carrizo and their respective auditors, the results of Camp Hill development, the effectiveness, efficiency and cost of steam injection, the effect of Carrizo’s other exploration activities, the results and dependence on exploratory drilling activities, operating risks, oil and gas price levels, land issues, availability of equipment, weather and other risks described in Carrizo’s Form 10-K for the year ended December 31, 2004 and its other filings with the SEC. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual outcomes may vary materially from those indicated. Investors should not place undue reliance on forward-looking statements. Each forward-looking statement speaks only as of the date of the particular statement and Carrizo undertakes no duty to update any forward looking statement.

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Item 9.01. Financial Statements and Exhibits.

     (d) Exhibits.

Exhibit Number	Description
99.1	Press Release dated March 9, 2006 Announcing Operational Results for the Fourth Quarter 2005.

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SIGNATURES

     Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.

CARRIZO OIL & GAS, INC.
By:	/s/ Paul F. Boling
	Name:	Paul F. Boling
	Title:	Vice President and Chief Financial Officer

Date: March 9, 2006

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EXHIBIT INDEX

99.1           Press Release dated March 9, 2006 Announcing Operational Results for the Fourth Quarter 2005.

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EX-99.1

Exhibit 99.1

                                    CARRIZO OIL & GAS, INC. News

CARRIZO OIL & GAS UPDATES FOURTH QUARTER OPERATIONS; RESERVES REACH RECORD 150.6 BCFE, REPLACING 527 PERCENT OF 2005 PRODUCTION; QUARTERLY AND ANNUAL PRODUCTION REACH RECORD LEVELS; ANNOUNCES ACCOUNTING MATTERS

HOUSTON, March 9, 2006 - Carrizo Oil & Gas, Inc. (Nasdaq: CRZO) today announced the operating results for the fourth quarter and full year 2005 and updated operations, reserves and accounting matters.

Reserves

Year-end proved reserves were a record 150.6 Bcfe based on reports from Carrizo’s third-party reserve engineers. This is an increase of 38 percent (net of 2005 production of 9.6 Bcfe) over the year-end 2004 proved reserves of 109.3 Bcfe. Year-end PV-10 value was $404 million as compared to $209 million at year-end 2004.

These additions resulted in the Company replacing 527 percent of 2005 production.

Barnett Shale reserves increased 50.4 Bcfe, or 159 percent, to 82.1 Bcfe. Gulf Coast reserves decreased slightly from 26.2 Bcfe to 26.0 Bcfe, almost replacing production of 7.5 Bcfe. Camp Hill reserves decreased 8.95 Bcfe, or 17 percent, from 51.5 Bcfe to 42.5 Bcfe, primarily due to a conservative reduction in the expected recovery efficiency of original oil in place. Additional information regarding Carrizo’s Camp Hill project will be included in an upcoming Current Report on Form 8-K to be filed with the SEC.

Production

Production during the fourth quarter of 2005 was estimated to be a record 2.75 Bcfe, or 13.2 percent above the 2.43 Bcfe of production in the fourth quarter 2004 and 26.3 percent above the third quarter 2005 production. Part of the third quarter 2005 and the first two weeks of the fourth quarter 2005 were impacted by hurricanes Katrina and Rita. Estimated annual production for 2005 reached a record level of 9.63 Bcfe, or 15.8 percent higher than the 8.32 Bcfe of production in 2004. The Company estimates that fourth quarter 2005 sales prices, including the effect of hedging activities, averaged approximately $9.78 per Mcf and $58.27 per barrel. The natural gas sales price was negatively affected $0.66 per Mcf by hedging activities. The oil sales price was negatively affected $0.16 per Bbl by hedging activities. Approximately 88 percent of fourth quarter production was natural gas, with 85 percent of total 2005 production being natural gas.

Current production is an estimated 31 MMcfe/d, including over 14 MMcfe/d in the Barnett Shale with 14 net horizontal wells already drilled but waiting on completion and/or pipeline connection.

Drilling

In the Company’s onshore Gulf Coast of Texas and Louisiana operating areas, the Company participated in the drilling of five gross exploratory wells in the fourth quarter of 2005, four of which were successful for an apparent 80 percent success rate. All of the successful wells have been completed and are currently producing. As of year end 2005, drilling operations were underway on three wells. Year to date 2006, the Company has drilled five wells with four successes and is currently drilling three wells.

In its Barnett Shale project area, the Company participated in the drilling of eight gross (five net) horizontal wells in the fourth quarter, all of which were successful. As of year-end 2005, two of these successful wells had been completed. Thirteen additional horizontal wells were in various stages of testing, completion or awaiting pipeline hook-up. As of that date, drilling was underway on six gross (four net) horizontal wells.

The Company’s overall apparent drilling success rate in the fourth quarter 2005 was 92 percent, comprised of a total of 13 gross wells drilled, twelve of which were successful.

For the entire year, Carrizo participated in 21 gross wells in its onshore Gulf Coast area with 17 successes for an apparent 81 percent drilling success rate. In its Barnett Shale area, the Company participated in 37 gross wells in 2005 (comprised of 30 horizontal and seven vertical wells), all of which were apparently successful. In the Camp Hill field in Anderson County, Texas, the Company drilled seven gross wells with seven apparent successes. All seven are producing. Overall, the Company was successful on 61 of 65 gross wells drilled for an apparent success rate of 94 percent.

Two wells are currently drilling in the onshore Gulf Coast area. One of these, the Chesapeake-operated Fuller #1 (Destaroyah prospect) has reached a depth of approximately 15,200 feet with an estimated targeted depth of 16,500 feet. Carrizo has a 22 percent working interest in this Wilcox test in Goliad County, Texas.

The Carrizo-operated 22,000 foot Miller A-14 #1 (Mega-Mata prospect) in Matagorda County, Texas spudded on March 7, 2006. Carrizo is paying five percent of the risk capital for a 25 percent working interest in this well after casing point.

Leasing

Barnett Shale leases in the Fort Worth, Texas area totaled 80,000 net acres at year-end 2005, up 167 percent from the year-end 2004 total of approximately 30,000 net acres. The Company is still actively engaged in leasing activities.

The Company has also begun actively acquiring acreage in other organic rich shale plays based upon geological and geochemical criteria. We currently have, under lease or option, 51,000 net acres in the Barnett/Woodford shale play in West Texas/New Mexico, 85,000 net acres in the Floyd/Neal shale play in Mississippi/Alabama, 17,000 net acres in the western New Albany shale play in Kentucky, and 4,400 net acres in the Fayetteville shale play in Arkansas. Drilling commitments on all of this acreage total two wells over the next 17 months.

S.P. Johnson IV, Carrizo’s President and Chief Executive Officer, commented, “We had an outstanding year in 2005 by all benchmarks. Our transition is complete to a more balanced exploration company with a steady resource play development in the Barnett Shale underlying an

exploration program with higher potential reserve and production targets in the onshore Gulf Coast. Leveraging off of these successful programs we have moved into other shale resource plays and also completed the sale of two high impact prospects we generated in the U.K. North Sea, both of which should be drilling in 2006. We are very excited about spudding the Mega-Mata well sooner than expected and anticipate that this will be one of the deepest, highest potential wells drilled by industry this year in the onshore Gulf Coast area.”

Restatement and Release of Earnings

The Company plans to restate the first three quarters of 2005 to record the impact of a financial restatement by its equity investee, Pinnacle Gas Resources, Inc. (“Pinnacle”). Carrizo owned 32.3 percent of the outstanding common stock of Pinnacle on December 31, 2005 and accounts for its investment in Pinnacle on the equity accounting method. Pinnacle’s financial restatement is related to certain natural gas derivatives which had historically been accounted for using the cash flow hedge method. Pinnacle’s management and independent public accountants have determined that these derivatives are not eligible for cash flow hedge accounting. Accordingly, Pinnacle will restate the 2005 quarters using the fair value hedge accounting method. Under this method, the open derivative positions at the end of each quarter are marked-to-market. The relative change in the fair value of these derivatives due to changing commodity prices are reflected as a gain or loss in Pinnacle’s earnings each quarter.

The related net impact of these Pinnacle hedges to Carrizo’s 2005 earnings is estimated to be a non-cash, after-tax charge of $1.1 million for 2005, comprised of a $1.0 million first quarter charge, a $0.1 million second quarter benefit, a $1.5 million third quarter charge and a $1.3 million fourth quarter benefit, resulting in a restatement of Carrizo’s three previously reported quarters in 2005. Management of Carrizo does not expect the restatement to have any material impact on Carrizo’s financial condition nor is it expected to indicate a material weakness in the Company’s financial reporting controls.

Prospectively, Pinnacle estimated, based upon commodity prices at March 8, 2006, the effect of the marked-to-market accounting for the Pinnacle derivatives in the 2006 first quarter would result in a gain to Pinnacle of approximately $2.7 million, or a $0.9 million non-cash after-tax benefit to Carrizo’s equity investment in Pinnacle. However, the actual gain or loss recorded for the first quarter of 2006, is likely to change, perhaps materially, and will not be determinable until the March 31, 2006 commodity prices are reported. Pinnacle’s management is considering alternatives and procedures to qualify for cash flow hedge accounting on future derivatives.

Additional information relating to the restatement will be filed in a Current Report on Form 8-K filed by Carrizo with the SEC. Particularly in light of the restatement, Carrizo expects to file with the Securities and Exchange Commission (the “SEC”) a Form 12b-25, stating that it will require additional time to complete and file the 2005 Form 10-K. The filing of the Company’s Annual Report on Form 10-K is expected to occur on or around March 31, 2006. Carrizo expects to release its earnings on or around March 20, 2006.

Carrizo Oil & Gas, Inc., is a Houston-based energy company actively engaged in the exploration, development, exploitation and production of oil and natural gas primarily in proven onshore trends along the Texas and Louisiana Gulf Coast regions and the Barnett Shale area in North Texas.

Carrizo controls significant prospective acreage blocks and utilizes advanced 3-D seismic techniques to identify potential oil and gas reserves and drilling opportunities.

Statements in this news release, including but not limited to those relating to Miller A-14 #1 well and other high impact wells, the timing of the completion of the restatement, current and first quarter 2006 effect of Pinnacle hedges, any restated amounts, timing of earnings announcements and filings with the SEC the results, reserves, testing, sales, potential and other effects of the Company’s wells, the Company’s or management’s intentions, beliefs, expectations, hopes, projections, assessment of risks, estimations, plans or predictions for the future including potential effects or timing, timing of completion and drilling of wells and other statements that are not historical facts are forward looking statements that are based on current expectations. Although the Company believes that its expectations are based on reasonable assumptions, it can give no assurance that these expectations will prove correct. Important factors that could cause actual results to differ materially from those in the forward looking statements include delays and uncertainties that may be encountered in connection with the restatement, the results of final audits and reviews by Pinnacle, Carrizo and their respective auditors, the results of additional testing of the wells, results of completion and follow-up operations, the results and dependence on exploratory drilling activities, operating risks, oil and gas price levels, land issues, availability of equipment, weather and other risks described in the Company’s Form 10-K for the year ended December 31, 2004, its upcoming Form 8-K filing and its other filings with the Securities and Exchange Commission.

Note Regarding Reserve Replacement Ratio

Management uses the reserve replacement ratio as an indicator of the Company’s ability to replenish annual production volumes and grow its reserves, thereby providing some information on the sources of future production. Management believes reserve replacement information is frequently used by analysts, investors and others in the industry to evaluate the performance of companies like Carrizo. The reserve replacement ratio is calculated by dividing the sum of reserve additions from all sources (revisions, extensions, discoveries, and other additions and acquisitions) by the actual production for the corresponding period. The Company does not use unproved reserve quantities in calculating the reserve replacement ratio. It should be noted that the reserve replacement ratio is a statistical indicator that has limitations. As an annual measure, the ratio is limited because it typically varies widely based on the extent and timing of new discoveries and property acquisitions. Its predictive and comparative value is also limited for the same reasons. In addition, since the ratio does not take into consideration the cost of timing of future production of new reserves, it cannot be used as a measure of value creation. The ratio does not distinguish between changes in reserve quantities that are producing and those that will require additional time and funding to begin producing. In that regard, it might be noted that the percentage of the Company’s proved developed reserves increased from approximately 17 percent in 2004 to approximately 35 percent in 2005. The Reserve replacement ratio for 2004 was 568 percent.