With the volatility of the stock market many investors are turning to direct ownership of  natural gas reserves as a tax advantaged income producing asset.

A direct working interest investor owns natural gas reserves that are stored in the ground and then produced to generate a monthly income stream. Because of the new fundamentals of the natural gas industry, consumption of natural gas is at an all time high.

With over 65% of new homes being equipped for natural gas, people will always need hot water for shower, laundry and cooking even in a recession. In the summer natural gas is used to generate electricity for increased air conditioning loads, and in the winter natural gas is used for heating. Natural gas consumption is expected to reach about 22.7 tcf in 1998, an increase of 700 tcf, which will top the previous gas demand record of 22.1 tcf set in 1972. Industrial demand increased an estimated 1.8%, and electric utility demand was up 4.3%. Utility demand rose as gas-fired power replaced nuclear power declines resulting from maintenance shutdowns in some New England plants. Most of the gain will be used in the industrial and electric utility market sectors. The industry is focusing on gas turbines. In these machines, natural gas is ignited and the hot gas expands, spinning hundreds of blades on a turbine lined to a generator that turns out electricity.

Higher consumption has resulted in higher prices. For the first time in 10 years California's 1998 natural gas prices have stayed above $2.00 per MCF even as the NYMEX price went below $1.80 per MCF in September and October. Lower storage levels in the West, along with record heat, supported prices during these shoulder months. (Two month period between summer cooling and winter heating demand). Some are now predicting a La Nina that may cause a colder than normal winter. In addition to natural gas being stored in the ground and produced for monthly income, Congress has specifically exempted the Direct Working Interest form of ownership from the passive loss tax rules. This allows an investor to deduct the drilling costs from their ordinary income, capital gains and investment income tax liabilities. Taxes on mandatory withdrawals from IRA's and retirement accounts can also be offset with the drilling cost deductions. In addition, the gross income from the sale of natural gas is 15% non taxable from the depletion allowance you receive. So an investment in natural gas drilling provides a tax deduction going into the development, as well as a deduction on the income it creates. Drilling is not without risk even with 2-D and 3-D seismic, and any investment should be diversified over several different prospects and projects.

If consumption does continue to grow and the increased demand causes the price to rise, the natural gas reserves will appreciate in value and future net worth. Drilling for natural gas reserves can provide tax deductions, monthly checks and appreciation all in one investment, giving good diversification to any portfolio.

The equatorial Pacific waters have cooled rapidly during the spring, first at lower depths and more recently on the surface.  The only remaining above average sea surface temperatures (SSTs) are close to the South American coast, and this El Nino is basically history.

All signs now point to imminent development of a La Nina, possibly a strong one, which would then most likely be in existence through the upcoming 1998-99 winter.

 La Nina means "The Little Girl".  Like El Nino, it refers exclusively to anomalies in the equatorial Pacific ocean temperatures, in this case below average ones (opposite El Nino).

Looking ahead to winter, the big cities of the Northeast will probably have a colder, snowier one than last winter - but of course that would be easy to do.  Just how much snow and cold weather there will be cannot be determined with confidence at this time.

Each year the Oil & Gas Journal ranks all public U. S. energy companies for their prior years' results.  The top in total revenue and net income was Exxon Corporation followed by all of the majors but for the third year in a row, Royale Energy, Inc., was in the Top Ten Companies in Return on Total Assets and Top Ten Companies in Return on Equity. In addition, Royale was one of only two companies ranked in the Top 20 Fastest Growing Companies list for three consecutive years.

"Five of the companies s were on the fast-growth list last year: Royale Energy, Global Marine, Tom Brown, Pogo Producing, and Adams Resources & Energy.  It was the third year in a row for Global Marine and Royale Energy."

River Branch Prospect is located in Colusa County, California, in the Sacramento Basin and near the Sacramento River. The proposed test well will be drilled to approximately 2,500 feet. The objective target is the Cretaceous Kione sands, which are being truncated up against the prominent Eocene Princeton Gorge. Seismic data has been acquired and reveals several high amplitude reflectors, which correlate to the upper Kione sands and may be gas charged. The seismic data is currently being processed for AVO (Amplitude vs. Offset) evaluation of these high amplitude reflectors. AVO evaluation for the Kione gas sands yields a very distinct gas sand signature. Estimated gas reserves for the River Branch Prospect range between 3 to 5 BCF.

Dunnigan Hills Prospect is located in Yolo County, California, in the Sacramento Basin. Royale is exploring for a new pool extension of the Dunnigan Hills Gas Field. The proposed test well will be drilled to approximately 2,500 feet and will be testing two (2) separate reservoir potentials. The deeper potential is the Cretaceous Winters sand, which is the main producing gas sand in the adjacent Dunnigan Hills Gas Field. The shallower potential is the Eocene Hooper/Hamilton sand, which is also a known producing gas sand within the Dunnigan Hills Gas Field. Proprietary seismic data has just been acquired and is currently being processed to confirm a drill site location(s). The total estimated gas reserves for both potential reservoirs for the Dunnigan Hills Prospect range between 2 to 15 BCF.

Bowerbank #14 is located in Kern County, California, in the Southern San Joaquin Basin. Royale Energy has drilled 13 wells in the Bowerbank field using 2D seismic. The drilling of Bowerbank #14 is based on a regional seismic line and geological mapping of a structural high. The Bowerbank #14 location is on the northeast flank of the structure where an Upper Maya sand pinches out. This interpretation is similar to the traps from which the Royale Bowerbank #3 and #4A wells produce and has been delineated on seismic. There is also an excellent bright spot with AVO.

Recently acquired 3D seismic data in the Glenn County area indicate that a deeper Forbes "bright spot" is present on Royale's acreage. The anomaly has a slight northerly component of dip and is cut off on the west by the Willow Beehive Bend thrust fault. The south closure is abrupt and is either stratigraphic or fault controlled. The well be named #1Landberg.

The fifth prospect will be designated after further evaluation.

The level of gas-related drilling activity is a closely watched measure, as it indicates the industry's forecast for future gas prices, the trend of prospective reserve additions, as well as subsequent deliverability levels. In times of weak gas prices, activity tends to weaken. We believe this excites commodity players and equity investors, as they conclude that supplies and future deliverability will decline. Conversely, in times of strong gas prices, activity tends to strengthen, and this usually leads to expectations of rising supply and deliverability.

In our opinion, it will be difficult for the industry to replace production in 1998. Thus, we believe that the supply/demand balance will remain tight. This would have positive implications for gas pricing over the next 12-18 months.

IRVINE, Calif.-(BUSINESS WIRE)- Oct. 12, 1998- On Monday C. K. Cooper & Company released an eight-page research report on Royale Energy (nasdaq: ROYL - news).

In this report, C.K. Cooper raised its Short-Term rating to Strong-Buy from Hold and maintained and raised its Long-Term rating to Strong-Buy. C.K. Cooper & Company further stated that, based upon 1998 earnings projections of $1.6 million or $0.44 per share, it placed a target price of $6.00 per share.

"We recognize that the energy sector remains extremely sluggish. However, given that Royale derives almost 100% of its oil and gas sales from Natural Gas, and our continued belief that strong growth can be sustained, we believe that the company remains attractive. Royale remains undervalued based upon a multiple of earnings, a multiple of cash flow and as a percentage of break-up value," commented Alexander G. Montano.

Royale Energy, Inc. has recruited a Senior Engineer form Occidental Petroleum.  The company is pleased to announce that Philip D. Nicoll has assumed the position of Chief Engineer.

Philip acted as Area Manager for Texaco Exploration and Producing Inc. before joining Occidental Petroleum Inc. as Senior Asset Team Engineer at Elk Hills Naval Petroleum Reserve.  Philip has a degree in Petroleum Engineering and Natural Gas from Pennsylvania State University.  His experience and excitement for the company and its goals will contribute well to Royale's overall plan.

In December of 1997 Royale's Board of Directors authorized a share buyback.  Since then, the Company has purchased over 4% of it stock.

The shares that have been purchased have been canceled, reducing the total number of issued and outstanding shares to 3,867,800.  The result is an increase in ownership for all shareholders  Additionally, the Company's earning will be divided by a lesser number s shares.

Given the current market conditions and the Company's growth in earnings, we believe the shareholders will benefit from the reduced number of shares.