happens; disputes do not occur when the answer is known. Litigation and tax 

 disputes arise in the area of uncertainty, and usually are due to a conflict be- 

 tween optimists and pessimists. If there were a sale, a fair sale, of that particular 

 property at that time, one could establish fair market value without knowing 

 any subsurface geology, or for that matter, without knowing anything about the 

 oil business. 



But fair market value must always be proved by comparison, inference, 

 and analogy. The next best evidence is records of sale from county deed records 

 of adjoining properties or of similar properties elsewhere. Oil companies keep 

 records of transactions submitted to them, and these tend to show fair market 

 value. Also, traders in that area frequently know of transactions or near trans- 

 actions on similar properties, which are admissible evidence in some proceedings. 



As soon as one begins to study adjoining or similar properties, he is deal- 

 ing in subsurface geology. An adjoining lease may raise such questions as: Is 

 it up or down structure? It is a gas- or water-drive reservoir? Does the pro- 

 ducing section thicken or thin in that direction? Does the reservoir increase or 

 decrease in porosity and permeability in that direction? And, when similar 

 properties are considered, it is almost entirely a study of subsurface geology — ■ 

 and the compared property is always similar in some respects and dissimilar in 

 many others. And the larger the area covered, the more subsurface geology 

 needed. 



Most disputes about market value end in a compromise, somewhere between 

 the optimists and the pessimists. But, in those cases which proceed to final legal 

 adjudication, victory usually comes to the appraiser who works the hardest and 

 knows the subject best — there is so much subsurface geology to know, and so 

 much evidence on both sides, that either side can win. 



ENGINEERING In contrast to fair market value, an engineer- 



VALUATIONS ing valuation is an analytical study of every 



known fact about a property to arrive at a 

 theoretical value (as of now or any other time). Such valuation assumes (1) 

 that the property will produce a certain amount of money — the computed reserve 

 at some assumed price, (2) that it will cost a certain amount of money to develop 

 and operate the property (except in the case of a royalty) , (3) that the difference 

 between gross income and expenses is the future profit — which when discounted 

 at some assumed rate of interest gives a present value of the property. 



Such engineering valuations are usually the basis of mergers and unitiza- 

 tions; they are required by banks and insurance companies in the making of 

 loans; and they form a trading background for most sales of properties. All 

 major companies make and constantly revise such valuations on their own 

 properties as a kind of perpetual inventory. The largest oil companies keep up 



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