Valuation and Subsurface Geology 795 



reservoir increase or decrease in porosity and permeability in that direc- 

 tion? And, when similar properties are considered, it is almost entirely 

 a study of subsurface geology — and the compared property is always simi- 

 lar 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, some- 

 where between the optimists and the pessimists. But, in those cases which 

 proceed to final legal adjudication, victory usually comes to the ap- 

 praiser 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 Valuations 



In contrast to fair market value, an engineering 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 ex- 

 penses 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 

 unitizations; 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 val- 

 uations on their own properties as a kind of perpetual inventory. The 

 largest oil companies keep up such reserve estimates on all producing 

 properties (those of all of their competitors as well as their own) to stay 

 posted on their relative reserve position, and to help their pipe-line sub- 

 sidiaries in their competition for control of the available oil. 



In spite of the fact that these valuations are in daily use by every 

 part of the oil and gas business, and although they are computed on 

 large, expensive mechanical calculators that carry the answer out to four 

 decimal places — still they are all based on assumptions and are far from 

 exact. Every engineering valuation assumes (1) some continuity of reser- 

 voir rock and porosity, (2) some amount of connate water, (3) a recovery 

 factor, (4) a future rate of production, (5) a future price for oil or gas, 

 (6) future costs, and (7) some discount factor or factors. In addition to 

 the above seven estimates, at least some of the following factors are esti- 

 mated in every valuation (usually one half of them are estimates) : (8) 

 productive acreage, (9) thickness of productive zone including gas-oil and 

 oil-water contacts, and the amount of gross section that is porous, (10) 

 percentage of porosity and how permeable, and (11) shrinkage factor. 



As mentioned above, quite reliable valuations can be made by a 



