My name is John B. Gustavson and I reside in Boulder,
Colorado. I am employed by Gustavson Associates, Inc. in the capacity
of President of a consultant firm with approximately 15 employees.
Of profession, I am both a geologist and a petroleum engineer and
I have through my experience become a minerals appraiser. I have been
a consultant in the area of minerals appraisal for about 10 years
preceded by another 20 years in the fields of oil and gas exploration
and production as well as with the economics associated therewith.
My professional affiliations include membership in the American Institute
of Professional Geologists, the Society of Petroleum Engineers and
the American Institute of Minerals Appraisers. My academic training
includes Master's degrees in both engineering and in geology, and
I have taught from time to time at the University of Tulsa and at
the University of Colorado. I have published numerous articles in
professional journals, both those related to the trade as well as
in peer-review publications.
My professional experience can briefly be described as having
spent the last 25 years as an independent consultant, heading up
a company that slowly has gained more and more reputation for providing
appraisal of the fair market value of oil and mineral properties.
My clients, as well as those of my firm, include both government
and industry members. I have thus served as an expert for the Department
of Energy, the U.S. Army Corps of Engineers, the Internal Revenue
Service, and various agencies of the Department of the Interior.
I have also served as an expert for the Justice Department in comparable
cases. On the industry side, I have functioned as an expert appraiser
for major oil companies such as Texaco and Chevron as well as for
numerous independent companies and financial institutions.
With regard to New Mexico, I can claim personal direct experience
in the geology, oil and gas production and the economic conditions
in southeastern New Mexico. As a totally independent appraiser,
I have no interest in any oil or mineral properties and my work
in this particular case has strictly been that of a fee paid independent
appraiser.
Finally, as evidence of my ability to provide an expert testimony
in this particular case, I can mention that I already in 1985 had
developed a Continuing Education course for the University of Tulsa,
which since then has been given numerous times to students all over
the country as well as internationally dealing with the subject
of Sppraisal of Oil and Gas Properties. This course, which is the
only one of its type in the country, has become widely recognized
as a course which keeps detailed track of the market discount factors
through hands-on experience and classroom exercises. I therefore
feel qualified to offer the following opinion:
I have been requested, as an independent minerals appraiser, to
estimate the Fair Market Value of the socalled Yates Energy Lease
in Township TS4S-R24E, Eddy County, New Mexico. The property consists
of approximately 1,600 acres of leasehold obtained from the U.S.
Bureau of Land Management. As is common practice in mineral appraisals,
I first determined the Highest and Best Use of the leasehold property.
Inasmuch as Yates, already in 1991, intended to drill gas wells
on the lease and to market the produced gas through an existing
pipeline only five miles away from the lease, and further that Yates
was financially capable of drilling these wells just like Yates
had drilled numerous other gas wells of this type before, I have
no difficulty ascertaining that the criterion for current use or
use in the very near fut7wre was satisfied.
In addition, a detailed geological audit was performed by me,
and will be described in the following. The findings of that audit
revealed that there was excellent geologic comparison between the
Yates Energy Lease and other producing gas fields in the immediate
neighborhood, and that the probability of production was so high
as to inMluence knowledgeable buyers and sellers to consider this
fact in any bargaining. Consequently, I arrived at the conclusion
that the Highest and Best Use of the Yates Energy Lease was for
the production of gas, as well as the income stream associated therewith.
Having thus determined the Highest and Best Use of the property,
I proceeded to select the approach that could reasonably provide
me an estimate of the Fair Market Value. I selected the so-called
Income Approach which provides the most reliable results when the
Highest and Best Use of a property is to produce income in the near
future with a high probability. The base for the Income Approach
is a financial forecast which consequently was prepared by me utilizing
a reserve estimate. I prepared this on the basis of the available
geologic and production data for the Yates Energy Lease, as well
as for the surrounding area.
As part of this effort, I performed a detailed geologic audit,
that is I carefully reviewed electric logs as well as various production
data and other geologic and engineering data relating to the property
and the nearby area. This work disclosed that the geologic work
already performed in 1991 by Yates Energy and its associates had
been accurately performed. Thus, sources of data had been accurately
transposed onto maps, and reasonable interpretations of the subsurface
and the gas-containing formations and structures had been made.
I then compared the interpretations which I had derived, not only
with those provided by Yates Energy, but also with those provided
by the U.S. Bureau of Land Management as part of its Draft Environmental
Impact Statement. I found that there was good correspondence in
all cases, and that this work by various parties, including this
independent Appraiser, basically confirms the same structural and
reservoir morphology of the Yates Energy Lease.
Having thus satisfied the mapping and interpretation accuracies,
the next task undertaken by this Appraiser was the risking, that
is to say the determination of the probability that the various
geologic and petroleum engineering features would indeed be encountered
upon the drilling of the Yates Energy five-well program. This was
done and is documented in the appraisal report by careful evaluation
of both the reservoir vv-hich contains the gas as well as the structure
which traps the gas in the quantities predicted.
The combination of the various probabilities for reservoir thickness,
the location of the reservoir stream channel, the existence of the
trapping fault, and the character of the structure led to a deterrnination
of the probability of the gas being trapped exactly as mapped. This
number was subsequently used in the appraisal. Utilizing the drilling
scenario as having been planned by Yates Energy in 1991, but subsequently
stopped by the U.S. Government, and further utilizing the financial
parameters associated therewith, I was able to develop a produGtion
forecast. Other parameters included gas prices, which I obtained
from El Paso Natural Gas, who will take the gas at a location 5.2
miles to the northwest of the Yates Energy Lease. From public sources
of forecasts as well as from energy banks which I monitor on a regular
basis, I established that $1.90 per MCF is a reasonable price forecast
for 1993.
Likewise, I ascertained that the petroleum industry as well as
the financial industry utilize an escalation figure of from 5 to
7 percent per year in their price forecasts. Consequently, this
Appraiser utilized a 6 percent escalation for the gas prices. Then,
I determined the operating costs, which were found to be typical,
by analyzing Yates Energy's operating costs and comparing with operating
costs of wells in the nearby area. This operating cost was escalated
at 5 percent per year in accordance with industry forecasts. Finally,
by looking at analogous wells in the surrounding fields, this Appraiser
prepared production forecasts which could be expected from the subject
property. This, together with the volumetric content of the interpreted
structure on the Yates Energy Lease, provided the necessary information
to arrive at a reserve estimate with cash flow forecast for the
property. When coupled with the drilling costs and with the cost
of laying the pipeline over the 5.2 miles to the nearby El Paso
pickup, this Appraiser was able to prepare a complete and realistic
cash flow (net revenue) forecast for the Yates Energy Lease.
The final step in the appraisal was then to utilize several industry-proven
methods of converting the future net revenue into an appraised value
at the present time. The methods used are described in detail in
the appraisal report and include a cash pay-back method which I
used in analogy with real estate appraisals; also, a discounted
cashflow method was used utilizing a discount rate as has been found
by my research to be typical in the oil industry for comparable
properties, and finally a more subjective risked present-worth method
which examines a large number of the specific characteristics of
this field, and consequently applies a market value discount factor
to the future cash flow for the effect of these.
The values achieved from each of these methods were finally reconciled,
with the most weight given to those methods in which this Appraiser
has found greatest confidence on the basis of industry experience.
Fortunately, in this case all three methods yielded results which
were very close, so the reconciliation was not a difficult task.
My reconciled appraised Fair Market Value is $20.7 million, which
I herewith offer to be the value before taking of the Yales Energy
Lease as of July 1, 1993. This value is higher than the value to
which I testified before the House Subcommittee on National Parks,
Forests and Public Lands (Chairman Bruce F. Vento) at the hearing
on HR693, primarily because of an increase in natural gas prices
during the interim period. Also, additional consideration, albeit
minor, has been given to the oil potential of the shallower Delaware
and Bone Springs formations which were penetrated in the first drilling
on the Yates lease, namely the drilling of the #1 Sidewinder well.
Mr. Yates has in prior projects made two significant discoveries
in shallower formations while testing the deeper potential, and
such occurrences are common in the oil industry.
In April of 1993 the U.S.
Bureau of Land Management proposed a number of alternatives
based on directional drilling. At the request of Yates Energy,
I have made an appraisal of the effects of one of the alternatives
as an example, namely Alternative "G," which
constitutes a partial taking of the Yates property by allowing
the drilling of only three wells (two vertical and one directional
well) from alternative locations outside the Cave Protection
Zone (see Figure 1). I have carefully appraised the Fair Market
Value of this remaining property, which thereby could be made
accessible to Yates Energy Corporation. I find that the value
of the property after the taking is $9.0 million, utilizing
exactly the same appraisal approach as above.
My conclusion is therefore
that the partial taking (Alternative "G") will result in a
diminution of the Yates Energy leasehold property of $ 11.7
million (the Before Value of $20.7 million less the After Value
of $9.0 million). The other alternatives will also introduce
a substantial reduction in value of the Yates property. Further,
none of the BLM-proposed alternatives would allow an oil company
to pursue the development of potential shallow oil-bearing
formations. In addition, a final appraisal would also need
to take into consideration the effects of presently undisclosed
terms and regulations, the promulgation of which is planned
to be totally at the discretion of the Secretary of the Interior.
Thank you, Mr. Chairman, for giving me an opportunity to present
this independent opinion on behalf of Yates Energy Corporation. |