- 34 -
reserves were particularly unreasonable since the sublease
restricted Stonehurst’s mineral rights to oil produced from
Bartlesville Sand.
Furthermore, the Coburn report assumed that waterflooding
would be necessary to obtain 518,400 barrels of oil over 15
years. Bowers testified that waterflooding would require
substantial additional capital to support additional drilling and
would result in increased operating costs. See also Yates
Petroleum Corp. v. Commissioner, T.C. Memo. 1992-146 (discussing
economic feasibility of secondary and tertiary oil recovery
programs); In re Dept. of Energy Stripper Well Exemption
Litigation, 520 F. Supp. 1232, 1244-1247 (D. Kan. 1981), revd.
and remanded on other grounds 690 F.2d 1375 (Temp. Emer. Ct. App.
1982) (expert testimony describes waterflood process and expense
involved). Neither the Coburn report nor the economic
projections in the Memorandum took such costs into account.
The Memorandum’s third critically flawed assumption was that
1980 oil prices of $32.50 per barrel would increase at 10-percent
per year, compounded annually, peaking at $123.44 per barrel in
1994. Even though Stonehurst was marketed in December 1979, at a
time when world oil markets had been destabilized by war in the
Middle East, the Iranian revolution, and the resulting embargo,
Krause v. Commissioner, 99 T.C. at 134, the Memorandum contained
no support for the 10-percent price escalation. Indeed, the
price of domestic oil never exceeded $40 in the 1980-81
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