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replacement reserves. Additionally, respondent contends that the
acquisition of Tri-Power did not significantly add to
petitioner's reserve base because the total reserves acquired
amounted to less than the reserves of several single wells
already owned by petitioner.
We disagree with respondent's contentions. Notwithstanding
its existing supply of gas reserves at the time of the
acquisition of Tri-Power, petitioner needed to continue the
growth of its reserve base. Several witnesses testified that
reserve growth is necessary for survival in the oil and gas
business: oil and gas companies must replace diminishing
reserves; otherwise they simply produce themselves out of
business. Additionally, although the KCC infill drilling order
allowed petitioner to increase its gas reserves, it did nothing
to diversify petitioner's production mix. Petitioner still
needed oil reserves. Finally, although Tri-Power's reserves were
small in comparison to petitioner's existing reserves, the
acquisition was wholly consistent with petitioner's initial
strategy to make smaller acquisitions. Furthermore, the
acquisition of Tri-Power replaced over half of petitioner's 1986
production.
Respondent also contends that the dropdown served no real
business purpose except to enable petitioner to use Tri-Power's
NOL's. We disagree. Petitioner transferred its oil and gas
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