Court Values Versus Reality: A Rebuttal to "Making Money Winning Environmental Lawsuits"
Authors: Gustavson J.B. , Silverman M.R. 
Published: December 2007

We analyze a case where "drilling in the courtroom" proved to be more profitable than exploring in the oil patch itself. Total awards came to $26,000 per acre for an undrilled tract without a barrel of discovered reserves and not proximate to production. Litigating for profit was presented in 1995 at this Symposium by Rose and Jones in a paper entitled "Making Money Winning Environmental Lawsuits". The authors valued an exploration play in Michigan, demonstrating that the 2680 untested acres were worth (1987) at least $71 million. We focus on the quantum of compensation itself, how it was calculated, and how it was reported by Rose and Jones. This study illustrates the potential hazards, as well a the possible profitability, of the judicial process. It also illustrates the elasticity of expert testimony and the opportunities which can be exploited before an indulgent court. The case is particularly useful since the entire argumentation is accessible in the public record. That fact permits a clinical review.

The "courtroom oil" was dramatically overvalued. We have tested that overvaluation in six ways: Reality checks suggest a priori that the value is implausible. The usual indicators of value were dramatically exceeded —according to Rose and Jones the lost property would have yielded a risk-adjusted ROR of 129%, much higher than typical expectations;speculative resources were valued at more than the going price for proven, producing reserves;the claimed per-acre value of the property was 100 times higher than average experience.

Six computation errors will be documented. The first overstated the probability of success by a factor of five-to-one. The others, taken together, inflated the value sixfold. Rose and Jones used improper analog for projecting possible hydrocarbon recoveries and ignored a proximate analog. This inflated the projected reserves by a factor of 3.5. Rose and Jones ignored a sale of the property itself the best indicator of market value. One could calculate the value at a maximum of some $2.84 million from plaintiff's own files. Rose and Jones omitted a proximate sale which commanded a price 170 times smaller than their claim. The article ignored lease bonuses. All real transactions show lower values — a distortion factor of 35.

Our analysis shows that the reported valuation is seriously overstated. First, the reality checks flag sharp disparities with practice. Second, the actual sales show lower figures. Third, standard appraisal methods lead to a much lower figure. Fourth, the demonstrable errors and exaggerations show how the inflated figure was in fact obtained — mathematical error and geological exaggeration account for the difference between computed value and revealed worth.

The case study illustrates the pitfalls of complex technical evidence where the court is ill-equipped to assess accuracy or error.

Introduction

We analyze here a new dimension to the oil industry, a case where "drilling in the courtroom" proved to be much more profitable than exploring in the oil patch itself. This "courtroom venture" was dramatically lucrative — total awards came to more than $71 million, a sum which is equivalent to about $26,000 per acre for a tract which was undrilled and untested, without a single barrel of discovered reserves and not proximate to established production. Here we shall address how this was possible — how Michigan courts concluded that undrilled acreage which is miles distant from proven reserves could be more valuable than prospects elsewhere or that such acreage could be more valuable than proven, producing properties in more attractive areas.

The question of litigating for profit was presented in 1995 in the JPT by Rose and Jones in an article, the original version of which was entitled "Making Money Winning Environmental Lawsuits". In both versions the authors outline how they valued an exploration play in Michigan, demonstrating that the 2680 untested acres were worth (1987) at least $71 million.

The acreage at issue is located some 25-30 miles to the southwest of the main fairway in the Niagaran reef play in northwestern Michigan. P. 79^