Fair Market Value Analysis

The method and manner for determining Fair Market Value for any energy mineral (also referred to as hydrocarbons), whether it is coal, oil or natural gas, can be imprecise. The two most important factors, which must be in agreement, are a willing seller and a willing buyer. In this respect, the determination of Fair Market Value is virtually identical to the Real Estate Industry.

The next factor, which is vital to the Fair Market Value, is the quantity of recoverable hydrocarbon present in the subsurface. In other words, how much of the coal, oil and/or gas can be extracted and sold in the market place. To determine this requires knowledge of the geology and the extraction methods employed for each product. In some cases, such as coal, it is possible to mine nearly 100% of the product and sell it to market. In other cases, such as oil, the physical properties of the rock and the oil may permit the production of less that 15% of the original oil in place. The recovery of natural gas can range from as low as 10% to as high as 80% of the calculated volume in place. The estimate of this recovery percentage is an aspect in which Gleason Engineering specializes.

Once it is known how much of the hydrocarbon can be recovered, it is necessary to determine the best extraction process to be employed. Selecting the optimum extraction process will then permit the appraiser to estimate the capital and operating expenditures required to bring the hydrocarbons to market. The extraction process will also determine, to some extent, the rate at which the coal, oil and/or gas can be removed from the subsurface and sold at market.

With the method and rate of production established, one must decide what the market place will set as a product price for the commodity, which has been produced. For the most part energy minerals are treated as commodities and the prices per unit volume are traded on the commodity exchanges on a daily basis. The prices received at the mine or well site are related to the daily trading prices and are usually referred to as the basis (the transport costs to the market place). Prices typically vary according to the quantity, quality and location of the hydrocarbon, which has been produced. These are referred to as market conditions.

All of the above factors are combined to produce a report, which is referred to as a 'Reserve and Economic Evaluation'. This report generally forms the basis for starting discussions between the seller and buyer, who may eventually agree on a Fair Market Value of the asset.

Ultimately, the final determination of Fair Market Value comes down to the seller and buyer arriving at a mutually agreeable price. Typically, the parameters, which will be analyzed to establish the price range for negotiation, will include the value per unit volume produced, the value based on a multiple of future cashflow, the present worth of all future cashflow at some agreed to discount rate, the capital development cost per unit volume of recoverable hydrocarbon, and the nature of the hydrocarbon reserves (that is whether or not the hydrocarbons are developed and generating cashflow).

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