Full opinion text
OPINION AND ORDER FOR JUDGMENT HANSON, Senior District Judge. I. This litigation is the aftermath of a Middle East oil venture gone sour. The principal questions in the case are whether the original defendant and counterclaim plaintiff, Roy J. Carver, was induced to join the venture through fraudulent or negligent misrepresentations of certain agents of the counterclaim defendants, Sedeo International, S.A., Sedeo, Inc., and Sedeo Energy Corporation (formerly TerraMar Consultants, Inc.); and, if so, how far the counterclaim defendants are liable for the expenses Carver incurred. In brief outline, the facts are as follows. Carver was a citizen of Iowa whose Muscatine-based businesses, first in pumps (through Carver Pump Co.) and later in the recapping of tires (through Bandag, Inc.), made him a large personal fortune. Sedeo, Inc., a Texas corporation with headquarters in Dallas, is a petroleum drilling contractor which through various of its divisions and subsidiaries also provides other services to the petroleum industry, including consulting services. Carver’s (ostensible) partner in the venture here at issue was R. Eugene Holley, former lawyer, Georgia state senator, speculator in real estate and Texas oil wells, and paper multi-millionaire since come to grief. In October 1975 Holley and Carver formed the Holcar Oil Co., for the immediate purpose of reentering and exploiting three abandoned oil wells located in the waters of the Persian Gulf about 60 miles off the eastern shores of the state of Qatar. Carver had been led to believe by Amos Carter, a Sedeo, Inc. vice president for mideast drilling operations, and by Robert Smith, president of TerraMar Consultants, Inc. (then operated as a division of Sedeo, Inc.) that the wells could be reentered and production of saleable oil begun in less than three months for a total front-end investment of between $2 million and $2.5 million, with subsequent quick return of the investment and eventual enormous profits. Holcar contracted with the government of Qatar for (among other things) the right to reenter and produce the wells, and with Sedeo International, S.A., a wholly-owned subsidiary of Sedeo, Inc., for the services of an offshore drilling rig and its crew, to be used to reenter the wells and ready them for production. TerraMar, through Robert Smith and others, was to provide a wide range of services in aid of the venture. Carver and Holly both personally guaranteed payment of Holcar’s debts to Sedeo International, although Holley and Carver had agreed that the front-end investment would be made in whole by Car- • ver, through the device of loans made by him to Holcar. Work on the project began in Qatar in late January 1976. Things did not go as had been expected, for two main reasons. First, it was soon revealed that the effluent of the wells included large quantities of hydrogen sulfide (H2S), a gas that even in relatively small quantities has deleterious effects on equipment and on humans — on the latter to the point of quick fatality. To speak of nothing else, the presence of the H2S rendered any oil the wells might produce unsaleable absent prior elaborate and expensive separation of the gas from the oil: Carver was advised by experts in such matters that installation of the required production facilities would take at least nine months and cost from $13 to $14 million in addition to the expense connected with reentering and reworking the wells. Second, the reentry and workover of the wells did not itself proceed quickly or smoothly. Instead of taking less than three months, it took six, at an average daily cost of between $40,000 and $45,000. Even at that, work on one of the wells — the best producer of the three — was not completed, and that well may indeed have been ruined during its workover. By mid-August 1976, when Sedeo reclaimed its rig and crew for rental to another customer, Holcar (hence Carver) had spent between $7 and $8 million on reentries and workovers alone. For this there was to show no saleable oil, and not even the prospect of saleable oil for many more months and millions to come. An additional $5 to $7 million (the exact figure is in dispute) was eventually expended on other aspects of the venture, including attempts to assemble production equipment capable of rendering saleable any oil the wells might eventually produce. Carver was arguably on notice of the severity of the H2S problem as early as February 25, 1976, when relatively little had been spent: that is, an attempt was made to make him aware that the large amounts of H2S in the wells could very well prevent the generation of any income unless and until he invested some $13 to $14 million in completely unforeseen front-end expenses and waited at least nine more months, no matter how quickly the reentry and workover program should go. This raises the question whether, even assuming fraud or negligence in the inducement, Carver should be permitted to recover amounts expended after he knew the cost and time projections on the basis of which he had joined the venture were radically too low. Resolution of this question turns on the quality of the notice actually had on February 25 and afterwards, and on whether Carver acted, as he became increasingly aware of the huge additional front-end costs, in reasonable efforts to mitigate damages already incurred. In fact, he continued to act into the first months of 1977 in reliance on the advice of Amos Carter, who consistently assured him his further investments of time and money need not be nearly as great as others said, and of Robert Smith, who (along with Carter) assured him that even the largest further front-end expenditures being discussed would still be paid back, and with good profits besides, eventually. Whether or not this was good or even honest advice, which has been a subject of dispute between the parties, it is in any case clear that Carver acted on it as and while he did, both in continuing to fund the workover program and in investing in production equipment, in good faith efforts to salvage as much as possible of investments already made. Carver’s ability to generate cash to invest was not however unlimited; nor was his faith in Amos Carter and Robert Smith. By early 1977 he found himself unable to borrow the large sums still required on terms acceptable to him. Holley was on the verge of bankruptcy and unable to contribute anything. It was becoming increasingly clear that installation of production facilities would indeed cost many months and about $15 million, despite what Amos Carter had been saying. Finally, Carver was given reason to doubt that the wells were capable of producing sufficient oil to pay back his investment, let alone generate a reasonable profit. Beginning in early 1977, Holcar’s efforts to develop the wells by itself ceased, and both Carver and Holley began looking for a partner for Holcar willing to invest the further sums needed to bring the venture to fruition. Such a partner was eventually found in the person of the Attock Oil Company, a Pakistani corporation, with which final agreement was reached in November 1977. By then, however, the government of Qatar had become disenchanted with Holcar, for reasons that require to be explored in further detail. The government refused to permit Attock to join the venture as Holcar’s partner, and in early 1978 ended, matters by cancelling its agreement with Holcar. Holcar never made a cent. This suit was commenced in this district on December 14, 1977, by Sedeo International, against Holcar and Carver, to recover amounts still owing for the services of Sedco's drilling rig, whose payment Carver had personally guaranteed. Holcar was quickly dismissed from the action; subject matter jurisdiction of this Court over the action against Carver (now his executors) is proper under 28 U.S.C. § 1332. By way of answer to the claim against him, Carver set up defenses of improper and incomplete workmanship by Sedeo International, and fraud in the inducement of the personal guaranty sued upon. By way of counterclaim against Sedeo International, and additionally against Sedeo, Inc., TerraMar, Amos Carter, and Robert Smith, Carver alleged fraud, conspiracy to defraud, and negligent misrepresentations; subject matter jurisdiction of the counterclaim is again proper under 28 U.S.C. § 1332. Sedeo, Inc., TerraMar, Amos Carter, and Robert Smith all moved to dismiss the claims against them, arguing that this Court lacked personal jurisdiction over them. Following a hearing on the motion to dismiss, the Court (per Judge Stuart) dismissed Amos Carter and Robert Smith from the action, but found sufficient basis for the exercise of personal jurisdiction over Sedeo, Inc. and TerraMar. In their joint answer to the counterclaim, Sedeo International, Sedeo, Inc., and TerraMar raised by way of denial and affirmative defense a variety of issues that shall be addressed herein. Trial of the case was to the Court, beginning on September 2, 1980 and ending on October 9, 1980. The issues were subsequently fully briefed and orally argued, and proposed findings of fact and conclusions of law submitted by the parties. This opinion, which shall constitute the findings and conclusions required by Rule 52, F.R.Civ.P., is based on the entire record in the case, including the pleadings, the testimony and exhibits offered and received at trial, and the arguments of the parties. II. A. Sedeo, Inc., began in the 1930s as the Southeastern Drilling Company, a “one rig land operation in northern Mississippi;” since then it has grown, by its own account, to be “one of the petroleum industry’s largest and most respected drilling contractors,” Ex. 441, owning and operating world-wide more than 30 on- and offshore drilling rigs costing as much as $80 million apiece. Sedco’s drilling business is conducted in large part through a number of partly- and wholly-owned subsidiaries, among them the wholly-owned Sedeo International, S.A., the Panamanian corporation through which Sedeo evidently conducts its drilling operations in the Middle East. From at least late 1970 until September 23,1975, the president of Sedeo International was Amos Carter, who worked out of the company’s offices in Tehran. Carter began working for Southeastern Drilling Company in 1951 as an oil-field roughneck; he went to the Middle East in c. 1957 as an employee of Sedeo International and worked his way up to the top position in that company. During his years there he gained a great familiarity with both on- and offshore drilling and oil exploration in the Middle East. Among other things, he personally managed drilling operations in various countries; he made necessary arrangements with the governments of countries in which drilling operations were carried out; he was involved in the resolution of labor disputes; he solicited business for Sedco’s rigs; and he negotiated drilling contracts with oil companies in need of Sedco’s services. Over the years he became well-acquainted in government and other circles throughout that part of the world. In the fall of 1975, wishing to return to live in the United States, he left his job with Sedeo International (though continuing as a director) and became a vice president of Sedeo, Inc. for Middle East operations, a position he held at the time of trial. His replacement as president of Sedeo International was Carl Thorne, who had gone to Tehran in 1970 or 1971 as vice president of that company, after having begun as a lawyer in 1968 in Sedeo, Inc.’s headquarters in Dallas. Besides contract drilling, Sedeo, Inc. has branched out into pipeline construction, the manufacture of drilling-related equipment, petroleum consulting, and the provision of engineering services to the petroleum industry. Engineering services are provided through Earl and Wright Consulting Engineers, a wholly-owned subsidiary of Sedeo, Inc., of which more will be heard later. Petroleum consulting was provided through TerraMar Consultants, Inc., organized in July 1970 under the laws of Texas, with headquarters in Dallas. The first officers of TerraMar were Phil Porter, president; Robert Smith, senior vice president; E. R. Schroeder, vice president; and Carl Thorne, secretary and treasurer. In late 1973 Robert Smith became president of the company, a position he retained until August 1977, when he took other employment. TerraMar was operated as a division of Sedeo, Inc. until late in 1975, when 1000 shares of stock were issued to Sedeo; even after that, as late as June 1977, the TerraMar letterhead still indicated that it was “A Division of SEDCO.” At all material times Sedeo, Inc. represented TerraMar and its personnel as possessing a depth of technical knowledge acquired in productive consulting work in all parts of the world, in such areas as reservoir analysis, reserve estimates, reservoir stimulations, production studies, geological analysis, valuation of permits and concessions, prospect valuation, geological interpretation of geophysical data, exploration program planning, management studies, exploration organization, feasibility studies, investment planning, and concession and joint operation contracts. Sedeo specifically represented Robert Smith as having been a consultant for many years in the petroleum industry in many areas of the world including the Persian Gulf, and as having furnished solutions to a variety of technical problems to private oil companies, governments, and government agencies. TerraMar did not prove to be as profitable as Sedeo had hoped. As of July 31, 1975, it had accumulated a deficit of $313,-345. Regular discussions concerning Terra-Mar’s losses were had with B. Gill Clements, president of Sedeo, Inc., and John Rhea, senior vice president. Robert Smith was told he and TerraMar had to generate more work; that “you have got to start making money.” Smith reasonably concluded that TerraMar would not be permitted to operate indefinitely at a loss and that he would probably have to find other employment if the losses continued. Smith depo. at 348-350. In fact, TerraMar did make money for about one year — 1976—the year it was actively engaged with the Holcar Oil Company project in Qatar; during that year between 40% and 50% of its income was derived from Holcar. When that work ceased, TerraMar again began showing a loss. Robert Smith left TerraMar on August 8, 1977; and the name of the company itself has since been changed to Sedeo Energy Corporation, under which name it is a party to this lawsuit. As has already been indicated, there has been some question in the case as to whether Sedeo, Inc. and TerraMar (which shall be so-called herein) are subject to the in personam jurisdiction of this Court. Judge Stuart’s January 7, 1980 ruling on this question turned on the internal treatment accorded Sedeo International and TerraMar by their parent Sedeo, Inc. This treatment was found to be such as to make it fair and just, particularly under the circumstances of this case, to disregard the separate corporate identities and to subject Sedeo, Inc. and TerraMar to the jurisdiction of the Court based on the Court’s unquestioned jurisdiction over Sedeo International. Apparently without wishing to concede the correctness of Judge Stuart’s ruling, counsel for Sedeo, Inc., Sedeo International, and TerraMar made the following stipulation on the first day of trial: [I]t is not the intention of Sedeo, Inc., to try to avoid any legal responsibility for any judgment that might be rendered on the counterclaim in this case by shifting assets or avoiding payment through the fact that they have the corporate structure that they do. So for the purposes of this litigation, we hereby agree and stipulate that in the event some judgment were to be rendered on the counterclaim in favor of Carver, that that judgment could be jointly and severally against the three corporate entities that are parties to this lawsuit; that is, Sedeo, Inc., Sedeo International, S.A., and Sedeo Energy, formerly TerraMar [Consultants], I would like to make it clear that in making this stipulation, it’s done for the purposes of simplifying the issues in this trial and without any admission that the tax planning and the substantive corporate identities of those entities is anything other than as represented. We believe that it’s not necessary to address any of those issues, and certainly [] the stipulation is without prejudice to those matters .... [T. 34-35]. Under questioning the next day as to whether by this stipulation Sedeo, Inc., Sedeo International, and TerraMar agreed to be treated as one and the same for all purposes of this suit, counsel for the three at first indicated that such was the purport of the stipulation, saying its purpose was to “facilitate ease of reference,” to “simplify things by collectively calling them Sedeo, and making no distinction,” and to “eliminate any necessity to even address or adjudicate” the question whether “the corporate entities truly or factually should be disregarded,” that point remaining unconceded. T. 148-150. Counsel later appeared to retreat from this construction of the stipulation, however, in the following exchange at least: THE COURT: Well, I understand you are indicating and contending that they are separate and distinct corporate entities. MR. McELHANEY: Yes, sir. THE COURT: I understand that .... And I further understand that for the purposes of the trial of this lawsuit, in all aspects they can be considered one. MR. McELHANEY: That is not part of the stipulation. THE COURT: All right. All right. Now, let’s just assume we have a jurisdictional problem, then what? MR. McELHANEY: We do in fact, and that would be one of the points of error in the event that there was a— THE COURT: All right. All right. I just want to be sure. MR. McELHANEY: I say this, though, that we still don’t retreat and fully intend to honor our stipulation and commitment to the Court about the fiscal responsibility. [T. 150-51]. The question then remains as to how far and for what purposes Sedeo, Inc., Sedeo International, and TerraMar did agree to be treated as one. In immediate practical terms the question comes to this: whether the issue of liability on the counterclaim is to be adjudicated separately and severally as to each of the three (absent some finding by the Court that the corporate identities should be disregarded for this purpose), they having agreed to stand together only in respect of any judgment that might otherwise be entered against fewer than all of them; or whether the issue of liability on the counterclaim is to be adjudicated as if the three were one, no close track being kept or further question raised of which agent or employee was acting for what corporate entity on what occasion, or whether their corporate structure should otherwise be disregarded. The question being put in these terms, the Court finds the answer clear: the three corporations agreed not only to stand together in respect of any judgment that might be entered against any of them, but to stand together as well, no distinction being made between them, for purposes of adjudicating the question of liability on the counterclaim. They will be treated accordingly herein, and will sometimes be referred to collectively as “Sedeo.” This construction of the stipulation is the only one consistent with the various expressed purposes for which it was made; and it is the only one consistent with the way the case was actually tried by counsel for Sedeo, Inc., Sedeo International, and TerraMar, and with the way the briefs and proposed findings and conclusions were written. What bearing the stipulation as so construed may have on the jurisdictional question may be left for the Court of Appeals to consider should the need arise. B. The Emirate of Qatar is an independent Arab state located on the eastern side of the Arabian Peninsula, just north of where the peninsula turns sharply eastward before dipping down again to the southeast and then around to the southwest toward the Gulf of Aden. The land portion of Qatar itself forms a small peninsula jutting northward into the Persian Gulf. Qatar was part of what was left of the Ottoman Empire until as late as 1916, when it passed under the protection of Great Britain under treaty terms similar to those then prevailing between Britain and the neighboring Trucial States, now the United Arab Emirates. Qatar is now ruled by the al-Thani family, the present ruler being Khalifa Bin Hamad al-Thani. One of the ruler’s sons is Minister of Finance and Petroleum. The capital of Qatar is Doha, situated on the eastern coast. Qatar has land boundaries with Saudi Arabia and the Emirate of Abu Dhabi (across its neck); since disposition was made of the waters of the Persian Gulf following World War II, it has also shared boundaries in the Gulf with Saudi Arabia on the west; the island nation of Bahrain to the northwest; Iran to the northeast and east; and Abu Dhabi to the southeast and south. These boundaries are indicated on the map included herein as Fig. 1. Oil in significant quantities was first discovered in Qatar in the early 1940s, in an onshore region along the southwestern coast called Dukhan. Offshore exploration began in 1953, when an affiliate of Shell Oil Company was granted the concession of the whole of Qatar’s territorial waters three miles or more offshore, with rights for a limited time to explore for oil and develop any fields found, the profits obviously to be shared with Qatar. Shell made extensive seismic surveys, mapping the contours of the rock formations deep under the seabed in search of the sorts of structural anomalies where oil might have accumulated. Subsequent drilling disclosed a large oil field at a place called Idd El Shargi in 1960; another at Maydan Mahzam in 1963; and a third at Bul Hanine in 1970. See Fig. 1. Meanwhile a consortium known as Abu Dhabi Marine Areas (ADMA) had discovered a field along the water border between Abu Dhabi and Qatar, called El Bunduq (put on production in 1972). All these oil fields produce from limestone formations laid down in the middle and upper Jurassic periods of the Mesozoic era, some 160 million years ago. Two groups of strata in particular have been found to be oil-bearing: the Qatar and the Areaj; the former produce from zones more particularly known as the Arab I to Arab IV. See Fig.-2. These are the same zones from which oil is being produced at Dukhan and in Saudi Arabia. Deeper down, a group of strata known as the Khuff (dating from the Permian period) has been found to contain large deposits of natural gas, demand for which has increased in recent years. Examination of Fig. 2 will disclose that the Qatar formations just mentioned — i. e., the four Arab zones — are overlaid by deposits of anhydrite; beds of anhydrite also separate the four Arab zones from each other. Ex. 78. Anhydrite is the mineral anhydrous calcium sulfate; its significance here is that its presence in the vicinity of the oil-bearing Arab formations may well account for their contamination by hydrogen sulfide, the “particularly vicious” gas that figures importantly in this case. The obnoxious qualities of H2S may be briefly summarized as follows. It reacts in damaging and sometimes dangerous ways with iron and steel equipment that has not been specially treated beforehand. It can react with water to form sulfuric acid, whose highly corrosive nature is familiar to every student of chemistry. Humans can tolerate extended exposure to it only in low concentrations, viz., in the range of 10 to 50 parts per million (ppm) by volume (.001% to .005%); levels in the range of 1000 ppm of H2S in the air (.1%) produce immediate unconsciousness and death. It is heavier than air, so that upon release to the atmosphere it tends to flow to the lowest point, or “ground” level; thus its presence on an offshore drilling rig, for example, cannot be escaped simply by taking to the lifeboats. When burned in air it produces sulfur dioxide which, though not considered toxic, can damage plant and animal life if present in high enough concentrations. Obviously the presence of H2S in the gasses and crude oil coming out of an oil well requires elaborate safety and other precautions; and in any case the H2S concentrations in the oil itself must be reduced to several hundred ppm at most before the oil is saleable. The record establishes that H2S — known as “sour” gas — is present in most if not all of the fields being produced on the Arab side of the Persian Gulf, and that this fact is well known to those working in the petroleum industry in the area. The amount “varies from well to well and from field to field, and in fact, from different zones penetrated by the same well.” T. 3420 (Elson). In the El Bunduq field, near neighbdr of the scene of events here at issue, the H2S concentrations in the gasses produced by the wells are as high as 350,000 ppm (35%); in the Idd El Shargi field to the north they are around 40,000 ppm (4%). c. Under the terms of its agreement with the government of Qatar, Shell was required to relinquish from time to time undeveloped portions of its original offshore concession area. This was done in stages whose end result was the division of Qatar’s territorial waters indicated on Fig. 1. In 1969 a Japanese consortium of power companies operating under the name of Qatar Oil Company (QOC) was granted for 35 years the concession of the (roughly) southwestern third of the whole original territory, an area comprising some 2.5 million acres. QOC agreed, among other things, to spend at least $24 million on exploration for petroleum during the first eight years; to pay certain bonuses to the government upon the happening of stated events (e. g., $2 million on signature of the concession agreement; $2 million on discovery of oil in “commercial quantities”); to relinquish fixed percentages of the concession area at stated times; and to pay certain taxes and royalties on profits. See Ex. 742, Ahmed report at 2. QOC spent about eight months, from August 1969 to April 1970, making and analyzing further seismic surveys of its concession area. Seven possibly interesting subsurface anomalies were identified, dubbed “A structure” to “G structure.” Three of these — A, D, and E — in the far eastern part of the area, were found to be located on the same general structural uplift as Bul Hanine to the northeast and El Bunduq very close by, where oil in commercial quantities had already been found. “A” was the largest structure — it actually appeared to be two-domed — and the closest to El Bunduq; the decision was made to drill there first. QOC contracted with Sedeo for the services for two years of the Sedeo drilling rig “Gusto,” also called “Rig 75;” Amos Carter and Carl Thorne negotiated the drilling contract for Sedeo. QOC began drilling its first well on January 18,1971; its last was completed on January 9, 1973. Altogether, eight wells were drilled, five on the A structure and three elsewhere in the concession area. Three wells, all on the A structure, tested significant amounts of oil; none other did. After having spent about $35 million on the project, QOC decided to go no farther, at least on its own. During 1973 and early 1974 some consideration was given to farming the concession out to another oil company; in this connection Koch Industries, Inc., of Wichita, Kansas, which was already in the petroleum business elsewhere in Qatar, gave strong consideration to taking over. Koch however concluded the undertaking was too risky to justify the large investment required and broke off negotiations with QOC and the government. On March 10,1974, QOC relinquished its entire concession. It will be useful for future reference to explore in some detail the reasons why QOC and Koch decided not to proceed with further exploration and development of the concession area. These reasons are expressed in a report prepared by QOC in 1973 (Ex. 113) and a report dated January 24, 1974 prepared for Koch by Alexander Erickson (Ex. 115), who also testified (via deposition) at trial. 1. There appeared to be little hope of finding significant amounts of oil anywhere in the area except in the A structure. 2. The A structure and the manner of oil accumulation in it proved more complex than had been expected or hoped. Instead of two local culminations, or likely reservoirs, QOC found four. Oil was found in both the Arab III and Arab IV zones of two of the culminations into which wells were drilled. But even the local behavior of these culminations proved unpredictable. In the north dome, one well (Al) produced only from the Arab IV zone, while another (A4) produced only from the Arab III. In the southwest dome, well A2 produced from both the Arab III and Arab IV. The porosity of the rock — through which oil must migrate toward wells during production— changed erratically especially in the Arab IV zone, leading Erickson to conclude that “the predictability of probable porosity trends [in Arab IV] is essentially zero.” Moreover, bottom water was found in the Arab IV reservoirs, giving rise to the clear danger of “water coning” during production, that is, pulling up water through a well into which oil is not migrating fast enough. 3. QOC concluded that “more wells would be required to be drilled to confirm the magnitude of total original oil in place in Anomaly-A,” and that in any case “the real extention of oil pool was limited and small.” 4. QOC was uniformly disappointed by the “pay” and “porous zone” thicknesses disclosed by the producing wells — that is, by the vertical and lateral extensions of rock from which each well could be expected to produce oil. Low pay and porous zone thicknesses, plus bottom water, tend to mean that many wells are needed to produce reasonably high percentages of the oil in place; they also tend to mean either low producing rates for each well, or short-lived wells, or both. 5. Volumetric analysis of the oil-bearing strata in the north and southwest domes led Koch to estimate the total recoverable reserves at a “probable” 15 million barrels of oil and a “possible” additional 7 million barrels. Such volumes are considered relatively small by Middle East standards. Furthermore, about % of the “probable” reserves were assigned to the Arab IV zone and “are considered high risk because of bottom water and erratic pay development;” Erickson’s report stated that “the actual value of these calculated reserves should be reduced by a comparatively high risk factor.” Erickson testified that he was unable to assign any “proved” reserves to the A structure based on the data available to him, which included most of the QOC data and the QOC report on the results of its exploration. T. 2147. There are evidently no fixed definitions in the petroleum industry of the terms “proved,” “probable,” and “possible” as applied to “reserves,” but the following definition of “proved reserves” will serve to convey what is meant by this term: “Proved reserves are the reserves that are proved to be present beyond a reasonable doubt, which can be produced under current economic conditions." This definition was characterized by Robert Smith of TerraMar as “a good definition.” T. 3612. 6. Wells Al, A2, and A4 produced at the following rates (barrels of oil per day (BOPD)) during flow tests performed by QOC: Well Arab III Arab IV Al 0 154 [ AX XXXX XXXX ] A4 1838 0 Al’s rate was low because the well was tested without prior “acidization;” QOC estimated it would have tested at about 2000 BOPD from the Arab IV zone had this been done. Acidization is done by pumping hydrochloric acid down through the well and out into the surrounding rock; the acid cleans and enlarges the pores of the rock, increasing its permeability. 7. Erickson estimated that “four producing wells [the three already drilled plus one yet to be drilled] should be more than adequate to support a[n initial] producing rate of 10,000 BOPD.” The producing rates of wells of course decline over time; how much and how quickly depends on the size and character of the reservoirs they drain and how fast they are made to produce. In making his economic calculations Erickson assumed the estimated initial producing rate of 10,000 BOPD from four wells would begin to decline after one, two, or three years, depending on the volume of recoverable reserves in the reservoirs. The one-year period assumed 10 million barrels recoverable; the two-year period assumed 15 million barrels; the three-year period assumed 20 million. 8. Analyses done for QOC of the effluents of the three wells showed that the concentrations of H2S in the produced gasses ranged between 4% and 7% from the Arab III zones and between 27% and 35% from the Arab IV. One sample from the Arab IV zone penetrated by well A2 showed 60.41% H2S in the produced gasses. 9. Wells Al and A2 had been capped at the ocean floor when the drilling rig had moved on; A4 had been left with pipe sticking up out of the water. If the wells were to be put on production, it was necessary to do something more with them; it was also necessary to provide somehow for pre-sale processing and storage of the oil they would produce. QOC considered two production possibilities: transmission of the oil (presumably through pipelines) to El Bunduq or Idd El Shargi for processing and sale; and installation of independent production facilities at the A structure. Why the first idea was rejected is not clear. As to the second, QOC said the following: With all the existing data obtained, the Company estimated the amount of oil reserves in Anomaly-A. But the amount turned out to be too small to be developed economically with the independent development system. At the time this statement was made, sometime in 1973, the price of oil was around $2-$3 per barrel. The statement and the economic study on which it was presumably based confirmed the opinion expressed on March 28, 1972 by Don Canada of TerraMar Consultants, Inc., who had done a study for QOC (before well A4 was drilled) “to provide better definition of the petroleum prospects of the QOC concession by analyzing and combining the seismic and well data.” According to the Canada report: It is doubtful if the “A-l” or “A-2” structures can be economically produced due to the thin oil columns and small productive areas. The thin oil column would probably result in production problems due to water coning and also necessitate many development wells. A thorough economic study should be made to determine the feasibility of producing the “A-l” and “A-2” structures. [Ex. 78, p. 00105]. 10. In doing his economic study of the feasibility of producing the A structure, Erickson estimated that the total front-end investment required to put the structure on commercial production (using an independent production system) would be around $20 million. This figure included the cost of drilling two new wells ($3.5 million); farm-in and “commercial discovery” bonuses to the government ($1 million and $2 million, respectively) (it was assumed the first new well would qualify the project as a commercial discovery — i. e., raise the production capacity of the field to some minimum); and further development costs of around $13.4 million. The further development costs were for such things as construction of a production platform (presumably over one of the wells) and production equipment capable of processing the effluent of the wells prior to sale of the oil ($2.2 million); construction of tripods or “jackets” around three otherwise unprotected producing wells ($1.5 million); floating facilities (tanker or barge) for storage and sale of processed oil, and the means of anchoring the same ($5.5 million); flow lines from three wells to the production facilities and from there to floating storage ($1 million); and mobilization of the whole venture ($2 million). Erickson estimated it would have taken from one to two years to begin production, essentially all the above costs being incurred before any oil was ready for sale. T. 2154-55. Erickson’s projections were made without regard to the costs of drilling into and testing the deep Khuff strata for natural gas, an operation required by the Qatar government. Erickson estimated that “The required Khuff test could conceivably increase [the] cost another $1-2 million.” There are several things to be noted particularly about Erickson’s projected front-end “development” costs of $13.4 million. First, they were based on “a fairly detailed, in-depth study prepared by one of our former engineers who was attached to [Koch’s] International Division.” T. 2150. Second, they remain roughly the same whether or not any new well is drilled and put on production: the only savings effected by producing only from Al, A2, and A4 are in the number of protective jackets and the lengths of flow line needed — surely representing less than $1 million. Third, Erickson made his development cost projections without regard to the special problems presented by the high H2S contents of the wells, of which he was aware. Even without the H2S, various other gasses had to be separated from the oil prior to sale; and in Erickson’s view, and that of other experts who testified at trial, a production platform and production equipment, along with floating storage facilities and the rest, were needed in any case if the oil was to be processed and sold from the A structure, H2S only serving to raise the cost of some of these items. Fourth, even if it might have been possible, absent H2S, to cut costs somewhat by installing the production facilities on the storage tanker instead of building a separate (unmanned) platform to hold them, the presence of such large quantities of H2S put this out of the question: it would simply have been too dangerous to the people necessarily on the tanker. 11. Erickson testified that “our preliminary studies indicated that it was economically feasible until we progressed along with the engineering work, when it became evident that it, from an economic standpoint, could be a very high risk project. * * [F]rom an engineering standpoint, why, the reserves were somewhat limited when you compare reserve potential with other fields in the area.” T. 2147. In his study Erickson assumed a market price for crude oil of $11.53 per barrel; the posted price in the Middle East had by then gone to $12.40. In one respect Erickson proved a poor prophet: he feared oil prices might come down. He recommended that Koch terminate its negotiations for the QOC concession area for two reasons: a. Uncertainty in crude oil pricing. Economics were based on a posted price of $12.40 (market 11.53). Future crude oil prices will probably be controlled by alternate fuel costs, shale oil tar sands and coal ($7 — 10/bbl.). b. The minimal reserve potential coupled with high risk will not justify the anticipated front end costs. D. The QOC operations generated a lot of information about the A structure and what was to be found there. This and other information related to the potential attractiveness of investing in the A structure was known or available in 1975 as follows. The history and results of the QOC’s efforts were documented in, among other things, analyses of seismic surveys; daily drilling reports; well logs; pressure buildup studies; pressure-volume-temperature (PVT) analyses; flow test results; and analyses of the composition and character of the effluents of the wells. Copies of these documents, which contained all the basic data on the QOC wells and the reservoirs they penetrated, were kept by QOC in Tokyo, and were probably available from there on some terms; in fact, QOC made the documents available to Koch for Erickson’s 1973 study. Copies were also kept by the Qatar Department of Petroleum Affairs in Doha. Once the concession area was relinquished by QOC and became available for re-letting, it was possible, by persuading the Qatar government that one was either a bona fide independent consultant attempting to interest oil companies in the area or was representing a company already interested, to get permission from the government to sit down with the files and make notes on them. T. 2482. It was well known in the petroleum industry, particularly in the Middle East, that QOC had relinquished its concession; and during 1974 and 1975 at least three independent broker/consultants gained access to the QOC files kept by the government, and using information gleaned therefrom attempted to interest a variety of oil companies in the area. No takers were found. The fact that Sedeo had drilled the wells for QOC meant Sedeo had independent access to information on them, in two forms. First, as the drilling contractor, Sedeo made out daily drilling reports, on standard forms prepared by the International Association of Drilling Contractors (IADC). These reports, the basis for a driller’s billing to the oil company for which it works, contain information on what is done each day the drilling rig is over a well. Among other things, they indicate the flow rates established during production tests and how a well is left when the drilling rig moves on. Although some question was raised about this at trial, Billy Joe Peterson, Sedco’s rig manager during part of the QOC operations, testified that the daily drilling reports should also contain information on the H2S concentrations in the effluents of the wells. T. 1311. Multiple copies of each report are made out and disposed of per the instructions of the oil company. In the case of Sedco’s work for QOC, one copy of each daily drilling report was given to QOC, one went to the government of Qatar, and one was kept by Sedeo in its office in Doha. Copies of these reports were never introduced in evidence in this case. The evidence supports the conclusion that Sedco’s copies were in Doha at all times material hereto, and the Court so finds. Second, quite apart from the daily drilling reports, there was much information about the QOC operations stored up in Sedco’s collective memory. In particular, even if the exact percentages of H2S in the wells were not recorded on the drilling reports, it is nevertheless certain that the approximate percentages at least were known to the Sedeo personnel on the rig when the wells were drilled and tested, to whom they were contractually required to be disclosed for safety reasons. T. 173 (Amos Carter). The Court has no doubt that this information was in turn communicated to Amos Carter and Carl Thorne, Sedco’s top men in the area. See Thorne depo. at 153. Billy Joe Peterson, who did not work on any of the wells here in question, learned when he came on the scene (to work on the last four wells drilled for QOC) that the H2S concentrations in wells Al, A2, and A4 were as high as 33%. T. 1312-13. Peterson will reappear later in this account. TerraMar, through Don Canada,' had of course done a study of the petroleum prospects of the QOC concession area in 1972, using seismic information and well data supplied by QOC. This report was on file in TerraMar’s office in Dallas. In addition, TerraMar represented itself as follows in an August 25, 1975 letter from Robert Smith to R. Eugene Holley: In 1972 personnel of TerraMar Consultants completed engineering studies of all the producing fields in Qatar. TerraMar Consultants has also reviewed for other clients the exploratory prospects of Qatar, both onshore and offshore. . .. [Ex. 8, p. 1], It is clear that TerraMar knew, or claimed to know, a good deal about the oil business in Qatar, and about the A structure in particular. There can be no doubt, particularly in view of the high H2S contents of the wells, that elaborate and expensive production facilities were needed if oil was to be produced for sale from the A structure itself. Despite his protestations of lack of familiarity with the “production end” of the oil business, the Court finds that Amos Carter knew this all along, and that Robert Smith of TerraMar realized it once he became aware of the H2S contents of the wells. As to the investments of time and money required to install the required production facilities, it may be said in general that these are very high in the Middle East because of the need to import so much of the materials and so many of the personnel required to do the work. This too must have been well known to Amos Carter and Robert Smith. III. A. Roy Carver was born in a small town in Illinois in 1910. He graduated from the University of Illinois in 1934 with a degree in “general engineering.” He then began working as a superintendent of construction in Davenport, Iowa, and later went to work for a company that was putting in locks and dams on the Mississippi River. In 1938 he went into business on his own, making pumps. During the first years of World War II he made some pumps for use by the British armed forces under contract with the U. S. Army Corps of Engineers; after the United States joined -the war, he was given substantially larger contracts. In 1942 he bought an old sauerkraut factory in Muscatine, Iowa, converted it into a pump factory, and was on his way. Although it has expanded considerably in the meantime, Carver Pump Co. is still headquartered in Muscatine. In 1958 Carver happened to be in Frankfort, W. Germany, visiting an acquaintance. He noticed something different about the tires on his friend’s car, inquired about it, and learned that the tires were recaps made using a new process and “We get twice the mileage of a new tire.” T. 715. He went next day to see the inventor of the recapping process, and secured the right to exploit it in the United States. The result was Bandag, Inc., engaged in the manufacture of retread rubber and tire recapping machinery. Like Carver Pump, Bandag is headquartered in Muscatine, Iowa and has manufacturing plants there. Bandag is publicly held and traded on the New York Stock Exchange; it is now a worldwide operation, doing business in some 90 countries. Carver was chief executive officer of both Carver Pump and Bandag until 1968, when he retired to become chairman of the boards of both corporations. He still held these positions at the time of trial. In addition, he was chairman of the board of Carver Tropical Products, a cattle-raising operation in Belize, Central America. After he retired from day-to-day involvement in the affairs of his companies, Carver gave himself over to a life largely of travel, the enjoyment of his wealth, and good works. Although he kept an apartment in Muscatine and maintained his legal residence there and voted there, his “haunts” were “the Cote d’Azure and Miami and the Isles of the Caribbean, places like that.” Carver’s second depo at 237-38. He served however on the board of trustees of Augustana College in Rock Island, Illinois and on the board of the University of Iowa Foundation, a “money-raising institution” for the university. Carver’s first depo. at 13-14. The University of Iowa particularly benefited from his largesse: he made large contributions both to the department of athletics and to the university hospital, whose new wing is called the Carver Pavilion. Id. at 28. In addition, just before he became involved in the oil venture here at issue, Carver had purchased about 340 acres of land in Muscatine which he planned to develop into a park and recreational facility for the city. Id. at 27. It was partly because the costs of this project grew so large (c. $20 million) that Carver decided to go into the oil business in Qatar. Carver was first interested in the Qatar project through R. Eugene Holley and Amos Carter, at a meeting on Carver’s yacht off Cannes, France, on July 25, 1975. In the process Carver was drawn into a tight little circle of friends and business associates, the details of whose relationships he did not learn until much later. Holley and Amos had met in 1973 on a flight from Iran to the United States. They had become friends; Amos had helped Holley promote one of his ventures by introducing him to various prominent Middle Eastern businessmen and government officials; and Amos and Holley were themselves in the cattle business together in Texas. Among those to whom Amos had introduced Holley were Ali and Kassem Jaidah of Doha, Qatar, with whom Amos had long been on friendly terms. Ali Jaidah was then director of Qatar’s Department of Petroleum Affairs; he and his brother Kassem operated Jaidah Motors and Trading Company in Doha, with which Sedeo did a good deal of business; and Kassem also acted as Sedco’s agent in Qatar, earning a 4% commission on all revenues taken in by Sedeo from work done in the country. Amos and Kassem were also about to go into business together on their own. During one of his discussions with Holley in the early summer of 1975, Ali Jaidah mentioned that the old QOC concession was open, evidently told him something about it, and suggested that Holley might be interested in investing in its development. Holley indicated he would like to take a look at it, and turned to Amos for advice. Amos must have encouraged him — at any rate, Holley waxed enthusiastic. Amos however warned him that he was not “heavy enough” financially to undertake the project on his own. Holley was then worth $40 to $50 million on paper, although his assets were probably overvalued and were in any case already heavily borrowed against. Holley began looking for a partner willing to finance the venture, through which he hoped to quickly improve his cash flow position; and his thoughts turned to Roy Carver. Holley and Carver had met earlier in the year, when Carver had sold Holley a $3.3 million airplane on easy terms. Believing that Carver was “a very good man to deal with,” T. 1138, and knowing that Carver needed additional funds so he could begin work on his charitable project in Muscatine, Holley decided to try to interest him in the Qatar venture. Hence the meeting in Cannes on July 25, 1975, which Holley initiated and to which he brought Amos (whom Carver had never met). The substance of the July 25 conversation was memorialized in the form of a recorded and transcribed telephone call that Holley made on August 4, 1975 to Marcella McKillip, Carver’s administrative assistant. Ex. 105. According to Holley, his remarks to McKillip reflected his thinking at the time based on what he had been told by Amos, T. 1196; and Carver testified that Amos told him “exactly” and “almost word for word” what Holley told McKillip on August 4. T. 723-24. The Court finds Ex. 105 to be a faithful reflection of the representations made by Amos on' July 25. As McKillip said at one point in the telephone conversation, “It sounds absolutely incredible;!’ and Amos certainly did make investment in the A structure sound like an attractive proposition. The crux of his message was that for an investment of roughly $2.5 million it would be possible to uncap the three producing wells drilled by QOC, run pipe down into them, produce them directly into a tanker or barge at a rate of at least 5500 BOPD for five years without any decline in production (with declining production for five to ten years after that), recoup the $2.5 million within the first six months from sale of the oil, and then net about $500,000 a month for a total recovery (in the first five years) of about $30 million on the $2.5 million investment. With minor variations, this (misinformation is what Carver believed and acted on until well into 1976, when he learned otherwise. Amos represented these figures as “conservative” and characterized the wells as “sleepers” and the deal as “one of the finest . . . you’ll find in the Middle East because of the little risk involved” (the wells already having been drilled and known to produce at certain rates). He explained that QOC had abandoned the wells because “they [were (unnecessarily)] going to run a pipe line out to these wells which were sitting 30 miles off the coast and go to a tremendous expense. Based on the value of oil [when QOC gave up] and the fact that [it’s] not a big producer at all [in] the Middle East [, t]hey determined that they would .. . surrender their lease, which they did.” He evidently said the major oil companies were not interested in the A structure because by Middle East standards “this is a marginal deal. In other words this is a little bit of production.” On the other hand Carver was warned to keep quiet about the deal until it was firmly in hand, for fear that someone else — including the Qatar government — might find out how good it was and steal it away. Carver was given good — and, the Court finds, sufficient — reason to rely on Amos in these matters. He was informed that Amos was a vice president of Sedeo, Inc., “the largest drilling firm in the world;” that Sedeo, Inc. was involved not only in drilling but also in petroleum consulting (through TerraMar); that Amos had long worked for Sedeo in the petroleum business in the Middle East; and that Amos knew a great deal about the QOC concession in particular since Sedeo (under his supervision) had drilled the QOC wells. Moreover, Holley’s opinion of Amos was high: “[L]ike I say I trust Amos Carter with every nickel I got and I’ve known him a good while and I have spent a lot of time with him and I know what he tells me is true.” Amos said nothing about H2S, nothing about the need for costly production equipment, and nothing about the fact that reentry of the wells might prove complicated and expensive in its own right. These were all matters on which he was well informed and which he knew were highly relevant to the investment decision Carver was presented with. The Court can only find that on July 25 (and thereafter) Amos deliberately misrepresented the value of the A structure by affirmatively and knowingly misrepresenting the costs in time and money required to put it on production and by failing to disclose information known to him that was inconsistent with the figures he gave out. At the very least, Amos’s assertions were made with a reckless disregard for the truth of the matters asserted. The Court specifically rejects Amos’s testimony to the effect that he was not aware on July 25 that the A structure was under particularly interested discussion, and that whatever he may have said about it was more in the nature of casual and unconsidered conversation than advice he had any reason to believe would be relied upon. According to Amos, Holley and Carver were just talking about possible Middle East oil deals in general terms, the A structure being one among many possible deals they bandied about. The Court finds, on the contrary, that Amos knew at the July 25 meeting that Carver’s- interest was already focused on the A structure, and that what he said about it was being taken as the advice of a professional in the oil business in the Middle East and being relied on as such. In any case, if Amos didn’t know these things on July 25, he surely came to know them very soon after that; and he didn’t change his tune. In fact, by the end of the July 25 meeting, Holley and Carver had reached a “gentlemen’s agreement” to actively pursue the right to develop the A structure. The arrangement between them Was roughed out: at Amos’s suggestion they would form an oil company; Holley, using his and Amos’s friendship with Ali and Kassem Jaidah, would contribute the rights to the old QOC concession and Carver would contribute the $2.5 million needed to develop it; Carver’s investment would be repaid out of the first proceeds (within six months); and “after that, he and I would then divide the V2 million a month — 50% to him, 50% to me.” Before Carver spent any money, however, Holley was to see to it that he was provided with some hard information about the project. Holley was to get this information through TerraMar: “[T]hey know something about this particular thing and I am going to have the benefit of what they do know when I go back over there;” additionally “we [will] get all the data that the country has got on the thing. They’ll give us more information to evaluate it.” Finally, Holley and Carver were to have the help of Carl Thorne, “Amos Carter’s understudy in the Middle East” who “draws Sedco’s contracts with these countries,” when it came time to draw their contract with Qatar. All told, Holley was of the opinion that with Sedco’s help “we have an awful lot going for us.” B. The basic fallacy in what Amos told Carver on July 25 was that the three producing wells QOC had drilled on the A structure could be reentered and put on production quickly, for the modest investment of around $2.5 million. Given this, the questions of how much oil could eventually be recovered from the wells, at what daily rates, and on what terms, paled into relative insignificance: any set of reasonable assumptions about these matters based on the QOC well data and likely terms with the government supported the conclusion that the investment was a good one, at worst relatively risk-free and at best extremely lucrative. Between August 1975 and January 1976 Carver was given additional reason to believe Amos’s cost and time projections, and, with one exception, no reason to doubt them. Carver’s commitment to the project — which took shape in much the manner discussed on July 25 — was based ultimately on these projections. In early August Holley commissioned Robert Smith, president of TerraMar, to write a preliminary report on the QOC concession and two other areas within the territorial waters of Qatar. It was made clear to Smith that the report would be submitted to Carver in an effort to convince him of the attractiveness of investing in the A structure; and in fact Carver saw and relied upon the report. Smith’s report came out on August 25. Ex. 8. In it Smith gave Carver good and sufficient reason to believe he knew whereof he spoke. Although he warned that “We have by no means complete files on the former Qatar Oil Company concession,” and in consequence “the conclusions reached may be subject to revision as additional data are obtained,” he went on to say that: In 1972 personnel of TerraMar Consultants completed engineering studies of all the producing fields in Qatar. TerraMar Consultants has also reviewed for other clients the exploratory prospects of Qatar, both onshore and offshore and made a thorough review of the exploratory prospects of the Qatar Oil concession for Qatar Oil Company. By virtue of this background in Qatar we feel that the conclusions reached in this study are valid and represent a reasonable basis for negotiations with the Government of Qatar. The report itself was a pastiche of information that Smith took from Don Canada’s 1972 report for QOC and that was given to him by Amos. Curiously, although Smith correctly indicated that QOC had drilled a total of 8 wells, he apparently did not realize that A4 — drilled after the Canada report was written — had tested oil. He faithfully reiterated the flow rates of Al and A2 as stated in Canada’s report, and included Canada’s evaluation that the areal extents of the oil accumulations were questionable and the presence of bottom water could prevent sustained production from the wells at the test rates. However, he estimated that a minimum of 3.3 million barrels of oil could be recovered from Al and a minimum of 8 million barrels from A2. And he drastically parted company with Canada’s conclusion (which he did not mention) that it was doubtful whether Al or A2 could be produced economically. We estimate a capital expenditure of $2,000,000 should be adequate to re-enter and complete both wells, to install flow lines, and to purchase and install a tanker to provide storage for produced oil. Oil would subsequently be loaded on tankers from the captive tanker. Smith thus confirmed Amo