6. The well count discrepancy

When the Trust was formed in 2012, the list of wells conveyed to the Trust under the Conveyance Agreement was disclosed on a "Schedule D". Although the Conveyance Agreement itself was made available to Unitholders, Schedule D was not.

In September 2024, we obtained a copy of Schedule D from the Santa Barbara County Clerk-Recorder Office. We cross-referenced the list of conveyed wells on Schedule D with the list of wells whose Asset Retirement Obligations ("ARO") PCEC claimed were liabilities of the Trust. We immediately alerted BNY to the fact that the Trust appeared to be being assessed for dozens of wells that were never conveyed to it.

On 10 October 2024, BNY filed a Form 8-K acknowledging a well count discrepancy of 76 wells, but claiming that the discrepant wells were service and injection wells whose inclusion in ARO was permitted by the Conveyance Agreement. BNY further stated that "between the date of the Conveyance and December 31, 2019, PCEC drilled 83 injection wells".

Following the 10 October Form 8-K, we used state permit data to discover that, contrary to BNY's claim, only one of the 83 injection wells had been drilled after the 2012 Conveyance. We also discovered that most of the injection wells had been idle since before the Conveyance. On 19 October 2024, we provided BNY with a list of all 83 injection wells and asked BNY to file a Form 8-K/A correcting the Form 8-K of 10 October 2024.

On 12 November 2024, BNY filed a Form 8-K acknowledging their prior error but claiming that when an injection well is drilled has no bearing on whether its ARO can be assessed to the Trust:

On 28 November 2024, we responded to BNY, observing that BNY's analysis of the Conveyance Agreement was inapt. In the Form 8-K of 12 November, BNY relied on a very specific phrase: "may deduct costs accrued for future plugging and abandonment of any well or facility on the Developed Properties Subject Interests".

But in the context of "Developed Properties Gross Deductions" (the provision in the Conveyance Agreement that is relevant to the great bulk of the ARO), that phrase occurs only a single time, in subclause (n):

Being a subclause, subclause (n) is qualified by its principle clause. It appeared that BNY never evaluated that clause.

The principle clause contains two criteria ((x) and (y)) that must be met by any allowable deduction, and each criterion contains two pertinent sub-criteria, for a total of four criteria. An allowable deduction must:

Be "allocable to the Developed Properties Subject Interests" or "related property or equipment used in connection therewith"
Be allocable to "the production and marketing of Developed Properties Subject Hydrocarbons"
"Have been incurred or accrued...from and after the Effective Time"
Be "not attributable to a production month that occurs prior to the Effective Time"

A deduction that fails a single one of the four criteria is not allowable. Yet the dozens of injection wells left idle since before the 2012 Conveyance fail at least three of the four criteria.

Criterion 1: deductions must be "allocable to the Developed Properties Subject Interests"

Developed Properties Subject Interests are defined to be those interests that arise from Developed Properties Subject Wells:

Developed Properties Subject Wells are defined, in turn, as those wells that appear on Exhibit D, those wells that are drilled as replacement wells, and any surface expressions that produces Hydrocarbons:

It is plain that deductions arising from an injection well left idle since before the Conveyance is none of these things. Nor does it avail BNY that an injection well is "property or equipment used in connection therewith", since an injection well idle since before the Conveyance cannot be said to be "used" at all. Criterion 1 therefore fails. This failure alone is enough to prove that BNY allowed dozens of pre-Conveyance defunct wells to be improperly included in the ARO. Still, for completeness, we can show that these "dead soldier" wells also fail at least two of the other three criteria for allowable deductions.

Criterion 2: deductions must be allocable to "the production and marketing of Developed Properties Subject Hydrocarbons"

Developed Properties Subject Hydrocarbons are those produced "from and after the Effective Time:

An injection well defunct since before the Conveyance cannot generate deductions allocable to production that occurs after the Conveyance. Thus, Criterion 2 also fails.

Criterion 3: deductions must "have been incurred or accrued...from and after the Effective Time"

It is arguable that this criterion could be met by an injection well left idle since before the Conveyance.

Criterion 4: deductions must not be "attributable to a production month that occurs prior to the Effective Time"

An injection well defunct since before the Conveyance cannot generate deductions attributable to a production month that occurs after the Conveyance. Thus, Criterion 4 also fails.

Despite defunct injection wells plainly failing the test for allowable deductions, BNY continues to endorse such deductions in its monthly Forms 8-K. As of 2 August 2025, BNY has refused to correct their false and materially misleading Form 8-K of 12 November 2024.