Appendix — Mobil Oil Corp. v. FPC
Supreme Court brief1974
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TABLE OF CONTENTS
(Part IT)
TESTIMONY
App.
Witness Record Pages App. Vol. Pages
Robert G. Sarikas 886-G-886-N 3 2-9
F. W. Batten 887-898 3 9-18
H. D. Borger 900-910 3 19-30
Herbert D. Clay 912-918 3 81-35
H. E. Ford 920-923 3 36-39
J. B. Simpson 925-936 3 89-50
Joseph P. Thomas 938-954 8 51-63
Sharman H. Clark 957-1004 3 64-109
John J. McGrath 1152-1173 3 110-127
John C. Jacobs, Jr. 1411-1414 3 128-132
: 1417-1451 3 132-172
John G. Winger 1452-1475 3 173-194
C. M. Allen 1613 3 195
1625 3 196
Ezra Solomon 1632 3 197
1692, lines 15 to end 3 198
1693-1694 3 198-199
J. Rhoads Foster 1696 lines 1-8 3 200
1709, lines 7-20 3 200
1715, line 25 3 200
1716-1717 3 201-202
1718, lines 1-14 3 202
1720-17387 3 203-215
Kenneth C. Vaughan 1749-1766 3 216-231
Radford L. Schantz 14916, lines 1-12 3 232
1928, lines 10-25 3 232
1929-1941 3 233-244
1942-1951 3 244-252
1952, lines 1-20 3 252
ii TABLE OF CONTENTS—Continued
App.
Witness Record Pages App. Vol. Pages i
John M. McCollam 1964-1968 3 258-257}
1973-1997A 3 258-2838
Charles A. Larson 2008-2026 3 284-297 i
H. D. Borger 2412, lines 9-12, 20-25 8 298 ;
2413-2417 3 298-302
2418, lines 1-10 3 308
2435, lines 10-18 3 308
2486, lines 5-22 3 308
2439, lines 8-18 3 304
2444-2446 3 305-307
2447, lines 1-7 3 307
2448, lines 18-25 3 307
2449, lines 1-5 3 308
2452, lines 5-15 3 308
2455, lines 2-11 3 308
2459, lines 1-12 3 309
2504, lines 3-4, 23-25 3 309
2505, lines 1-6 3 310
Joseph P. Thomas 2636-2641 3 811-815
2642, lines 6-25 3 315
2643, lines 1-4, 6-10, 15-25 3 316
2644, lines 1-12 3 317
2684, lines 2-18 3 317
‘2685, lines 16-21 3 318
C. M. Allen 3439 3 319
Radford L. Schantz 3512-3513 3 320-321
3518-3521 3 321-825
3524 3 325
Kenneth C. Vaughan 3801, lines 12-23 3 327
3803, lines 3-25 3 327
3804, lines 1-17 3 328
3812-3813 3 329
3821 3 330
3822, lines 3-25 3 331
3828, lines 1-24 3 332
es
TABLE OF CONTENTS—Continued
Witness
Kenneth C. Vaughan
Record Pages
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0
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App.
CO CO C9 CO CO OO CO 09 CO CO C8 CO 9 CO CO 09 CO OW CO CO OO Co Co CO C9 Co 09 68 Co GO GO WO GO WO
John C. Jacobs
Record Pages
3993, lines 1-8
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TABLE OF CONTENTS—Continued
App. Vol.
LPP Ee a Hee Le Pe PF ELE ee aE EEE SD CW en WW WW &
Rae er ee Siiias were is bie,
Se Se EE ee ee
2 Bade ic
Aiea:
TABLE OF CONTENTS—Continued
Witness
John C. Jacobs
John Q. Winger
Record Pages
4645-4648
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eee
App. Vol.
vi TABLE OF CONTENTS—Continued
App.
Witness Record Pages App. Vol. Pages |
John Q. Winger 4824, line 1 4 495
4829, lines 8-25 “4 495
4830, lines 1-8 4 496
4837, lines 24-25 4 496
4838, lines 1-2 4 496
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4858, lines 23-25 4 500
4859, lines 1-11 4 501
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4888, lines 2-25 4 ~ 601
4889-4891 4 502-504
4904, lines 24-25 4 505
4905 4 505
4906, lines 1-11 4 506
4908, lines 11-25 4 506
4916, lines 2-10 4 507
Charles A. Larson 5127, lines 2-25 — 4 508
5128, lines 1-23 4 509
5162, lines 14-25 4 509
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5164, lines 7-24 4 510
5168, lines 1-17 4 511
5174, lines 11-21 4 512
5178, lines 9-25 4 512 |
5179, lines 1-17 4 513
Lawrence R. Manken 5190-5204 4 514-524
5446 4 524
5450 4 525
Victor H. Zabel 5472-5474 4 527-529
5480-5481 4 529-530
5482, lines 1-20 4 531 «
Witness
Charles A. Larson
William J. Ogden
Stephen P. Sherwin
Donald W. Auten
Reid Fell
Raymond D. Murr
W. P. Anderson
John L. Moye
Reid Fell
C. M. Allen
TABLE OF CONTENTS—Continued
Record Pages
5925
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_ App.
Ph hh Lh LE L LE LP PF LP PLL LL La LE LLL SS LLL PhP PP
ee ee ee eats sothcnideleariies$:
Pope
?
viii TABLE OF CONTENTS—Continued
Witness
Stephen P. Sherwin
William J. Ogden
Charles A. Larson
W. P. Anderson
John L. Moye 7
Louis J. Engel
Record Pages
6494
6611-6612
6624, lines 18-25
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|
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6798-6799
App. Vol.
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WALA MA Rah ah “at bance ils ab ache Leby ai ct Lite 55 natin SRG npaatlalighs
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TABLE OF CONTENTS—Continued
Witness
Albert F. Bass
Herbert D. Clay
David L. Knapp
Alexander E, Wiskup
David L. Knapp
Louis J. Engel
Record Pages
6825-6831
6833-6851
6939, lines 1-8
6940-6980
6982, lines 1-6
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6985
_ 6987-6989
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App.
Vol.
ix
App.
Pages
rhe ELLE ELLE LAL LLL ELL LLL LL PLL PP DW rhe PP PP Pp
700-705
706-722
723
723-757
758
Witness
Louis J. Engel
Herbert D. Clay
> Celia Star Gody
= David L. Knapp
Record Pages
7427, lines 8-25
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Alexander E. Wiskup 7544
x TABLE OF CONTENTS—Continued
App. ba
ry Fhe LF LLL KLLLL LE KLE KR LEL KLE KL KL LL LLP PPP
809-814
815-817
818
819
820
821
Witness
Celia Star Gody
Supplemental Brief
on Exceptions of
Shell Oil Company
Answer of Shell
’ Oil Company in
Opposition
Record Pages
7667, lines 17-24
7669, lines 21-25
7680, lines 1-23
7684, lines 16-25
7685, lines 1-3
DOCUMENTS
306, 832
306, 856-306, 859
307, 822-307, 832
TABLE OF CONTENTS—Continued
xi
App.
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3
IN THE
United States Court of Appeals
FoR THE FIFTH CIRcuIr
No. 71-2761
“On Petitions to Review Orders of the
Federal Power Commission
JOINT APPENDIX
(PART IT)
SOUTHERN LOUISIANA AREA RATE CASE
PLACID OIL COMPANY, ET AL., ©
Petitioners,
V.
FEDERAL POWER COMMISSION,
Respondent.
[4,567]
Testimony of John C. Jacobs
[4,567]
TESTIMONY OF JOHN C. JACOBS
Q. Now, Mr. Jacobs, when the analysis is prepared for
the AGA Reserve Report, you indicate that the subcom-
mittee members actually do the work of reviewing the
data, that subsequently the committee discusses their
findings and ultimately you put all the different areas
together to come up with a report. Is that in substance
what is done?
A. In summary that is the procedure that the com-
mittee follows in preparing its annual report.
Q. Can you tell me, using South Louisiana as the ex-
ample, how these eleven men actually go about getting
their information?
A. Well, I have attempted to do that in the testimony
[4,568]
that was filed in writing.
Q. Well, let me be more specific, then, if I can. How
would a producer—how would one of these men obtain
information from Placid Oil Company, for example, as
to whatever gas reserves have been proved in South
Louisiana?
A. He would ask the Placid Oil Company for the in-
formation.
Q. Would he actually go to their offices?
A. He might very well go to their offices and look at
the data there; copies of the data might be sent to him,
might be loaned to him for his use in preparing the re-
port. :
412
va, 4 +n Pain as pla he ee bh Dic Clery ae eae Sok ee Se eee ee eee eee ae nae ee ee See ED
[4,569]
Testimony of John C. Jacobs
Q. Now, if somebody in Placid Oil Company in charge
of the data felt that the data was confidential, would
this individual obtain that data?
A. As we have indicated in the report, we have some
instances, which I have characterized as not having a
significant effect upon the numbers that were published,
in which data are withheld from the committee. Let’s
take a situation and let’s suppose that Placid has drilled
a well and because of the lease situation around this well
he elects to hold that data confidential. And let’s sup-
pose further the committee member that has been as-
signed that particular field calls for the data and Placid
says that this data will not be forthcoming from Placid.
Well, then the committee goes to whatever sources of in-
formation may be available.
[4,569]
Q. You mean the subcommittee member?
A. Your correction stands. The subcommittee member
would then look at whatever other sources of data might
be available.
For example, the seismic information which shows the
size of the structure is fairly generally available for
Louisiana Offshore Area now. This wouldn’t necessarily
have to come from Placid.
There are other information that could come from
wells being drilled by another operator in an adjoining
lease. Whatever information of that type that were
available would be collected by the subcommittee member.
The data as to reservoir pore space, that is, the re-
covery per acre-foot that is expected, in an area such as
Offshore Louisiana where the sands from field to field
in this characteristic don’t differ too radically, might
even be assumed in an initial estimate.
413
[4,569]
Testimony of John C. Jacobs
In other words, even though Placid said you cannot
have these data now, there are situations in which the
committee could obtain enough data to meet what it con-
siders its minimum requirements and prepare an esti-
mate for that particular field.
Q. Would the data which you have just described be
sufficient to allow the subcommittee member to determine
that there are proved reserves in an area where there is
a well, the information about which he has none?
[4,570]
A. Well, as I have stated in my testimony, we are
talking about proved reserves here, and a minimum re-
quirement—one of the minimum requirements is that we
have had a production test. In the case that I am citing,
there would have had to have been production tests in
some of these adjoining wells, at least one of them, in
order to meet the minimum requirements.
Q. I see. So that if a well were drilled in a new
field and you had no—the subcommittee had no informa-
tion as to what that well showed, this would not be suf-
ficient of itself to allow the reserves, if there were re-
serves, to be categorized as proved. Is that correct?
A. What I have tried to say is it might be and it
might not be, depending upon the situation.
There are situations: when it would not be, other situ-
ations when it would be.
Q. Mr. Jacobs, if a well were drilled again by, for
example, Placid Oil Company in an area where there
were no offsetting wells previously drilled and the sub-
committee member had no information other than seismic
and the other kind of information you have talked about,
could you characterize that as proved reserves?
A. We could not.
414
yet
[4,571]
Testimony of John C. Jacobs
Q. Mr. Jacobs, you indicated you were one of the
founders of the Potential Gas Committee and are familiar
[4,571]
with the practices of it. Is that correct?
A. I have so testified.
Q. Yes.
A. Let me qualify that, if I may.
I, in describing my experience, pointed out that I was
active in the Potential Gas Committee affairs for several
years. I am not now, and have not been for the last
couple of years.
Q. Under the approaches that the Potential Gas Com-
mittee uses, where would the well I have described hypo-
thetically for Placid Oil—where would those reserves be
found? Would they be probable, potential, speculative,
or would they be any one of them?
A. Those reserves would be in the probable category
the way these studies are made up.
Q. Using the definitions that are used by the Poten-
tial Gas Committee in their report, how can you arrive
at that conclusion, Mr. Jacobs? :
A. Well, I will correct my answer to say that in the
case we are discussing, where there was drilling across
the lease line, this Placid well would be in the probable
category. If there were no across-the-lease-line drilling,
it would be in the possible category.
[4,572]
What I have tried to say in my written testimony is
that it is of no consequence to the study, or to the cal-
culation, the estimation of proved reserves, as to whether
415
[4,572]
Testimony of John C. Jacobs
a well is expendable or not. What the committee con-
siders is every well that is drilled.
Now, there are no wells that are drilled in secret. Per-
haps there is some misunderstanding about this. Per-
haps there is éome thought that because a well has the
name expendable that it is done in secret and nobody
knows anything about it. This, of course, is not so.
Expendable wells have to be permitted the same as any
other kind of well. And the ~
[4,573]
committee, one of the bits of data it works off of and
that Mr. Bass did not emphasize in his testimony is the
list of wells that are permitted. And all these expendable
wells are permitted. So whether expendable or not, so
far as the committee is concerned we consider all the
wells that are drilled.
Q. Well, if a well were drilled as you define it as an
expendable well from a device other than a permanent
platform and it were drilled by Placid Oil Company,
again for purposes of reference only, and capped and
shut in and the data kept confidential, how would you
on the American Gas Association Gas Reserve Committee
treat the gas reserves under that?
A. The important thing to the committee, the factor
in your question that affects the answer is the confiden-
tiality of the data, regardless of whether the well is an
expendable well or any other kind of a well. The ques-
tion to the committee is whether or not the data are
available to the committee.
Now, your question carries us back to what we talked
about formerly. If the data on that particular well were
held confidential, then the committee would search about
and see if there were any other way in which-it could
416
[4,574]
Testimony of John C. Jacobs
develop the minimum data that are necessary to prepare
an estimate. If this were not so, it were impossible to
prepare an estimate that year, then the well would be
followed up next year—or the field would be followed up
next year. And our experience has been
[4,574]
that in the greater part of these cases where people don’t
want to release data because of its proprietary value,
that this is usually for a year, no longer.
Q. Mr. Jacobs, do your subcommittee members keep
records to show which companies have kept information
confidential and which have given data that they haven’t
considered confidential?
A. We do not keep such records.
Q. And if a producer keeps information confidential,
obviously, as you have just stated, you would not know
what that information would show; is that correct?
A. As I have just stated, we might or might not know
what the situation is. What I have tried to point out is
that with the committee organization, where we get our
numbers, our reserve estimates through a committee of
men each of whom is daily active in the energy business,
in this case particularly in the gas business, and men
that are experienced in estimating reserves and experi-
enced in knowing what are the sources of data as well
as experienced in judging the data from the different
sources, that we have a constant contact with all sources
of data. So again looking at the overall, we don’t have
very many cases in which there are not enough data for
any period of time to not make an estimate.
Q. Well, getting back to that expendable well we were
talking about a moment ago, if it were shut in without
a report of any production, and if the information were
kept
417
[4,575]
Testimony of John C. Jacobs
[4,575]
confidential, what sources of information would you have
available to you to find out whether or not there are re-
serves there?
A. Well, as I mentioned before, perhaps somebody
will come along and drill another well and we’ll get the
data on that well.
Q. Until the well is drilled you don’t have any data;
is that right?
A. As I say, most of these cases where somebody wants
to withhold data, they do not slow us down for more
than a year. We like to put a reserve in one year’s re-
port, and we put it in the next year’s report. And it is
because of the case I am talking about. Somebody makes
a discovery—you have looked at enough of these Louisi-
ana offshore maps I am sure to know that these fields
don’t fall within any one block and somebody else will
come along and drill because the first well has been
drilled. And it is unusual to find a situation in which
all of the data would be withheld from us.
[4,579]
Having said all that, I must characterize the subject
that is before us as the expendable well red herring.
Now, let’s take the AAPG quotations. What the prob-
lem with these people is on expendable wells is that the
operator
[4,580]
doesn’t declare them either as a dry hole or as a pro-
ducer. What the committee wants to know is whether
or not this is a dry hole. The operator says well, maybe
it is and maybe it isn’t.
418
eS ee eee
Ee
[4,581]
Testimony of John C. Jacobs
MR. COOPER: Excuse me. When you referred to
the committee there you meant the AAPG Committee?
THE WITNESS: The AAPG, not the AGA Commit-
tee. Now what the AAPG Committee is after is to cal-
culate a success ratio, and they have all the wildcat
wells, all the exploratory wells in the denominator. And
remember, we are talking about ten thousand wells a
year here that we are keeping up with—we, both the
AAPG Committee and the AGA Committee on natural
gas reserves.
His question is how many wells does he put in the
numerator. So his problem is that each exploratory well
has to be put in one pigeon hole or the other; that is,
success or dry. And on the expendable well, his problem
arises from the fact that the opeartor is saying I can-
not classify this well at this time, I will classify it later
on, but I am saving this well so that I might possibly
reenter it. Maybe I will and maybe I won’t, t-:t I might
possibly reenter it. So I won’t put it in either pigeon
hole. So AAPG has a problem. The Committee on Natu-
ral Gas Reserves doesn’t have this problem. As I have
said before, it doesn’t make any difference to this com-
mittee what you call the well. We take into account every
[4,581]
single well that is drilled. None of them are drilled in
secret. : :
And if I may add one other thing which I think will
be helpful, I do think these AAPG quotations are help-
ful in the sense that they bring out again the point that
there is nothing secret and there is nothing nefarious
about the drilling of expendable wells. This is a proce-
dure that has been devised in order to minimize the cost
of producing gas for the American public.
419
[4,581]
Testimony of John C. Jacobs
Q. I want the record to be clear, Mr. Jacobs, we have
not suggested there is anything nefarious about the prac-
tice of drilling expendable exploratory wells.
A, I am sure that was the case.
Q. But let me button this down, if I can.
If a well is drilled which the AAPG looks at as ex-
pendable and they dont’ know whether it is a producing
well or a shut in dry hole, and the information is kept
confidential, the AGA Reserves Committee doesn’t know
whether it is producing or a dry hole and consequently
the AGA Reserves Committee can’t put that into proved
reserves unless there is an offsetting well to show that
it has become proved. Is that correct?
A. But not because of the fact that it is called an
expendable well and AAPG can’t decide whether to put
it in the numerator of their success ratio or not.
[4,582] A
Again, the problem that the Committee on Natural
Gas Reserves has is~the problem of confidential data.
And again, I must characterize all of this discussion
about expendable well as an expendable well red herring.
Q. Well, I don’t think you will find either Mr. Bass
or the AGD or any other party to this proceeding rely-
ing upon the fact of the expendable well. We are trying
to find out as you are, exactly what is in South Louisi-
ana and what will be available. -But, again, the AGA
Reserves Committee would not have this in proved re-
serves; is that correct?
A. Would not have what in proved reserves?
Q. If the producer held the information confidential
and the well was shutyin and no one knew whether it
was a producing well or a dry hole except the producer,
420
[4,585]
Testimony of John C. Jacobs
the AGA Reserves Committee would not have that in
proved reserves. Is that what you have said?
A. Again, I think for the third time this morning, if
a well were drilled and the data on that well were held
confidential, that is, withheld from the Committee on
Natural Gas Reserves, and if the committee through
other sources could not obtain the necessary and mini-
mum data to make a reserve estimate, then there would
not be an estimate for that well in that year’s report.
2 * * *
[4,585]
A. Well, Bill, as you very well know, I run this com-
mittee, and my reputation is on the line on these num-
bers.
As I think any prudent administrator would do, I
run constant and what I consider adequate checks on
whether or not these hundred-odd people that are work-
ing for me in this enterprise are doing their job accord-
ing to the rules that we have set out for them. So al-
though I do not actually construct these estimates my-
self—and of course it would be impossible for any one
man to do this. Remember, each year this committee
looks at every gas-producing well in the United States
plus the ten thousand new wells that are drilled at pres-
ent-day levels. And there is no single person that could
ever digest all this information. But as I say, I run the
checks that I think a prudent administrator would run.
So I have some knowledge and I think adequate knowl-
edge of what is being done in these committees.
Now, as I pointed out in my written testimony, one
of the problems, one of the questions that anyone, any
fair-minded person would face in setting up an operation
such as this is this question of accessibility to data. And
421
[4,585]
. Testimony of John C. Jacobs
we think that we have devised a method by which we
have excellent accessibility to data.
There are cases, particularly a. situation where there
are open leasehold properties across the line, where data
has such a high value that it is not only not released to
people
[4,586]
outside the business entity that owns that data, but often
it is restricted to one or two people within that business
entity itself. So it is obvious from the beginning that
4 there could possibly be some data that wouldn't be avail-
able to us. So then the question gets to be, well, what
is the order of magnitude of what you don’t have?
} Fortunately, this committee has operated now for a
8 long, long time, has had a lot of experience. It has fol-
3 lowed the drilling in Offshore Louisiana since the be-
; ginning.
& Now, the reason that I say that the withholding has
3 had an insignificant effect upon the figures that the
*. committee produces is twofold: One, the cases where
: data have been withheld just in actual numbers are small.
And as I mentioned earlier, the second factor is that
: the length of time over which these data were withheld
' is quite short. We have few instances in which we have
been delayed more than a year because of withheld data.
- I don’t think we have any instances where we have been
delayed say more than three years. But that is the basis
' for my opinion that the withheld data is insignificant
* when we turn and look at the overall job that the com-
_ mittee is doing.
> s . * *
[4,589]
Q. Mr. Jacobs, in the situation you have posed, the
drainage sale approach, would the adjoining tracts which
a
[4,590]
Testimony of John C. Jacobs
are going to be put up for sale—would the reserves un-
derlying those ‘adjoining tracts be categorized as proved
or probable or potential under the AGA definitions?
A. Now, the AGA definition is of proved reserves. We
don’t have any other definition.
Q. AGA Potential Gas Committee. I am sorry.
A. And you have already worn out my poor memory
about those definitions for the Potential Gas Reserves
Committee. But let’s talk about proved reserves because
I think your question is pertinent there.
Your question goes to the size area, the amount of
acreage that the committee would consider proved by one
well. I believe this is the nut of your question. This is
a variable. We, after a great deal of discussion, have
left the amount of acreage that one well will prove up
to the individual committees. In other words, it depends
upon the data that are available.
[4,590]
Data. could be convincing to show proved reserves across
a lease line on a lease that wasn’t drilled. In another
case, data would not be that convincing.
Q. In this case, then, the proved reserves could include
both the drilled and the undrilled portions of a given field;
is that right?
A. It is possible that could be so. :
Q. Mr. Jacobs, turning to the subcommittee again, in
Southern Louisiana you indicated there were, subject to
check, eleven individuals doing the studies for the AGA
' Committee. How many fields do they have to review, or
did they review in this past study in the offshore area;
do you know?
A. I don’t know, but again I would be glad to see if
my colleague has that number with him and put it in
the record here.
423
ond “ se3bas~,
EB ep parc emecmencorrnns FPL ERLE SEL RPO RS PLL OG SOML
[4,590]
Testimony of John C. Jacobs
Q. I wonder if we could obtain a list of the fields
that were actually included.
A. This is not possible. That is confidential.
Q. Would you check with your colleague to find out
how many fields were included?
A. Would you like me to do that and submit this later?
Q. If you would, Mr. Jacobs. Perhaps after the mid-
morning recess.
Again this is the offshore area I am directing myself
to
; Now, the subcommittee members again would have
q checked
[4,591]
the particular fields, and you have indicated that in most
of them they have obtained the information from the pro-
ducers involved, but that some of them may likely have
had confidential information withheld from them. Is that
correct?
A. Not some. A very few might have had confidential.
Q. Do you know how many?
A. It is a small number. Very small number.
Q. Have you been told how many?
A. In the checking I have done, yes, I have an opinion
of how many.
Q. Excuse me. I didn’t hear the last part of the re-
sponse.
A. I say in the checking that I have done as I have
described, yes, I have an opinion of how many. As I say,
it is very few.
Q. I gather that the number would be kept confi-
dential.
A. This is correct. As I pointed out, the confidentiality
is necessary to have access to data.
Q. At this time, Mr. Jacobs, I am not arguing with
Ree er COD c Lote tet! es
tenis
APPS
Qe hoe ON EE Fes
SUAS WEEE LAO Shy
per Aeie
MAME RA
wk
424
%
Pt II OE TERE EG SLEEP ROME LEGAL EINE EA RR TOE ORE BN —
[4,592]
Testimony of John C. Jacobs
the fact of confidentiality. I am just trying to find out
how far it goes.
How much time does each of the subcommittee mem-
bers put into making the study for AGA?
A. As proportion of his total time, I really don’t
know. In my own case I would suppose it is in the
order of magnitude ~
[4,592]
of, oh, ten to twenty percent of my time.
On the individual committee memberg,-I do know this:
I get these things back when we have our review meet-
ings, are getting ready for our review meetings, not only
the expressions from the men themselves as to how many
extra hours that they are putting in to get ready for
these meetings but also get this out of the wives, which
I thought is a truer measure, perhaps, of just how much
time they are spending than their own declarations,
Q. As to the subcommittee members themselves, those
who are making the studies, who work for individual
producers or pipeline companies or distributors, about how
much does the average one of the eleven members, which
again you have accepted subject to check, put into the
studies for AGA?
A. I say I really don’t know.
Q. Now, when any individual subcommittee member
has finished his analysis for a field or group. of fields,
does he discuss this with the other subcommittee members
prior to bringing his report to the committee?
A. He discusses it with the other subcommittee mem-
bers at the subcommittee meeting. This is the whole pur-
pose of the subcommittee meetings, is to review the esti-
mates hat have been made by the individual members
from the standpoint of how he went about it, how much
data he had, the reasonability of what he has come up
with.
425
[4,593] ;
Testimony of John C. Jacobs
[4,593]
Q. I think you indicated in your testimony that you
have two such meetings a year; is that correct?
A. This is of the main committee.
Q. That is the main committee.
A. The subcommittee will hold as many meetings as it
thinks is necessary to get its job done, just as on this
question of how many hours one of these committee
members put in and I said I don’t know. When you con-
sider, on the other hand, the total output of the commit-
tee, that is, that each year a review is made of the pro-
ducing history of every gas field in this country plus a
review of, what is it, ten thousand new wells that are
drilled, you can see that a great many hours are put
in in this effort.
Q. Yes, I appreciate that. I am just trying to get
some picture of what the individual subcommittee mem-
ber would actually be doing as far as time goes.
Do you know for the 1969 report how many meetings
were held by the South Louisiana subcommittee?
A. I do not.
Q. Once the subcommittee reaches a conclusion as to
the estimates of reserves, again for purposes of reference,
in South Louisiana, a report is made to the overall com-
mittee; is that correct?
A. That is correct.
Q. Is this report in writing prior to your committee
[4,594]
meeting?
A. The individual subcommittee chairmen report to
me in writing prior to the date at which the entire com-
mittee prior to that time, the date of meeting?
426
[4,595]
Testimony of John C. Jacobs
A. The reports that I get are then assembled—this
is one of my responsibilities—into an overall report.
These overall reports are distributed to the committee
members so that they have time to study them and be
ready to raise whatever questions they want to raise at
the meeting of the full committee.
Q. Now, as to the 1969 report again for an example,
how much time prior to the meeting did the committee
member have to review this? When did you send them
out and when was the meeting?
A. I don’t remember exactly. It would be in the order
of magnitude of twa to three weeks.
Q. Two to three weeks?
A. Something like that.
Q. And in that two to three weeks’ time he would
have to review the overall picture for the United States;
is that correct?
A. He would have that much time to look at the other
data and note whatever points he wanted to bring up
with the actual committee.
[4,595]
Q. And after this two or three-week period you would
have your full committee meeting, and you did have
prior to the conclusion of the 1969 report; is that correct?
A. That is correct,
Q. Now, at the meeting you held for the 1969 report,
could you tell me how long you actually met on the
subject? One day, two days, a week?
A. Well, we schedule three days. Just how many hours
we were in actual session, I don’t really have a count of
that; but the committee was together in this final re-
view meeting for three days.
427
[4,595]
Testimony of John C. Jacobs
Q. Were any changes made by the overall committee
in the subcommittee’s report for South Louisiana?
A. I don’t recollect whether there were any or not.
Q. Would that be confidential information?
A. I would consider that confidential.
Q. Mr. Jacobs, I have asked for a list of the sub-
committee members in South Louisiana as to their em-
ployment. I wonder if you could indicate which of those
members actually did the study for the offshore South
Louisiana Area and which did it for the onshore area.
A. That is confidential.
MR. HARKAWAY: Your Honor, may we take the mid-
morning recess at this time? I have further questioning.
PRESIDING EXAMINER: You have further ques-
tioning?
* * * *
[4,600]
that field is abandoned. In other words, the assumption is
; that some of the gas that is present in the reservoir will
; not be produced,
4 Q. Now, if we were to make a calculation of the
a original gas-in-place, that gas remaining in the field and
not recoverable would be part of the original gas-in-
place category; is that correct?
A. It would depend upon what type of original gas-
in-place one were estimating.
Now, if by original gas-in-place one means to signify
the total amount of gas that is going to be produced |
from the field, then there is no reduction. If by original
gas-in-place one means all the gas that is in place in the
reservoir, then I say the abandonment pressure signifies
an assumption that part of that gas will be left in the
reservoir at abandonment.
Q. Now, the data on the pressure decline curve that
. Bi ithe a ee te
i cies pm ahl t Rilo ebsl ner Aas Melee %
ick e
a
¥
%
428
BIG PALED NE —
[4,601]
Testimony of John C. Jacobs
is above the abandonment pressure would all be con-
sidered recoverable reserves by the AGA; is that correct?
A. That is correct.
Q. And the gas that is below the abandonment pres-
sure that is used would not be considered as proved or
anything else by the AGA; is that correct?
A. It would not be considered as proved gas within
the terms of the AGA definitions.
Q. Proved recoverable reserves?
[4,601]
A. Right.
Q. In making the study, does the subcommitteeman
determine what the abandonment pressure will be?
A. This is determined by the subcommitteeman sub-
ject, as I have pointed out here, to review by the com-
mittee and ultimately—and if a specific case were of
interest, subject to final review by the committee.
Q. You say it is determined by the subcommitteeman.
Is it in fact determined by him or is it determined by
the producer in the field?
A. Well, in making the estimate it is determined
by the subcommitteeman. He makes an estimate as to
what the abandonment pressure in this particular reser-
voir will be. He takes into account some physical factors,
he takes into account some economic factors.
Q. How does he determine whether it is economic at
a given level?
A. Under our definitions, he makes this determination
on the basis of today’s economic situation, because we
don’t try to estimate what the economic situation will
be say twenty years from now in picking an abandon-
ment pressure for a reservoir with a twenty-year life.
So as I say, he makes his estimation of abandonment
429
vAR oY
5
Z SHIGELLA ILGDE LED LLL LEE AMEE LIE GEIR EERE IM
F i le I at -
[4,601]
Testimony of John C. Jacobs
pressures on today’s situation as they are known in the
area that he is working in.
Q. Would you mind telling me what you mean by
today’s
[4,602]
economic situation in the context about which we are
speaking. ; .
A. Well, one of the factors would be the price of gas.
As I have mentioned, abandonment pressures are con-
trolled by physical factors. This basically goes back to
what sort of a producing mechanism the reservoir will
be subjected to. Without going into any great detail, there
are generally three types of mechanics that go on in
these sub-surface strata to produce gas from the reservoir.
If we take a case in which the gas produces itself, in
other words, we have the classical balloon situation that
there is nothing to bring the gas out of the reservoir
except the pressure that existed there initially, then the
price of gas would be most pertinent Compared to the
other producing mechanisms in setting an abandonment
pressure.
As I say, as a practical matter we have taken today’s
situation, today’s gas prices, today’s cost of compression
and so forth, in making our own estimates of abandon-
ment pressures.
‘ I might point out—again I would hope that it would
be helpful—that abandonment pressures are not im-
portant in gas reserve estimates in the sense they are
in oil reserve estimates. We—technologists in America
are quite proud of the progress that may be made in
increasing oil recoveries because you find oil fields in
which the recovery is going to be twenty-five percent;
on the other hand, in gas fields we have recoveries in
430
[4,605]
Testimony of John C. Jacobs
[4,603]
the order of magnitude of eighty-five percent. So there -
isn’t as much effect, if you will, order of magnitude effect
upon gas reserve estimates from this abandonment as-
sumption as there is in some of the other activities that
reservoir engineers indulge in such as estimating oil
reserves.
Q. Do you know, Mr. Jacobs, whether the eighty-five
percent recovery factor was used in all reservoirs in the
study?
A. I do not know. As a matter of fact, the abandon-
ment pressure to be used is set in each case by the man
that is making the—by the subcommitteeman who is
, making the study. In other words, we don’t dictate any
across-the-board abandonment pressure. The conditions
are just too varied for that to be a sensible approach.
The more sensible approach, as I say, is let the man have
access to the data and know the producing conditions
of that well and that field to make an estimate of what
the abandonment pressure will be.
Q. But even in the South Louisiana Area, no specific
abandonment pressure was set for all offshore wells or
all onshore wells generally?
A. For the reason that we have different types of
producing mechanisms in South Louisiana, and the engi-
neers that are making estimates take that into account.
Q. Now, in determining what the abandonment pres-
sure would be for the 1969 study was any direction
given to keep it
* * * *
[4,605]
Q. Was it the South Louisiana Area? .
A. I would say that is confidential.
431
eT ee ee te
shi en east htt 0k ABLVS. Te ad sche atte
lob telah Beth dail SP Bie
LEY
[4,605]
Testimony of John C. Jacobs
But perhaps again, for purposes of illustration, the
reason we don’t set rules, in Pennsylvania where gas
fields are produced on a vacuum, these are old fields. The
wellhead value of gas has been in the order of magnitude
of 2714 cents. Compression—a lot of compression can be
justified and is installed. I mean an engineer is not just
guessing it is going to be installed. He can see in certain
fields it is installed.
Here one might assume zero pounds of a animate pres-
sure. In other words, all the gas is going to come out of |
that reservoir. On the other hand, you can get into situa-
tions with very deep wells in which you have a water-
drive mechanism in which the abandonment pressure
might be assumed as high as a thousand pounds because
this is offshore, the wellhead value is less than, what,
nineteen, an order of magnitude of nineteen cents. Com-
pression is very expensive, and the engineer might very
reasonably make the assumption would be put in.
Q. The engineer then with his knowledge of the field
makes assumptions as to whether compression is neces-
Sary, as to whether water-drive would produce, and as-
sumptions as to the price to be received for the gas;
is that right?
A. Well, he would make assumptions. I would think
that the ones that you have mentioned wouldn’t be sub-
ject to much variation. The price of gas is pretty well
known. The
[4,606]
producing mechanisms can be pretty well determined
before production starts. And certainly after production
commences, when you begin to get your pressure-produc-
tion history, you begin to have a very exact history of
the method. And remember, most of these reserves that
we are fooling with—excuse me. Let’s scratch “fooling.”
432
[4,607]
Testimony of John C. Jacobs
Most of these reserves that we are estimating have had
a number of years on the line. Remember it is just a little
bit of new gas we are adding in each year to this great
bank of gas that we are working with. So the price of
compressors is well-known, the operating cost of com-
pressors is well-known. Certainly these are estimates. No
one could ever maintain that they are not subject to re-
vision as further facts develop. But the particular type
of estimate that you are talking about in a given produc-
ing area, I would say that this is one of the easy things
that we do, a thing that there is not much doubt about.
Q. In the 1968 and 1969 reserve studies were the
subcommittees instructed to use the area rates that the
Commission had determined in Opinion 546 for their
economic purposes?
A. No such instructions were given. We rather have
used in the committee all of the gas prices that we know
of in making these estimates, whether they are promul-
gated by the Federal Power Commission or whether they
are in nonjurisdictional deals.
_ Q. Again in the offshore area, which would be regu-
lated
[4,607]
by the Federal Power Commission, do you know whether
the subcommittee members making their studies and using
economic determinants used prices which the Commission
had specifically set for it in its opinion?
A. In.the Federal offshore area, where only FPC pro-
mulgated prices apply, those would be the prices that the
committee would consider in making its estimates about
the installation of compressors late in the life of the field.
Q. Except I suppose in those instances where the gas
were dedicated to a direct sale such as, for purpose of
433
[4,607]
Testimony of John C. Jacobs
reference, the Chandeleur Pipeline Case which is not con-
trolled by the Commission?
A. I should presume that the reserves estimates be-
hind the Chandeleur Pipeline took into account the spe-
cial purposes of its disposition. Although as we develop
these questions I think we begin to ride back on another
facet of the committees work and the way we have set it
up to operate, again we think we have made the best of
several choices, and that is, we estimate the amount
of gas that is in the reservoir that we consider prudent.
Now, we do not keep records that have to do with how
q the gas is disposed of. We don’t say that this particular
. gas goes to this particular pipeline, therefore in this case
such and such an estimate of installation of compression
F will be made, and because the gas next door goes to
. another pipeline that another abandonment pressure
‘ would be
= [4,608]
assumed, because the calculation of abandonment pres-
sures is not that exact.
* * * .
: [4,614]
5 * * . .
A. It is a difficult question to answer. Certainly gen-
} erally in making engineering and economic justifications
; for expenditures there are advantages in size. The larger
: the size the reservoir you are working in, generally at-
tracts the larger expenditures. But, on the other hand,
most of the factors that govern investment in compres-
sion equipment are a per cubic foot function. They cor-
relate on a per cubic foot basis rather than on a total
volume basis. So I say again it would be difficult to give
any meaningful general answer to your question. But my
434
[4,620]
Testimony of John C. Jacobs
general experience has been that the important factors
tie into the per cubic foot rather than to the total volume.
Q. In making the economic analysis, then, the sub-
committee man would determine the cost per Mcf of
investment versus the revenues per Mef that could be
returned in determining whether it is economic. Is that
about what it amounts to?
A. That is one of the things that we look at.
[4,615]
Q. Are there any other economic factors other than
the price and the cost of compression that might be in-
volved in the determination by the subcommittee man?
A. Well, we are talking now about what we expect is
going to happen several years in the future. And one of
the factors that would be looked at would be whether
or not recompletions were going to be necessary. Again,
in making gas reserve estimates this is usually a fairly
unimportant question because by far and large gas wells
last the life of the reservoir.
In oil fields we do usually expect to make two or three
recompletions over the life of the well. But generally
this is unsignificant, as I say, in gas production, but it
is just one of the things that a good engineer, such as
our subcommittee members, will take into account.
[4,620]
A. And my previous answer was responsive to that:
That we examine summaries of these well status reports,
again in our annual reviews of keeping up with every
well and what its history has been. These well status
reports are reviewed in some detail. And what my previ-
435
me ee
[4,620]
Testimony of John C. Jacobs
ous answer indicated is my experience is that in review-
ing those reports the temporary abandonments, are, in
the cases I can remember, those old wells.
Now, I also know from my experience that operators
can write in that description of the well status many
things, and one of our great problems is chasing down
just exactly what these words that were written on the
well status report meant. But regardless of the am-
biguity there, the well status reports are used by the
committee, and we do determine over and above anything
we get out of the state agency through our other sources
of information just exactly what the status of the well
is. If the well turns up temporarily abandoned, why, this
runs up—and we hadn’t anticipated this, this runs up a
—this turns on a red light and this flags it, and we
check out and see whether or not there is anything un-
usual happened there that would affect our reserve esti-
mae.tes.
[4,625]
A. In our committee procedures we do not take into
account the availability, or possible future availability
of a pipeline. There are—could be instances in which a
very small reserve of gas, that is, a physical reserve of
gas would not be included in our totals because it was
so tiny that even if the pipeline were there it would
not be exploitable in an economic sense. But the com-
mittee does not—subcommittee members do not in as-
signing reserves take into account the
[4,626]
distance from a pipeline.
Q. What do you mean by the term exploitable in an
economic sense as you used it just now?
436
[4,631]
Testimony of John C. Jacobs
A. Well, to cite an example, let’s suppose that a well
were drilled to a depth of, let’s say, 20,000 feet and that
the log that was taken on this well indicated that there
was one foot of gas sand and that in the hope that there
might be more the sand were actually tested by the pro-
ducer and that all of these data were available to us.
Under most of the circumstances that I have encountered
in reality, although there is physically a tiny bit of gas
there which we know exists, we would not assign a
reservoir for the reason that we would not expect that
that gas would ever be exploited commercially. It would
take quite a—these would be quite tiny reserves.
Q. Can you quantify for me what you are talking
about when you Say small or tiny reserves? You have
used those terms several times in your recent answer.
A. Well, right now I am talking on a per-well basis.
It is hard to generalize. It would depend upon the loca-
tion of the well, but I would suppose one might talk
about one billion cubic feet or less.
[4,631]
BY MR. HARKAWAY:
Q. Has the AGA made any study, or any use of the
information reported by these producers in this case to
see if the drilled and undrilled reserves associated with
these shut-in gas completions were included in the 1969
AGA reserves report?
A. My answer goes to the AGA Committee on Natural
Gas Reserves rather than the association as a whole.
And the answer is no, because it is not necessary.
437
[4,631]
Testimony of John C. Jacobs
We are aware of the reports that the producers have
used in preparing their data for the Commission. And
these reports are used by our committee.
I don’t mean to brag, but we think that the commit-
tee’s list of wells, the sources of data that we have as to
existing wells and new wells is the best there is in this
country, and we think it is complete.
Now, we haven’t taken what has been submitted in
this proceeding as such and gone back well by well to
see did we take into account that well and that well and
that well because we know that we have on the one hand
in our studies all existing wells and we know that each
year we go to all the sources of data
[4,632]
that there are to bring into our records all the new wells
that have been drilled.
Q. Again you are qualifying this, I presume, by the
fact that some information might have been kept con-
fidential about which you know nothing, and we have
talked about that earlier today. Is that correct?
A. As I have testified and will testify again, there
are some new wells that are drilled, a few, which data
is withheld because of its proprietary value.
My study of this situation has resulted in my opinion
that I would like to express again: That the withheld
data did not significantly affect the results that were
published by the AGA.
Q. What study did you make, Mr. Jacobs? The study
you just referred to?
A. As to the data that——
Q. That is right.
A. ——are unavailable? Well, I think as I mentioned
this morning, I have done the checking and asked the
438
[4,633]
Testimony of John C. Jacobs
questions that I think fit the standard of a prudent ad-
ministrator to——
Q. Well, would you tell me what you did?
A. ——to find out exactly what the order of magni-
tude of this problem is and how much we have been ex-
posed to it in our committee work.
Q. I have no doubt that you have done what a super-
visor should do in this area. But would you tell me
just what you did?
[4,633]
A. Well, what I have done is to discuss this question
in some depth with the men under me that prepare re-
serve figures in areas where withheld data can be a
problem.
Q. Is that the subcommittee members or the commit-
tee members that you discussed this with?
A. It would be both.
Q. With both. And did the subcommittee members in
the South Louisiana area tell you how many wells were
kept confidential?
A. I think I must necessarily take the position that
the details of my discussions with the committee mem-
bers are confidential.
Q. When you conclude that they are not significant,
this is based upon the discussions that are for purposes
here confidential discussions and which I would not want
to breach as confidential discussions. Is that what you
are telling us?
A. Well, I explained this morning my opinion, which
you have brought out with your questions is based upon
rather lengthy and detailed discussions with the com-
mittee members and subcommittee members involved—
the basis of my opinion rests on two aspects of the prob-
lem: One is that the withheld data are few in number,
439
sh Bites tt ieee Se
[4,633]
Testimony of John C. Jacobs
and the other is that they are withheld for a very short
time.
I think it is important to keep in mind the concept
of reserves that the committee data represent. This is
‘not a
[4,634]
Q. Yes. Mr. Jacobs, the gas reserves report lists re-
serves by states, and in certain instances parts of the
states. Is that correct? At page 120 of the 1970—Volume
24 of May 1970, the reserves as of December 31, 1969,
you show——
A. Would you repeat the page number, please?
Q. 120. Is that correct?
A. The table on page 120 of the May 1970 report
lists proved recoverable reserves in the United States by
states and in some instances the states are subdivided.
Q. The report does not set forth the gas reserves by
geological area such as the Hugoton-Anadarko or the
South Louisiana or such. It is by states only; is that
correct?
A. I believe that the areas you mentioned are not
geological areas but are Federal Power Commission pric-
ing areas.
[4,637]
Q. What is the type of information that would be
provided to the subcommittee member in that case?
A. The type of information would include such things
as a log or logs on the well, core data that were obtained
in drilling the well, and the tests that were run on the
well to prove that it was a productive well.
440
SEO Se DEAL IBLE EOI BIE LLORES ALD
[4,638]
Testimony of John C. Jacobs
Q. Now, would this information be obtainable not only
for purposes of making estimates of extensions and re-
visions but also for new discoveries? New field wildcats,
even?
A. In most instances—in nearly all instances, yes.
Q. Now, in view of your answer, Mr. Jacobs, I want
to ask you now to explain, if you would, the nature of
any rules or concepts of confidentiality that apply be-
tween producers. The confidentiality you have described
is access of the public to data that may be available only
to the AGA or to the committee
[4,638]
or to the subcommittee. But from the testimony you have
just given, it would indicate to me that the producers
are in a position to have access to the other producers’
data so that there is a general spreading, general dis-
semination of knowledge—perhaps not published—on be-
half of the various producers who work for various com-
panies among themselves of the operations and the re-
serve potentials, the reserves inventory, the current status
of wells and so forth, of other producers.
And I wondered if the concept of confidentiality comes
in there as between one producer and another.
A. I am not exactly certain what you mean about
the concept of confidentiality between producers. Now,
let?’s ——
Q. Let me make my question more clear.
A. Please do.
Q. If the subcommittee member that is employed by
Humble Oil can get the reserves information necessary
to evaluate Texaco’s reservoirs, why can’t the public
get it?
441
a
[4,638]
Testimony of John C. Jacobs
A. Well, for the reason that in submitting these data
to a subcommittee member, the company owning the data,
whoever it may be, knows that those data will be con-
sidered with the confidentiality that is characterized by
committee procedures and publications. Whereas if the
data were made available to the public, there would be
no such limitation of its use.
[4,639]
Q. Now, in making the estimate of the reserves for a
given well or field or reservoir, as the case may be, what
is it that the subcommittee member prepares? What
does it look like? Is
[4,640]
it a piece of paper, is it done on a form, does it involve
a formula—standard formula for reservoir calculation?
Or, in other words, what I am trying to get at, Mr.
Jacobs, is what is circulated at the subcommittee meet-
ings.
A. Well, I think I can best characterize it as a sum-
mary showing the results—that is, the estimated re-
serves and the primary factors that he has used—the
subcommittee man has used in calculating this reserve.
I hope my analogy is not a bad one, because it has
been several years since I have been involved in this,
but as I remember, the FPC staff used to have some
summary forms that were used on per-field reserves.
And what I am trying to get at, I think most any reser-
voir engineer would come to a fairly simplified summary
form, as I say, which set out the results and the perti-
nent factors.
442
[4,645]
Testimony of John C. Jacobs
Q. Does the committee see this data?
A. If it wishes. In other words, if the perusal of
the summary form would raise questions, then the sub-
committee member would lay out the data; and again,
these are all experienced men, he would let them take
their own look at it and see whether or not the numbers
he has used are in their opinion proper ones.
[4,644]
Q. Now, I want to touch on another area. I notice
from your testimony that you are one of the founders
of the Potential Gas Committee. I was wondering hav-
ing that experience and now as the Chairman of the
Committee on Natural Gas Reserves, whether or not you
could say on the basis of your knowledge that where the
AGA reporting of proved reserves leaves off, that at that
very point is where the Potential Gas Committee picks
up. In other words, I want to be sure that there is no
overlap or no gap in the reporting of the reserves in
one source as opposed to another.
A. I would like to give two answers to that question,
if I may.
If one is thinking in terms of the approximation that
is involved in the potential gas reserve figures—and these
figures are quite rough or quite approximate as com-
pared to the sort of studies that the Proved Reserves
Committee makes.
[4,645]
If one is looking at the total United States situation
from the standpoint of Potential Gas Reserves Commit-
tee, I would think that the answer to your question would
be that, yes, one can take the three categories that were
443
[4,645]
Testimony of John C. Jacobs
mentioned in the testimony this morning and add to it
the proved reserves and have a complete picture of the
United States, proved and potential, in the terms of the
possible magnitude of error in the potential figures.
Now, on the other hand, if one turns around and looks
through the other end of this shall we say horn of
cornucopia, from the standpoint of the man who calcu-
lates the proved gas reserves, then we get into all sorts
of discussions as to a every exact fit between proved and
what shows up in the Potential Committee’s figures as
probable. And there there could be a lot of discussion
about how close they would fit, But I say for a look at
the overall United States, proved plus potential, I would
think the figures could be added together and the total
used as a reasonable figure.
Q. Now, I would like to ask your opinion on some-
thing now, Mr. Jacobs, if you would be willing to give
it. I wonder if you think it would be helpful if the
Potential Gas Committee reported their reserves on the
same geographical basis as does the AGA report proved
reserves.
A. You have asked for one man’s opinion. I think not,
for the reason that I believe that such a breakdown of
potential
a Da ee as ee Ae ele Rg PROP ARSENE SPEER
[4,646]
: figures would give them a cast of exactness that they by
; their very nature do not have. It seems to me this dif-
ference in reporting areas, at least when we get to pon-
dering that, that is, why don’t these guys put out figures
: that we can add up and put into equal columns and run
4 a Comptometer on them and get the same numbers both
ways, well, one of the reasons why they don’t and that
they shouldn’t is they are two different kinds of numbers,
the proved reserve number being a very exact number
444
4
Pi]
4
»
a
i. OTP RE CLL LOGE GOL NINO GILLING OO CD We RAY ARE TRIES » eA 1g re
[4,647]
Testimony of John C. Jacobs
and the potential reserve number being a very approxi-
mate number.
Q. Would your answer change if I asked you only to
limit your answer to the probable reserves category as
opposed to the other categories?
A. It would not change.
Q. Now, you also testified that if prices—I think it is
the thrust of your testimony. I will characterize it and
if it is not accurate you can correct me. That if prices
were increased in, for example, the Southern Louisiana
Area, that might well justify the installation of addi-
tional compression and that in turn would have the effect
of actually increasing the—in essence creating additional
proved reserves,
A. This is the thrust of my testimony.
Q. Yes. And I would like to know whether you could
calculate approximately how much—how many Mcf of
reserves
[4,647]
would be added by, for example, a one-cent increase in
the price for the volumes flowing in Southern Louisiana.
A. Again, if I may, two answers.
In my opinion, an increase in the order of magnitude
of one cent would not increase the reserves; that is, it
wouldn’t change an engineer’s estimate of what the aban-
DRE PE
—
donment pressure may. be. 4
Q. Right. E
A. I would thing it would take increases—well, I will M4
use an example, ten cents in order to have an appreciable 5
effect. And this is part of what I was trying to say, r
although I am not sure I said it clearly enough in an-
swering the questions earlier. And that is, I recollect f
the price differentials in South Louisiana that I have F
been questioned about may be in the order of magnitude é
4
445 \
i
AN SL LM LILI ELMO LEE LETC I LEAL SINCE I Ll ae a aS we |
[4,647]
, Testimony of John C. Jacobs
of one and a half or two cents. Well, again I wouldn’t
expect that that would have a noticeable effect upon
proved reserves.
The other side of the answer to your question. Let’s
suppose that we have forgotten about the penny case and
your question is well, what about five cents. And I say,
well, it ought to be ten. You say, well, I want to know
about five. It would require a detailed study on a
reservoir-by-reservoir basis to answer the question with
very lengthy time-consuming study. I don’t think gen-
eralization would be meaningful in trying to differen-
tiate for a few cents. As I say, I think
[4,648]
if you get up to the ten-cent category you could expect
that there would be some effect through the lowering of
expected abandonment pressures.
Q. All right. Taking the ten-cent example, it increases
ten cents in Southern Louisiana. I take it then that the
people on your committee in yeur subcommittees by vir-
tue of the information to which they have access and on
the basis of the parameters that you have established for
making these calculations, that it would be possible then
to come up with an area-wide Southern Louisiana esti-
mate of the amount of volumes that would be saved or
new reserves that would be created, however, you want
ww look at it, by an assumed increase of ten cents in the
price. It would be reasonably comprehensive and reason-
ably detailed and reasonably accurate?
| A. It would be a prodigious undertaking to expect tc
be forthcoming from a voluntary committee.
Q. Mr. Jacobs, I would like to ask you one last ques-
tion that I think is I might say just by way of pre-
amble that as far as we are concerned goes to the heart
446
[4,650]
Testimony of John C. Jacobs
of the matter. Turning to the testimony that you have
given here. Are you generally familiar with the way
that the AGA reserves are used in the costing of non-
associated gas? Are you generally familiar with what the
Commission has done in the past?
A. I am not generally familiar with these detailed
proceedings.
[4,650]
2 * * *
Q. Every Mcf ever produced from a field is at one
time or another during the course of the life of that
field accounted for as an extension, revision, new field
or new reservoir? I want to reaffirm that that is your
testimony. Based on annual checks of the reservoir by
reservoir?
A. If we add to your question production, in other
words, every Mcf that is produced we had appear in the
AGA figures either as production, an extension, revision
or new discovery, the answer is yes.
Q. I have one last question I would like to ask you,
Mr. Jacobs, and that is I believe in your testimony you
said that the membership of the subcommittee is limited
to people in the industry on a theory that they were the
only people who could be productive in the work of the
subcommittees. Is that your view of a hard and fast
rule that will in all cases be applied, or is it possible
that the committee might at some point consider allow-
ing membership at the subcommittee level on an ob
server status?
A. In my opinion it would be a very great mistake
to introduce observers in the procedures of this com-
mittee.
447
[4,651]
Testimony of John C. Jacobs
[4,651]
I differentiate the way we set up the Potential Gas Com-
mittee. There is no question of confidentiality there. Basi-
cally two kinds of numbers are sought after: The one is
volume of undrilled sediments and the other is the per
cubic mile recovery factor. These are so approximate
that there is no confidentiality involved. In the case of
the work this committee does, I say confidentiality is a
key to ready access to data. We don’t have anything that
we are covering up. We don’t know what the function
or purpose of an observer would be. We are perfectly
happy and welcome opportunities to take part in hear-
ings such as this, to be cross-examined on our procedures.
I mentioned this morning we are in contact with or-
ganizations that are outstanding in this field, such as
NERA, asking for their suggestions as to what ought
to be done or not done. We don’t see anything to be
gained by observers, and we can see that a great deal
might be lost. We are not interested in having com-
mittee meetings with observers sitting around so that
nobody says anything. We have to have meetings in
which these people have a great deal of give and take,
and we think the committee would lose a great deal if
this were cut off.
Now, in regard to observers, my own position as chair-
man with any organization, and particularly those that
are parts of our Federal Government, is that we will
sit down with representatives of that organization and
talk at whatever
[4,652]
length and at whatever times those particular people
want us to talk and answer their questions as best we
can answer them. We think that with this approach we
448
[4,688]
Testimony of John C. Jacobs
can obviate any need for observers and at the same time
we don’t have the loss of open discussion that observers
would necessarily bring with them.
[4,688]
PROCEEDINGS
PRESIDING EXAMINER: All right, gentlemen, let’s
proceed.
JOHN C. JACOBS, JR.
the witness on the stand at time of recess, resumed the
witness stand, and, upon examination testified further
as follows:
PRESIDING EXAMINER: Mr. Wheatley?
CROSS-EXAMINATION (resumed)
BY MR. WHEATLEY:
Q. Mr. Jacobs, referring you to transcript 1425 where
you set forth the definition as used by the committee of
proved reserves.
Now, under the definition I would like to ask you
questions relating to that part of the definition that re-
fers to “under existing economic and operating condi-
tions.”
Where are the criteria set forth to guide the subcom-
mittee members under this part of the definition?
A. Well, the details other than the definition which is
set forth here are not in writing. This is the type of
definition that is ordinarily given to a professional engi-
neer in making an estimate of reserves. And it is as
complete as is necessary to guide an experienced man.
Q. So that there is nowhere any specific written
criteria as to what constitutes existing economic and
operating conditions?
449
[4,689]
Testimony of John C. Jacobs
[4,689]
A. Well, these criteria are a matter to be determined
by the engineer who is making the estimate. These are
experienced men. As I say, this is the normal way, normal
type of instruction one gives an experienced engineer in
asking him to make a reserve estimate.
Q. Well, it presumes, does it not, that the engineer
knows the existing economic conditions?
A. The engineers on the committee and subcommit-
*tees, as we pointed out, have been carefully chosen be-
cause of their daily activities in the gas business and
particularly in the reserve-estimating side of the gas
business.
Q. Well, at transcript 1429, in answer to the question
appearing in the middle of the page you state that a
change in the price level in some cases could cause a
change in the committee’s estimates of reserves recover-
able under existing economic and operating conditions.
Is that not true?
A. Do you refer to the question that is characterized
in my testimony as the Gooch Question No. 16?
Q. Yes.
A. Which reads “Would a change in the price level of
natural gas cause a change in the committee’s estimate
of reserves recoverable ‘under existing economic and
operating conditions’? What is your answer?” Answer:
“In some cases, yes. For example, an increase in the
price level of natural gas might justify additional com-
pression which, in turn, might increase the recovery
factor of the fields to which
[4,690]
the compression was applied.”
* * * *
450
[4,712]
Testimony of John C. Jacobs
[4,698]
I said generally in my opinion a price change in the
order of magnitude of say a couple of cents would have a
negligible effect upon the committee’s estimates. On the
other hand, I should think that a price change, all other
conditions being equal, in the order of magnitude of ten
cents might have an effect upon the committee’s esti-
mates,
[4,711]
A. I testified at some length yesterday to the effect that
there are a few wells drilled in which the proprietary
interest in the data is so great that these data are not
available to the committee for a short period of time. I
say again I characterize this as a few instances, in
my opinion, few enough that the withheld data does not
have a significant effect upon the results published by
the Committee on Natural Gas Reserves.
[4,712]
PRESIDING EXAMINER: Well, the question is that
if they don’t report the wells to you or what is in them,
how do you know how many there are?
THE WITNESS: Well, the point is, your Honor, that
we do know how many wells there are, and we know
how many that we did not get information on. Conse-
quently, I know that the ones that we did not get infor-
mation on are a few.
451
[4,712]
Testimony of John C. Jacobs
BY MR. WHEATLEY:
Q. How many are there?
A. This is a matter of confidentiality within the com-
mittee.
e * Sd 2
[4,713]
THE WITNESS: I would consider that is a confi-
dential matter within the limitations that our commit-
tee operates.
THE WITNESS: Your Honor, to the best of my recol-
lection at this time, the number is less than ten.
[4,730]
BY MR. HARKAWAY:
Q. Mr. Jacobs, you answered in response to a ques-
tion asked by counsel that there were approximately ten
unreported wells. Were you referring to South Louisiana
in your response?
A. I testified——
PRESIDING EXAMINER: He didn’t say ten. He said
there were less than ten.
THE WITNESS: I think I testified, yes, your Honor,
that
[4,731]
the number was less than ten. My answer does apply to
the entire United States ex the Alaska North Slope,
which, as I testified yesterday, is a special case in itself.
452
[4,736]
Testimony of John C. Jacobs
[4,734]
MR. HARKAWAY: Though I do have one question
on this area, if I might, and if I am not treading onto
confidentiality.
BY MR. HARKAWAY:
Q. Mr. Jacobs, do you have any idea what kind of
wells these were? Were they discovery wells, were they
development wells, or in giving an answer would that be
giving a confidential response?
A. That would be a breach of confidentiality.
Q. One further question. In response to other ques-
tions of Counsel Wheatley, you indicated that the price
impact—and I am paraphrasing your response this morn-
ing—the price impact was on the abandonment pressure,
and we went through this to some great degree yesterday.
Would the change in price have some effect on whether
or not a producer would add compression to recovering
gas from an otherwise unrecoverable gas area? Is this a
different impact that might be considered?
A. Well, if I understand your question, you are asking
the same—about the same situation, that is, that the addi-
tion of compression and the abandonment pressure are
correlative.
MR. HARKAWAY: That is what I wanted to clear up.
Thank you, Mr. Jacobs.
MR. SIMONS: Mr. Examiner, before this witness
leaves the stand, I would like to comment on the con-
fidentiality shield that
[4,736]
Q. Mr. Jacobs, I show you page 4676 of the tran-
script of yesterday, line three, where it says, as the
453
[4,736]
Testimony of John C. Jacobs
reporter has it, “The Witness: Excuse me. Proposed ex-
hibit is correct.” Do you have a change to make in that?
A. Yes. What I said was “Excuse me. Assuming the
proposed exhibit is correct.” The words “assuming the”
were omitted by the reporter.
Q. On 4633, lines seven through twelve, Mr. Hark-
away asked you a question, “And did the subcommittee
members in the South Louisiana area tell you how many
wells were kept confidential?”
Do you want to clarify your answer to that question?
A. I would like to to this extent: That is, that it is
the data from the wells that is kept confidential and not
the wells themselves. As I have testified, the committee
has knowledge of all the wells that are drilled in the
offshore area as well as the onshore.
[4,740]
PRESIDING EXAMINER: All right.
DIRECT EXAMINATION
BY MR. COOPER:
Q. Mr. Jacobs, I hand you the document that has been
marked for identification as Exhibit 49 and ask you
whether Part II of that document, beginning on page
85 and extending through to page 265, is the report of
the Committee on Natural Gas Reserves of the American
Gas Association as of December 31, 1969?
A. It is.
Q. And that is the report to which you have been
testifying during the past two days?
A. That is correct.
454
[4,741]
Testimony of John C. Jacobs
MR. COOPER: Mr. Examiner, I would like to offer
Part II of Exhibit 49, being, as I have said before, pages
85 through 265, in evidence in ‘this proceeding.
MR. SIMONS: Mr. Examiner, I would object to the
receipt in evidence of the portion of the AGA report as
defined by counsel.
The report lacks probative value, and it lacks pro-
bative value because the basic underlying data is not
made available and cannot be seen by the public. It has
been cloaked in a mantle of confidentiality from the be-
ginning. There is simply no way, shape or manner to
test the reliability of this other than to do what Mr.
Jacobs has suggested, to have faith in the members
[4,741]
of the committee. But that is not a legal basis for re-
ceiving data in evidence.
Now, the objection that I am making, Mr. Examiner,
I think goes to the very heart of what kind of proceed-
ings we are going to have here before the Federal Power
Commission, whether, when you announce to the public
or when you tell a court that we had an evidentiary
hearing and a full record and full cross-examination
you are keeping faith with the concept of due process in
American life, or whether you are simply engaging in
a great charade where there is no meaning, there is no
honesty, and there is no truth whatever in what is being
done.
If this report cannot be tested other than to say that
we have faith in the people who compiled it, if you can’t
go back to the basic data, if you remember that the peo-
ple who compiled it are people who work for the industry
that is requesting the increase here involved, if you re-
member that at the time that they prepared it they were
455
[4,741]
Testimony of John C. Jacobs
perfectly well aware what arguments would be made
from a shortage in reserves, from a decline in reserves,
and what arguments would be made from an increase
in reserves, then it seems to me there is nothing that
you can do other than to say that this report lacks
probative value, it cannot be tested, it is-not competent
evidence, it is not competent for any purpose. There is
no basis for accepting it under even that old, tired
wheeze, “for whatever it may be worth”, or under that
old excuse for avoiding decision, “well,
[4,742]
the argument goes to the weight to be accorded, we will
take it in and we will see about it later when we come
to write a decision”. Because if it is in the record, it is
going to be cited as record data; and if we have record
data, that record data ought to be factual, it ought to
be competent. People ought not to be able to say there
is something in the record when that record data does
not really mean anything at all. And this data doesn’t
mean anything at all, and there is no way to test it
to find out whether it means anything at all.
Accordingly, Mr. Examiner, I would urge with every
ounce of vigor at my command that this exhibit be
excluded from admission in evidence.
I would also point out that if this data is wanted in
by the moving parties, they can make it competent, they
can make it have probative force by making available
the data which underlies it, and by making available
as witnesses the people who prepared the reports and
have them come with the reports that they prepared.
The question is not whether it goes in or not; the
question is whether it goes in in a competent manner
or not.
456
[4,743]
Testimony of John C. Jacobs
There is certainly no basis in American law for put-
ting in a series of summary reports where the underly-
ing data is hidden from public view and using that data
against any party to any proceeding. When that is done,
you have the merest shambles of a trial, you degrade
the whole adversary and hearing process. And I don’t
think, Mr. Examiner, that the Federal Power Commis-
[4,743]
sion should be a party to that, and I don’t think that you
should permit yourself to be a party to that.
Accordingly, I object to the exhibit; I ask that it not
be received in evidence for any purpose whatsoever.
MR. WHEATLEY: Your Honor, on behalf of the
municipal distributors group, we wish to second Mr.
Simons’ objection to receipt in evidence on the very rele-
vant grounds that he has put forth.
We believe that the cross-examination that has taken
place these last two days demonstrates beyond question
that there is no way in which the truth and accuracy of
the figures contained in this report can be tested by any
other party to this proceeding.
The confidentiality claim that is made as to all of
the data presented here precludes any such ability by
any party.
We believe that the very fundamental question of due
process of law is involved in this matter, and we submit
that it would be certainly contrary to the interests of
the consumers of this country if data prepared by parties
with an interest in the outcome, and a conflict of in-
terest, I might say, in preparing any material that
would be inconsistent with the positions which are ex-
pressed by their companies before this Commission,
457
[4,743]
Testimony of John C. Jacobs
should be adopted here by the Commission as evidence
and as proof of the very facts which are being asserted.
And we strongly second Mr. Simons’ objection on the
various
[4,744]
grounds that he has stated in putting forth that ob
jection.
MR. NORRIS: Your Honor, if I may, I submit that
the bridge has already been crossed as to whether the
figures appearing in this report will be in this record.
Exhibits 8 and 8-A contain these figures. It is not
necessary for my purposes that Exhibit 49 be admitted,
but I would suggest to Your Honor that rather than the
bare figures that appear in Exhibit 8 and 8-A, it would
be helpful to have the explanations which appear in Part
II of the AGA report also in the record.
As counsel Simons points out, the weight to be given
these figures has not been determined on this record.
However, the data in that report gives a little fuller
picture of what went into the numbers and the strictures
which surrounded them.
Now, whether this is evidence of the type on which
reasonable and fair minded men would rely might be
indicated by the fact that the Federal Power Commission
in both the Permian Basin and the Southern Louisiana
decisions made use of this data. And I think that per-
haps no substitute for it has been suggested. Therefore,
I would ask Your Honor to admit it as helping to have
a more complete record in this case,
PRESIDING EXAMINER: Didn’t staff use these
figures in the preparation of Exhibit 9?
MR. NORRIS: Yes, Your Honor.
MR. MATTINGLY: Yes, Your Honor.
458
[4,746]
Testimony of John C. Jacobs
[4,745]
PRESIDING EXAMINER: Do you have any com-
ment?
MR. MATTINGLY: Yes, I would like to make a few
brief comments.
MR. GOLDBERG: Perhaps before Mr. Mattingly—is
Mr. Mattingly going to respond to the statement that
has just been made?
MR. MATTINGLY: I would like to respond very
briefly, yes.
MR. GOLDBERG: Because I was going to respond
to the statement that has just been made.
MR. MATTINGLY: Go right ahead.
MR. GOLDBERG: And as to the Examiner’s inquiry
about Exhibit 9.
Exhibit 9 on its face states to anyone who reads the
report that the figures that are published by the Ameri-
can Gas Association with respect to reserves, which are
the subject of this Exhibit No. 49, were accepted at face
value, and the staff was not vouching for those figures
and could not vouch for those figures. The staff con-
fessed they had no ability to confirm or analyze or verify
those figures. So that Exhibit 9 cannot possibly furnish
a predicate for putting Exhibit 49 into this record.
With respect to the proposition that the Commission
has used AGA figures in the Permian Basin and South-
ern Louisiana cases—that is, the first Southern Louisiana
cases, I would remind the Examiner that those repre-
sented the Commission’s
[4,746]
initial efforts without having gathered any data which
it could turn to in order to fix area rates.
459
[4,746]
Testimony of John C. Jacobs
Now, the Commission has proceeded in that fashion
for too long a time now. The Commission has all the
power it needs to secure data that is reliable. And that
applies to this Exhibit No. 49. It has the power to get
behind these data an find out if it is reliable. And the
time has arrived for calling a halt to reliance on figures
that cannot be verified, that cannot be vouched for. So
that to refer to Permian Basin and to Southern Louisiana
area proceedings as a predicate for using this informa-
tion unverified at this late date simply won’t wash.
PRESIDING EXAMINER: Mr. Goldberg, whether I
personally agree with you or not, I think it would at this
point be quite irrelevant. Your argument along those
lines would be better addressed to the Commission than
to me.
MR. GOLDBERG: Not at all, Mr. Examiner. You are
fully empowered to decide in this case whether this
should be admitted. And being fully empowered to de-
cide that, you have the full power to decide that the time
has come to call a halt to letting into the record unveri-
fied data which Mr. Simons very correctly points out
will be lost sight of. And once it gets into this record
you will be talking about it as probative evidence when
in fact that has never been established.
PRESIDING EXAMINER: Mr. Goldberg, isn’t it a
fact that
[4,747]
this report is used quite extensively throughout the in-
dustry?
MR. GOLDBERG: That proves nothing. Index fig-
ures——
PRESIDING EXAMINER: I am not asking whether
it proves anything. I am asking you whether or not it
is not a fact.
460
[4,748]
Testimony of John C. Jacobs
MR. GOLDBERG: I couldn’t say to you how exten-
sively it is used, or for what purposes it is used.
Now, assuming arguendo that it is used extensively,
it may be that the use of that report for the purposes
used by private people may be fine. But you are talking
about the use of this report as a basis for reaching
determinations that affect consumers all over the coun-
try. And they are entitled to have the best possible in-
formation, and not just somedne’s suggestions that we
have faith.
PRESIDING EXAMINER: Mr, Mattingly, you were
going to make a comment?
MR. MATTINGLY: Your Honor, I do believe this is
a matter that is essentially an argument that has been
addressed to the Commission on a number of occasions
and I think will undoubtedly be addressed by a number
of parties, as has been done, in this proceeding. But at
least from my point of view, from the staff’s point of
view, this is how we would view the situation.
Certainly these data are the only data of this nature
that we know that are available. They are the only data
in the world that are available to indicate the trend of
reserve additions, the actual reserves, and the various
other statistics
[4,748]
that are presented for the natural gas industry on a total
U. S. basis. So in that respect, there is no alternative.
Now, these data have been consistently prepared. They
are a continuing data series going back to 1945. I would
represent that they have been accepted by Government
agencies, both Federal and State. They are accepted by
the industry. They are accepted by anyone—the eco-
nomic, banking industry. Any industry that has to deal
with these problems has in fact and does rely on these
data.
461
[4,748]
Testimony of John C. Jacobs
These data have been used in every single area rate
case before this Commission. Their use has been con-
sistently approved, along with various other published
statistical data series from a wide variety of sources
including the Federal Government, the state governments,
various business organizations, whose information, as
stated by the Commission in its opinion, is essential to
obtain information on a nation-wide basis for these na-
tion-wide gas reserves and costs and other data that, are
necessary.
Now, beyond that, the use of these data for the pur-
poses for which the Commission has used them has been
uniformly approved in judicial review by the courts.
Their use has been conclusively affirmed by the Supreme
Court of the United States in its opinion in the Permian
Basin area rate cases.
Now, in this particular proceeding, in addition to the
published definitions and procedures and explanations
that are
[4,749]
contained—the extensive explanations that are contained
in the annual report, the staff has undertaken in co-
operation with the witnesses sponsored by the united dis-
tribution group—we have previously by our letter sent
to—a general counsel’s letter sent to Mr. Jacobs, asked
him pertinent, pointed and direct questions which we
considered appropriate for developing the issues, for en-
lightening all of the parties to the extent possible as to
the precise nature of who does this work, how it is done,
how the figures are prepared. I think the evidence in
this case for that reason is much more extensive than
it has been in any of the past proceedings.
Now, it is our position, certainly, that the data are—
in demonstrating that the data are entitled to sub-
462
[4,750]
Testimony of John C. Jacobs
stantial weight, we think the data—we would not pur-
pose to argue that at this time because that essentially
ultimately will be a matter for determination by Your
Honor and by the Commission and ultimately by the
courts. And being reasonable men, obviously we are going
to be willing to live by the results of those decisions;
however, we think that it is simply not valid, it is not
appropriate, in an attempt to exclude this evidence,
to simply allege, after Mr. Jacobs has come up here
and testified on the basis of his appearance in this pro-
ceeding—to simply allege that the reason that they are
entitled to no weight is to assume bad faith on the
part of the committee or the subcommittees or Mr.
Jacobs himself. I don’t think that is
[4,750]
certainly any such reason for keeping them out.
And I think all of the indications, all of the factual
background, all of the nature of the arguments point all
in the direction, Your Honor, clearly, of admitting these
data into evidence and using them as is necessary to make
the determinations for which the data are appropriate in
this proceeding. And I think that from every standpoint
at least that I can think of, based on Presgdent, based
on common sense, based on the objections reasonable
men, and based on even the Commission’s rules, 1.26 that
govern this particular decision, that you are going to
have to make—as far as I would be concerned, Your
Honor, and it would be the staff’s position, that all of
these indications point to the receipt of this evidence in
this proceeding.
MR. SIMONS: Mr. Examiner, I would like to respond
to Mr. Mattingly, primarily, as well as to certain ques-
tions that you raised. If this is the appropriate time to
do it, I will do it.
463
[4,750]
Testimony of John C. Jacobs
PRESIDING EXAMINER: Go ahead.
MR. SIMONS: With respect to whether this material
was-received and relied on in Permian and in the first
Southern Louisiana case, first of all, it was received with-
out objection and I believe by stipulation. In this case
there was no stipulation on it. The reason that there was
no stipulation is because we felt that the data was being
jimmied and we had seen how the data were being used
against us. We no longer wanted
[4,751]
to acquiesce in that kind of a suicidal project.
Now, the second difference is that when you use in-
dustry data for a second time, you run this very severe
risk that it will be altered to fit the arguments being
made by the industry when they know how it is going
to be used. In the first case this was a series that had
been used for a long time, and it was used by the Com-
mission. When it had been prepared it had not been
prepared with the idea, and the people who prepared it
hadn’t known how the Commission would use it. After
Permian, they did know. And look at the sharp differences
that we got in the last two years just prior to this pro-
ceeding: Very marked differences from anything that
happened before. this is not some sort of wild suspicion.
Now, as to Mr. Mattingly’s statement, therefore, that
this procedure has been approved by the Commission and
approved by the courts and approved by the Supreme
Court, he is just as wrong as he can be. It was never
raised in those cases. No issue was ever made of it in
those cases. Courts do not reach out and decide issues
that are never raised. Nobody challenged the use in those
cases. So to say that there is some precedent on this
is just completely wrong.
464
[4,752]
Testimony of John C. Jacobs
You are not bound, there is no holding—Mr. Mattingly
did not cite a single holding and you cannot cite a single
holding that says when there is objection to this kind of
non-probative data it can go in. It can go in by stipula-
tion. We
[4,752]
do not stipulate. I hope that that point is clear.
Now, he says that it should go in because they are the
only data that are available. And I must confess that
I find this a pathetic response for counsel for the Govern-
ment agency charged with regulating this industry.
Developing the point made by Mr. Goldberg, why has
the staff not gotten other data available?
I am at a loss to understand the position being taken
by the Office of General Counsel in their little dispute
with the Federal Commission as to whether they have
jurisdiction to get this data. The fact that they haven’t
gotten reliable data does not justify putting unreliable
data in. The fact that they have not obtained probative
evidence doesn’t justify putting non-probative evidence
in.
Now, Mr. Mattingly referred to the Gooch question-
naire, but the major and most important item that that
questionnaire demonstrated, and which has been corro-
borated by Mr. Jacobs’ testimony on the stand, is that
every time you go to look for something, down comes
the shield of confidentiality, there is no way you can find
anything. In part, the questionnaire was very useful for
that purpose, because it demonstrated, as had never been
demonstrated before, that this report lacks probative value
unless the shield of confidentiality is dropped and unless
the basic underlying data are presented.
Mr. Mattingly says that the objection seemed to be
based
465
[4,753]
Testimony of John C. Jacobs
[4,753]
on the assumed bad faith of committee members. That
is not so. There is no assumption one way or the other.
But the offer in evidence—and the burden is on the
party offering—the offer in evidence is based on the
conclusive assumption of good faith of committee mem-
bers, and there is surely no basis for that. Parties are
entitled to examine the committe members who prepared
the reports, and they are entitled to see the reports.
Now, one final point. Mr. Mattingly indicated all of
the factors that he thought that the receipt in evidence
of this data could be based on, and he mentioned per-
cedent, and I think I have taken care of that, and Com-
mission rules, and so on. I think it is extremely signifi-
cant, Mr. Examiner, and I perhaps end where I have
started at the very beginning, that one of the factors
that Mr. Mattingly did not mention when he mentioned
factors that pointed to admission was the very basic one
in our whole judicial concept. The concept of due process.
If you can’t cross-examine this data meaningfully, it
can’t be in. If you can’t get the people who prepared it
and ask them what they did and why they did it and
how it differed from what they did last year and what
field it related to and where they made their revision
and what their basis was for it, then the whole report has
no real meaning and the kind of a trial that we get at
the Federal Power Commission should be reported by
Franz Kofka.
MR. COOPER: Mr. Examiner, I don’t know whether
you desire
[4,754]
any argument from me or not.
PRESIDING EXAMINER: I think I have heard
enough. And I will reserve my decision on the admission
466
[4,755]
Testimony of John C. Jacobs
of this exhibit until at least 2 o’clock. We will recess
now until 2 o’clock.
I don’t think it is necessary to hold Mr. Jacobs. We
won’t need him any more.
(Witness excused.)
(Whereupon, at 12:30 o’clockk p.m., the hearing was
recessed to reconvene at 2:00 o’clock p.m.)
[4,755]
AFTERNOON SESSION
PRESIDING EXAMINER: All right, gentlemen, let’s
proceed.
Staff counsel has asked to be heard.
MR. MATTINGLY: Your Honor, I wanted to simply
make an additional remark or two that I think will be
in order, that Your Honor will find in order prior to
Your Honor’s ruling on the matter which was left prior
to the noon recess.
I wanted to be sure that I stated on the record that
it has been the testimony of staff witnesses in this pro-
ceeding that have been cross-examined to date that the
trends in reserve additions and gas supply as reported by
the AGA have been in fact confirmed in large degree by
the data which is reported to the Federal Power Com-
mission on FPC Form 15.
I also want to say this with respect to the suggestions
that were made this morning by counsel for the New York
Commission relating to his request that we undertake,
and parties have access to AGA information that would
allow them a review and analysis of all of the underly-
ing work papers of the AGA used in preparing its
report.
467
[4,755]
Testimony of John C. Jacobs
In our view, Mr. Examiner, this would require essen-
tially the creation of an organization or a bureau which
would be essentially similar to the AGA and it would
require essentially a duplication of the effort and the
work which is done by the AGA. I would suggest that
the parties and the Commission and Your Honor must
consider in making a decision on this matter—must
[4,756]
consider the spirit in which the request was made. Ir-
respective of any arguments which may have been ad-
vanced, which were advanced, we must be aware that
what has been requested by the New York Commission
and by certain of the other parties is a massive data col-
lection, analysis and review procedure which they must
know, and which I would state at the present time is
beyond the capacity and the resources of the Commis-
sion staff at this time for us to undertake at this time.
And I think that we must be careful in these proceed-
ings to distinguish between the need for data—between
the need, for example, for an ever increasing mass of
detailed technical reservoir data on the one hand and any
attempt by any party to vitiate the objectives or the
progress of this proceeding.
Now, in that connection, Mr. Examiner, that is, the
question as to whether this mass of underlying data are
in fact necessary, I would like to detail for the benefit
of those gentlemen here and for Your Honor and for the
vecord some experiences that we have had in that con-
nection.
Now, in the very first area rate proceeding in the
Permian Basin evidence was presented by a member of
the Committee of the Natural Gas Reserves Committee
of the AGA, Mr. C. E. Turner. In response thereto the
468
[4,757]
Testimony of John C. Jacobs
staff requested that he provide the work papers which
underlay his exhibit. Now, those work papers were com-
prised of approximately three steamer trunks full of
all of the individual reservoir factors and individual
sheets of
[4,757]
analysis that were used in the preparation of the data
in the AGA report for the Permian Basin area. The
material was reviewed by the staff; it was put on data
tapes, and exhibits were prepared therefrom and sub-
mitted in that proceeding together with related testimony.
Now, I would not attempt at the present time to
characterize that testimony, but I would think that in
view of the isssue that has been made in this proceed-
ing, it would be helpful to incorporate that material in
this proceeding by reference to the official record of the
Permian Basin. And I have those citations and I would
propose to have that material incorporated at the present
time. That is, the testimony and exhibits of Mr. Clar-
ence E. Hamilton, Staff Witness.
MR. HOLTZINGER: I am just not clear, Mr. Exami-
ner. Could I ask counsel a question? |
PRESIDING EXAMINER: All right.
MR. HOLTZINGER: You are referring to the testi-
mony of the Witness Hamilton in Permian. Is that
National or Permian Basin testimony?
MR. MATTINGLY: Subject to—I will give you my
own understanding, that it is Permian Basin data. I
would stand corrected by any of the parties, but I be-
lieve it is Permian Basin.
MR. HOLTZINGER: The other question I had is there
was a witness by the name of Brammer presented by the
staff in AR61-2, and I was wondering if that was
available updated.
469
[4,758]
Testimony of John C. Jacobs
[4,758]
MR. MATTINGLY: Well, Mr. Holtzinger, I cannot
answer your question specifically. What Mr. Brammer
had in the original AR61-2 proceeding is, of course, in-
corporated by reference by virtue of the order which
instituted this proceeding. Now, I believe I stated at an
earlier point in the prehearing conference that we did
not propose to update that exhibit.
MR. HOLTZINGER: My question was had it been up-
dated.
MR. MATTINGLY: No. We have nothing further to
add.
PRESIDING EXAMINER: I don’t know if this has
any relevancy here at this point.
MR. MATTINGLY: Your Honor, I think the only point
that I am trying to make, and I am not going to insist
that this material be incorporated by reference, although
I think it would be extremely helpful, is that we have
had experience with attempting to get this massive de-
tail and data and trying to work through these work
sheets. I might state that the conclusion that was reached
by the staff was that there was no substantial deviation,
no substantial error in the reserves calculations as made
by Mr. Turner. So I think that is another—it is simply
another factor, it is another factual consideration which,
as I indicated earlier this morning, all go to establish
the validity of the data that is in question at the present
time.
Personally I think it would be very helpful to have
that material incorporated by reference here. I can pro-
vide the
[4,759]
citations to it.
PRESIDING EXAMINER: Well, I would rather- not
hear any more argument on this. I am prepared to
470
[4,760]
Testimony of John C. Jacobs
give my ruling on the admissibility of the exhibit.
MR. GOLDBERG: I would simply like to have the
record show, Mr. Examiner, that Mr. Simons is not
here, nor is Mr. Wheatley here. And I am sure they left
with the expectation that there were going to be no
further statements.
PRESIDING EXAMINER: Well, I think whether there
were or not, if they were that anxious they might have
appeared here to get the ruling.
MR. GOLDBERG: Well, I am here and I would like
an opportunity to briefly—
PRESIDING EXAMINER: You are here and I am
prepared to make a ruling.
MR. GOLDBERG: I would just like the opportunity
briefly to respond.
Mr. Mattingly has said that the trends of reserves
additions disclosed by the AGA report is confirmed by
the reports made on FPC Form No. 15.
Now, it has not been demonstrated that the information
presented in Form 15 represents independently derived
data unrelated to the source of AGA data, and it is
only that kind of data that could be even remotely con-
sidered as confirmatory. Where you have data coming
from the same source, one could hardly say that a re-
report—two reports based upon the same
[4,760]
data confirm each other, even if they came out with the
same result, because you have not demonstrated that the
underlying data on which those conclusions are based is
reliable.
Mr. Mattingly argues that if the AGA data were not
received there would be an enormous burden placed upon
the staff of the Commission.
471
[4,760]
Testimony of John C. Jacobs
Mr. Examiner, it was 1954, 16 years ago, the Com-
mission was charged with the responsibility of regulating
producers. It has had 16 years within which to collect
information independently, objectively collected informa-
tion, objectively evaluated information, and it hasn’t done
that. And it hardly seems to me that the Commission
or its staff can argue that because of the Commission’s
failures you should now receive information that has
not been subjected to the kind of analysis we are en-
titled to have.
PRESIDING EXAMINER: All right. The principal
objection to the admissibility of Exhibit 49 for identifica-
tion at this point is to its claim of confidentiality and
the inability to go behind the figures to find out where
they come from and what is behind them. Insofar as
confidentiality is concerned, the Commission itself with
respect to the figures on uncommitted reserves which are
being used in this proceeding has accepted and respects
the confidentiality of the producers. And I would apply
the same principle to the figures to which confidentiality
is claimed in this Exhibit 49 for identification.
[4,761]
Aside from the issue of confidentiality, if I were to
apply the rule which is set forth in Rule 1.26 of the
Commission’s rules of practice and procedure, which
states that evidence of a kind which would affect reason-
able and fair minded men in the conduct of their daily
affairs must be accepted or admitted, a quick check shows
me that it is used by—these AGA figures are used by
Government agencies; the Bureau of Mines of the De
partment of Interior in its Minerals Yearbook, which
is issued yearly, uses these figures and relies on them.
If you can refer to page 727 of the 1968 Minerals Year-
472
a
[4,762]
Testimony of John C. Jacobs
book, you will find reference to it there. You will find
reference to the estimated productive capacity of natural
gas in the United States as of December 31, 1968, on
Table 9 of the same volume.
Furthermore, these figures are used extensively by the
Power Commission itself in its new gas costing technique
to determine additions to reserves. The AGD has spon-
sored a witness—the Associated Gas Producers in the
South Louisiana case sponsored a witness by the name
of Roseman who used the AGA figures in determining
nation-wide cost of gas well gas.
In the Permian Basin decision of the Commission, I
find reference which is reported at 34 FPC 159, at page
197; there is a sentence which states the total reserves
added were derived from the AGA proven reserves sta-
tistics.
Now, this is enough to prove to me that this is the
type of a reference, the type of figures or the type of a
report
[4,762]
which would affect reasonable and fair minded men in
the conduct of their daily affairs, and I am therefore
admitting into evidence Exhibit No. 49.
(THE DOCUMENT PREVIOUSLY IDENTIFIED
AS EXHIBIT NO. 49 WAS RECEIVED IN EVI-
DENCE.)
MR. GOLDBERG* Mr. Examiner, may I ask in view
of your ruling that you direct that the sponsors of Mr.
Jacobs and of this exhibit, the UDC make available
the underlying materials, committee reports, work papers
to the New York Commission—I am sure they would be
interested in it—to the municipal group, and anyone else
who wishes to use that material. Not only with respect
473
ae
[4,762]
Testimony of John C. Jacobs
to Exhibit 49, but with respect to the preceding five
years as well.
Nothing that the Examiner has said about accepting
this material because in the Examiner’s view others have
used it and therefore others are reasonable and it is
reasonable to conclude that this affects reasonable minds
precludes our right. to get behind this exhibit. And we
therefore ask that you grant our motion and direct that
that information be made available.
PRESIDING EXAMINER: I will not so direct.
Who is our next witness?
MR. HARKAWAY: If Your’ Honor please, a proce-
dural matter that ties in with this witness’ testimony.
PRESIDING EXAMINER: Which witness?
[4,773]
Testimony of John G. Winger
[4,772]
TESTIMONY OF JOHN G. WINGER
DIRECT EXAMINATION
BY MR. T. JONES:
Q. Would you please state your name and business
address.
A. I am John G. Winger. My business address is 1
Chase Manhattan Plaza, New York City.
Q. Are you the same John G. Winger whose prepared
testimony appears in the record in this proceeding be-
ginning at transcript page 1452?
A. I am.
Q. Are the answers given therein the answers you
would have given if these questions had been asked to
you orally?
A. Yes.
Q. I invite your attention to a document entitled
“Consumer Price Trends” which has been identified as
Exhibit 20 in this proceeding. Was this prepared under
your direction and supervision?
A. Yes, sir.
MR. T. JONES: Your Honor, I move the admission
of Exhibit 20.
[4,73]
THE WITNESS: Well, since this material was sub-
mitted we have conducted further study of the future
energy requirements of the United States. This testi-
mony was based upon a very detailed study prepared
475
[4,773]
Testimony of John G. Winger
in 1968, and it has become apparent since that time
that the forecasts for all forms of energy were too con-
servative. Therefore, we have gone back and reviewed
all of the work that was done and are now convinced
that the re-
[4,774]
CROSS-EXAMINATION
BY MR. GOLDBERG:
[4,781]
THE WITNESS: We use the AGA report for our
economic studies. I use it all the time in analyzing the
relationship between reserve additions and capital ex-
penditures devoted to the search.
PRESIDING EXAMINER: Do you find that you can
rely on them? !
THE WITNESS: Yes, we do rely on them.
BY MR. GOLDBERG:
Q. Do you rely on it because you have a choice of
materials that are available to you, or that is the only
thing you have got available to you?
A. I think I might respond by citing a parallel. We
also use a large number of the indicators of the Federal
. Government; and I might say that some of those are
more suspect than the AGA numbers. Yet we rely upon
them because that is what we have.
Q. I am glad you said “more suspect”, because that
implies that maybe the AGA could be suspect, too.
476
[4,788]
Testimony of John G. Winger
A. I would say that if we had to have numbers that
we could feel were perfect, we might just as well go
stand in a corner or go fishing.
[4,786]
A. Well, this is in the same sense that we began to
be concerned about fifteen years ago over a shortage of
gas. We pay a great deal of attention to the momentum
of change when we deal with the energy market, and it
did become apparent at that time—we saw the shadows
of a shortage.
Now, it is necessary in our activities to look on down
the road ten, fifteen years, because capital expenditure
[4,787]
programs usually cover that period of time. And in look-
ing ahead, we see the matter becoming critical, and we
are currently advising our customers that it will become
critical. Critical in the sense that they won’t get all the
gas they want. Many potential end users will get none.
[4,788]
A. Well, as I did point out in the testimony, there
were various financial factors in the past, dating back
into the Thirities, and for a period of about ten years
after World War II the petroleum industry was experi-
encing rapid scale price appreciation.
If I may say it in this way, in that ten-year period
the actual wellhead value of oil and gas production in-
477
[4,788]
Testimony of John G. Winger
creased at an average rate of $600 million a year. Now,
something more than 400 million of that was the result
of price appreciation. The price of gas went up too, but
something that is next to nothing doesnt’ add up to very
much in any event.
Well, in the mid-Fifties, by that time there was—well,
[4,789]
first there was a slowdown in the economy which can be
tracted to demographic factors, a slowdown that lasted
until the early Sixties. This was the time when the flood
of gas came into the energy market and provided for
the producer very little revenue. The gas was displacing
oil that was a source of revenue, and we could see an
abrupt change from our studies in the generation of
capital funds, And the petroleum industry being char-
acterized as a high-risk industry has always found-‘it
necessary to generate most of its funds for capital and
other requirements, debt service and dividend payments,
from its operations.
Since the industry had moved into an era when it was
unable to generate at the rate it had been in the past,
it became necessary to curtail capital spending, and that
is exactly what happened.
Q. Well, let’s get this much clear: When these first
signs became apparent about fifteen years ago that you
have just described, they were not FPC-related, were
they? Federal Power Commission related?
A. Well, I don’t know that I could say that without
knowing the thoughts that went through the minds of
all of the individual producers, the major companies who
constitute the industry.
I would not want to say that the 1954 decision and
the other developments prior to that did not influence
the industry.
478
Testimony of John G. Winger
[4,790]
The utilization of capital—the decision to utilize money
is based upon many factors which might be put into three
categories: Geologic, economic, and political. And we had
two factors that went bad for the producer. His geologic
factors remained good, but the economic factors were
poor because very little oil was going into the market.
The political factors went bad as a result of this de-
cision; also as a result of the two actions of the ad-
ministration in the past which went against the interests
of the producer.
Q. All right. With respect to the economic factor, you
say very little oil is going into the market. Now was
that because of the petroleum industry?
A. The petroleum industry was making available pe-
troleum hydrocarbons, both oil and natural gas and the
liquids therefrom. And as I indicated in the testimony,
less than one—or approximately one-fifth of the market
growth was captured by oil, a major part of it by gas.
Q. All right. Now, was that because the industry was
promoting the sale of gas in competition with oil?
A. I would say for a time the independent producers
were making all the gas available and actually promoting.
The independent producer is not in a position to make
an economic analysis of the energy market, I would say
also in the early years immediately following World War
II that very little of the industry was really looking into
the future and
[4,791]
measuring the impact upon its overall operations that
stem from the great amounts of gas going into the
market. It took some time for this to become known.
479
[4,791]
Testimony of John G. Winger
Q. With respect to the majors, were they promoting
the sale of gas over oil?
A. As a group—I can’t say for all majors, but as a
group they were in the earlier years, until it became
apparent that this was financially not proper action to
take.
Q. In other words, you are saying that by promoting
the sale of gas over oil they were reducing the amount
of funds available for capital expenditures for explora-
tion and development from internally-generated sources.
Is that right?
A. Well, I think we have to add an additional factor.
I don’t like the term “promoting.” I imagine all of us
in this room are familiar with the ruling of the Texas
Railroad Commission shortly after World War II that
the flaring of gas had to stop. We all recognize it was
a great economic waste. And simply stated, the ruling
was that either the gas had to be sold for some economic
purpose or returned to the reservoir. Returning it to the
reservoir entailed additional capital expenditure without
any promise of return. So the producers, large and small
alike, were willing to sell the gas at that time. I say
willing, without having measured the full impact in the
market in the energy market. But then it became ap-
parent that this was not the thing to do. The production
of
[4,792]
the gross revenue dollar that flows from the sale of gas
is so very small there could not possibly be any profit
from it when it was displacing a liquid product.
Q. Does it come down to this then: That the ruling of
the Texas Railroad Commission forbidding the flaring of
gas forced producers to sell that natural gas, but they
would have been wiser if instead of selling it they had
480
[4,793]
Testimony of John G. Winger
taken a long-range view of the effect of the sale of that
gas on capital available to them and have returned that
gas to underground reservoirs?
A. Economically it would appear to be wiser, yes.
Whether it would be physically possible for them to have
returned all of the gas to the reservoirs, I can’t say.
Q. Is it your testimony that if the market for oil is
such that the price of oil is depressed, which in turn cuts
down the amount of money available internally for ex-
ploration and development, that the price of gas must
then make up the deficiency created by the depressed
price of oil.
A. Well, it was the amount of gas coming into the
energy market at a price very much lower than any
price that could be justified for a refined product that
depressed the price of oil. Number Two heating oil had
to compete with this gas, and only in one small corner of
the nation was it able to compete on a price basis. So
that price was held down. To the degree possible, the
price of gasoline, which is not affected by this
[4,793]
competition, was inflated. But the industry—too many
elements of the industry attempted to find relief in the
transportation market, and the intense competition there
kept the price of that down.
Q. But if I understand your testimony, it is that if
the requirements for funds doesn’t come out of the sale
of oil because the oil prices are depressed, then it has
got to come from the sale of gas at a price level that
makes up the conditions in the oil market?
A. Well, the two are not quite the same, because in
the case of oil, for a producer, a producer alone, his
gross revenue comes from the sale of crude oil. For the
integrated company, his gross revenue comes from the
sale of refined products to the ultimate consumer.
481
[4,793]
Testimony of John G. Winger
I can say to you that the revenue that can be traced
to the sale of gasoline is equal to sixty percent of all
gross revenue, and that the revenue that comes from the
sale of natural gas is less than five cents of the gross
revenue dollar.
So it is a very complicated industry, and we can’t trace
the revenue source through and say that this is the case
for all of the industry, because it is different for the
different components of the industry.
Q. Well, if I understand what you have just told us,
you are saying that even with increased prices of gas,
which would generate more funds internally, it represents
a very
[4,794]
small fraction of the internally-generated funds that are
needed to keep exploration and development at an ap-
propriate level.
A. Yes.
Q. All right.
A. May I elaborate on that?
Q. Yes.
A. I will use myself as an example. I am a consumer
of gas, and I will pay at the point of consumption about
$1.50 per Mcf.
Now, all that the petroleum industry gets from my
dollar and a half is what the producer receives at the
wellhead, roughly ten percent or slightly more than that.
If I were using oil instead and paying the same $1.50,
approximately half of it, or 75¢ would go back to the
producer and the other 75¢ would go to the other in-
tegrated activities of the petroleum industry. So the fi-
nancial residue from my $1.50 spent for oil is very
much larger than the $1.50 that I spent for gas. And
it is from that financial residue that the producer is
482
[4,795]
Testimony of John G. Winger
able to devote a greater financial effort to the search
for both.
Q. So you are saying that the producer, from the
viewpoint of having sufficient internally-generated funds,
is better off selling the oil than he is selling the gas,
but he was forced to sell the gas because of the Texas
Railroad Commission’s
[4,795]
ruling against flaring.
A. Well, that is part of it.
When he embarks upon a search for petroleum re-
serves, in most instances he is motivated by his desire
to find oil, not gas. He wants to find the most valuable
petroleum hydrocarbon.
But the record indicates that for most ‘of the time
since World War II, for every dollar invested in the
search, he has found almost equal amounts of dry gas
and liquids, a combination of crude oil and gas liquids.
And since that is the result, he has the gas and he must
sell it.
Q. I don’t know that I have an answer yet to one of
the questions that I have been asking, and I would like
to try it this way. It is probably my fault, not yours.
Since the sale of gas doesn’t provide as much inter-
nally-generated funds for exploration and development as
the sale of oil does, something needs to be done about the
price of gas so that gas will make a greater contribution
of internally-generated funds for exploration and develop-
ment. Is that correct?
A. Exactly. Must have.
Q. Now, if the price of gas is increased and thereby
produces a greater reservoir of funds for exploration and
development, the producer is nevertheless going to be
interested in developing—or in searching for the most
valuable product, and that would be oil, right?
483
[4,796]
Testimony of John G. Winger
[4,796]
A. That’s correct. For the time being.
Q. Yes. And you know of nothing, do you, that would
compell him to devote the money, greater internally-gene-
rated funds resulting from increased gas prices, to the
search for gas?
A. Well, iff his incentive to conduct a more active
search increases, if he looks for oil and if his results in
the future are the same as they have been in the past,
he is going to find gas as a result of the search for the
oil.
If there should be changes, economic changes which
would give hiim an equal incentive to search for gas, to
some extent we believe that a directional search may
be maintained. But only to some extent.
Q. Do yow have any idea of the level to which the
gas prices would have to be raised to provide that equiva-
lent incentive? |
A. May I give you a lengthy answer to that, to repeat
part of what: I said here, because I think it is very im-
portant,
Q. If you can’t give me a short one, give be a long
one.
A. All right.
We are talking about an industry, industry averages,
and individual company experiences will vary substan-
tially from this.
But our records indicate that there has been a consis-
tent relationship since World War II between the re-
serves of oil
[4,797]
and gas added and the dollars invested—capital dollars
and exploratory dollars.
484
[4,798]
Testimony of John G. Winger
Because of this longstanding relationship, and also be-
cause the amounts of gas and liquids have also been
equal, this gives us a reasonable basis for projection.
We believe as a result of our studies that we can make
realistic measurements of the future energy requirements
of the nation divided between the various sources of
energy. This will give us the quantities of oil and gas
required. And we can relate to these quantities, then,
the capital expenditure that would be needed to provide
that amount, assuming that the industry could have the
Same success as it has in the past.
Well, this suggests to us that immediately the in-
dustry would need to spend approximately $3 billion more
annually. How might the industry generate that much
more? Well, we could start out by using ten cents, be-
cause it is an easy figure to work with. Ten cents more
for all gas, new gas and flowing gas, that would generate
slightly more than $2 billion additional wellhead value.
After taxes that would leave somewhere between eight
and nine hundred million dollars that could be potentially
available for reinvestment. I say potentially, because we
can’t be assured that every producer is going to use the
funds in that fashion.
That then would be less than one-third of the indicated
amount required. But, if the price of gas were to advance,
[4,798]
it I think is a very good likelihood that the price of oil
products would move up too, that the price of the compet-
ing oil products would mo € up and that the price of
[4,799]
Testimony of John G. Winger
[4,799]
A. We have a regulation of the price of gas, as we
all know, and this has constituted an indirect regulation
over the price of competing refined products and the
price of crude oil.
Now, if the regulation is changed or removed, then that
would have an upward push to the price of domestic
crude oil.
Now, coming to the international market, there are
various reasons for believing that the world price of
crude oil may
[4,800]
have bottomed out and will be moving up from now on.
One of the reasons for this is that our dependency upon
certain parts of the world has increased to the point
where they have very great bargaining power and can
insist upon higher prices.
Q. When you speak about the regulation of gas hav-
ing an indirect regulatory effect on oil, are you saying
that the price of oil is influenced by the regulatory price
established for gas in terms of ability to compete?
A. That’s correct.
Q. Would you refer to page 1455. In that sentence
appearing in the first paragraph of the answer which
begins: “It was the industry’s overall inability,” et cetera,
you are there talking about the interdependence of oil
and gas and that a shortage of one or the other or both
is a combination of factors that affect oil production
and gas production?
A. Yes. The interdependence is in there all the way
through from the first search to the final sale in the
market place.
486
[4,802]
Testimony of John G. Winger
Q. And that refers to all of the incentives that may
be available to a producer in connection with explora-
tion and development activities—I am thinking, for ex-
ample, of tax laws. There too there is an interdependence?
A. Yes.
[4,801]
Q. Doesn’t your testimony at pages 1457 and 1458
mean that one of the major factors which reduced ex-
ploration in the United States was the large increase in
imports of foreign oil at the expense of the domestic
crude?
A. That was a factor, yes.
Q. Would you call it a major factor?
[4,802]
A. Secondary to the gas factor.
Q. But nevertheless, a major factor? An important
one?
A. An important one, yes.
Q. Yes.
Does your testimony at those pages also suggest that
higher prices for natural gas twelve or fifteen years ago
would have increased the drilling for hydrocarbons in
the United States?
A. I don’t think there is any doubt about it.
Q. But you are not suggesting by that testimony that
the effort would have been to produce more gas; is that
right?
A. Well, I think that if we could depend upon the
evidence from the past, a greater amount of money spent
would have resulted in a greater discovery of gas.
487
<<
[4,802]
Testimony of John G. Winger
Q. But because gas was associated with the search for
oil and the producers would be looking for this more
valuable hydrocarbon, namely oil; is that right?
A. They would be looking for the oil, but as a by-
product of that effort they would have found the gas.
Q. So that increased exploratory effort for oil as a
by-product would have increased gas reserves?
A. Right.
Q. Would that increased effort have been influenced
by projections of demand for gas?
A. Well, if we could presume that as the result of
a higher price for gas that the market growth would
have been
. [4,803]
somewhat less, then the market growth for oil would
have been greater. And there would be a double edge
then to the increase of revenue, more coming from the
gas, even though the volume was smaller, and more
coming from the oil because the volume of oil would be
larger and also the price would have been higher, had
the price of gas been higher.
Q. Does your answer then mean that estimate of the
demand for gas was an irrelevant factor in connection
with drilling effort?
A. Well, going back to that period of time, there
were estimates relating to the future requirement for
oil which proved too optimistic because the industry was
under estimating the competitive impact of the gas. More
gas came into the market than had been thought at the
time:
488
[4,807]
Testimony of John G. Winger
[4,806]
Q. You speak of the industry being an industry that
relies primarily on internally-generated funds for their
exploratory and development efforts; yet they do borrow
money, right?
A. They do.
Q. And they borrow money because they want to
mount an effort which can’t be mounted solely from in-
ternally-generated funds; correct?
A. That’s correct.
Q. And would the borrowing of funds for such
[4,807]
‘strike that and let me start over.
Are you here today indicating any limit on the bor-
rowing capacity of the producers?
A. Very definitely.
Q. Now, what is that limit?
A. All right. As I said earlier, the industry did gene-
rate most of its funds for financial requirements from
operations until about 1960. From that point on, there
has been a steady decline. Now, when I am speaking
of the industry here, more specifically I am talking about
this group of major companies that we have studied for
many years, and I am referring to their worldwide op-
erations.
Well, throughout the decade of the Sixties, they experi-
enced a steady deterioration in their ability to generate
sufficient capital funds, and in the most recent year for
which we have numbers, 1969, the industry found it
necessary to go to the capital markets for about twenty-
eight percent of their needs.
489
[4,807]
Testimony of John G. Winger
Now, we need to bear in mind that the industry’s
capital expenditures are in many areas. We might, for
the sake of simplicity, talk about production expendi-
tures and expenditures beyond the wellhead. There has
been no change in production expenditures since the mid-
Fifties with the exception of the outlay required for
making the lease bonus payments in recent years to
state and Federal governments, There has been
[4,808]
no increase in the expenditure devoted to the actual
search for petroleum hydrocarbons.
On the other hand, the industry has increased di-
tures for all other purposes: For transportation, for
refining and for market. It has also increased its ex-
penditures abroad relative to the outlay in this country.
Now, capital is very mobile, and when any of the
three factors that I mentioned earlier become unfavor-
able, capital will indeed take flight, and much more
quickly today than at any time in the past, because on
a worldwide basis there is a shortage of capital, a short-
age of capital facing the worldwide economy. This means
that the petroleum industry must compete more vigorously
for borrowed capital than it has ever had to in the past.
And I can,say to you that one of the hardest things
for a banker to do is to say no to a perfectly sound loan.
Yet bankers throughout the nation and abroad have had
to do that.
Q. Because of shortage of funds?
A. Because of a shortage of funds.
Q. You said that the production expenditures have not
changed since the mid-1950s except for increases due to
lease bonus payments. Were you talking about production
expenditures in the Forty-Eight States?
490
[4,812]
Testimony of John G. Winger
A. That’s correct.
Q. But production expenditures abroad did increase?
[4,809]
A. No, they have also stayed level. There was not the
need to increase them abroad as there was in this coun-
try, because of the prolific nature of the discoveries in
the Middle East and North Africa.
[4,811]
I might add that lease bonus payments are a new
element of cost that is likely to be in the picture from
now on, not only in the United States but in the rest of
the world as well. It could very well detract from the
actual expenditures devoted to the search.
Q. You say a new element of cost.
A. Yes. In other words, it is an increased flow of funds
[4,812]
from the industry to governments.
Q. In the United States has that ee in con-
nection with offshore exploration and evelopment? Fed-
eral leasing?
A. It started with offshore. It has taken various forms
on government lands in the past. In Alaska it was not
offshore.
Q. In other words, these are payments made to the
government, which payments are not therefore available
to the producers for exploration and drilling efforts?
491
Lr
[4,812]
Testimony of John G. Winger
A. Well, it is money that the government is charging
the producer for the use of the land, for the right to
conduct the search.
Q. And these charges tend to reduce the available
funds for exploration and development?
A. Yes, they will, if the industry is unable to generate
that much more.
Another reduction, of course, was the change in the
depletion allowance last year, which reduced one of the
industry’s provisions for capital recovery.
Q. To the extent that changes in the depletion allow-
ances reduced the amounts available for exploration and
development effort, you are saying, are you, that the
funds have to be produced some other way and if isn’t
to be done through borrowing, it has to be done through
raising prices to increase the amount of internally-gene-
rated funds. Is that
[4,813]
A. Yes. Historically, of the funds generated from op-
erations, approximately half was derived from net in-
come and the other half from the various provisions for
capital recovery. So if the latter goes down, then the in-
dustry must try to make up that deficit in net income,
which of course would mean higher prices.
Q. With respect to the expenditures made abroad, do
you know whether they were made abroad because they
offered the industry greater profits than might be avail-
able from domestic exploration?
A. That would be part of it. If I might again go back
to the three factors. Starting with the geologic factors,
there are many areas of the world in which the petro-
leum industry might conduct a search for petroleum, a
promising search. The growth potential for petroleum
outside the United States is very much greater than it
492
[4,815]
Testimony of John G. Winger
is within. Western Europe and the Far East are two
parts of the world that are likely to be seen to have great
growth. So that means the economic factors are favorable.
The political factors change frequently in various parts
of the world. To provide you with one example, in 1958,
the Venezuelan Government imposed a much higher tax
on the industry, which precipitated a flight of capital.
That capital moved around to various parts of the world.
Now just to bring us up to date, we have had other
[4,814]
developments. I am referring to the discovery of—impor-
tant oil discoveries in the North Sea by two companies,
combinations, and then even more recently a major dis-
covery in Southeast Asia. Just as sure as we are sitting
here today, there are meetings in various corporations
reallocating budgets. If the budget doesn’t increase, the
funds have to be diverted from activities in some part
of the world to another. And it is most likely that these
funds would have to come from North America.
I say North America, because Canada would be affected
as well.
Now, on your point on profit, currently and for most
of the past since World War II the rate of return on
average invested capital has been higher abroad than in
the United States.
Independent producers have cut their capital outlay in
[4,815]
the United States to one-half of what it was in the mid-
Fifties. Now, we are unable to say where they are em-
493
[4,815]
Testimony of John G. Winger
ploying capital. There are many opportunities open to
the independent producer these days, particularly since
we are in an era of capital shortage.
Q. To the extent that higher profitability for effort
is available abroad, you would expect that the increased
funds generated by higher prices would tend to be used
by the industry in such areas, wouldn’t you?
A. Not if the increased prices improve the rate of
return in the United States relative to what it might
be abroad, and also taken in the light of the various
political risks encountered about the world.
Q. In other words, you are saying that the comparative
profitability must take into account the comparative risks
involved?
A. That’s correct.
[4,818]
Q. Would you say that the total level of expenditures
during the period 1956 to 1969 for finding and develop-
ing gas and oil reserves was a function o: the total
revenue derived from oil and gas production?
* eo * *
THE WITNESS: It is a function of it, but it is not
the only factor involved, because the investor may in
considering his alternate opportunities for investment
conclude from this level of investment that he would
dedicate part of his revenue generation to another form
of investment. This obviously is what has happened to the
independent producer.
* * a .
494
[4,829]
Testimony of John G. Winger
[4,823]
* * * *
If the producer is going to put his money where he
has the promise of greatest return and regulation does
not establish prices based upon such a philosophy, isn’t
the producer always going to put his money where there
is this promise of greatest return regardless of the in-
crease in prices regulation gives him?
A. Well, I think all forms of regulation, whether it
is the price of natural gas or banks or railroads or what-
ever, must recognize that financial capital is a resource,
too. And it is not in plentiful supply. And there is com-
petition for the available capital. And if there must be
regulation—and I don’t say that we should do away
with all regulation, but rather that enlightened regula-
tion would recognize this fact and thereby provide regu-
lation which would permit the industry to compete ef-
fectively for capital.
And under those circumstances, then, the producer
[4,824]
utilize the funds for the purposes you have in mind.
* * * *
[4,829]
Q. Is it the sense of your testimony on page 1459 that
beginning in about 1956 and down to the present time
domestic crude oil has been overpriced in relation to its
cost and natural gas has been underpriced in relation
to its cost? ~~
A. One might reach that conclusion because of the
inability to segregate the cost. And there is a tendency
495
ee oe
[4,829]
Testimony of John G. Winger
when costs aren’t known to relate them to revenue re-
ceived. So we had in effect, then, gas going into the energy
market bearing a very small price tag and little of the
cost burden and displacing oil bearing a high price tag
and most of the cost burden.
Now, under different circumstances, if there were a
higher price for gas, conceivably the price of oil could
have been lower, up to that time, but not since that time.
Q. You say that one might reach that conclusion. Is
that the conclusion you want one to reach from your
testimony at transcript 1459?
A. No, not necessarily.
[4,830]
The conclusion I would want people to reach is that the
generation of capital funds from that point has been too
small.
Q. Even if domestic crude was properly priced, your
conclusion still would be that there should have been a
greater contribution to the revenues needed by the natural
gas price?
A. From 1956 on.
Q. Yes.
A. Yes.
[4,837]
Q. Would you say that if both domestic crude oil and
natural gas had been priced to recover the costs properly
[4,838]
attributable to each, that the growth in gas demand since
1956 would have been substantially less than was actually
experienced?
[4,842]
Testimony of John G. Winger
[4,839]
THE WITNESS: This hinges upon the term a proper
allocation of costs. And I can only give what I would con-
sider to be proper. And that would mean an allocation
of the costs that related to the intrinsic value of the
hydrocarbons found, And under those circumstances, the
price of gas moving into the energy market for all and
uses would have been substantially larger than it ac-
tually was, because the cost so attributed would have
necessitated a higher price. And even so, I do not be-
lieve that the volume of gas going into the market would
have been very much less because the gas did move into
the energy market ata price far below that of competing
sources of energy. gas in addition to a comparison
of Btu costs has other values to the consumer.
[4,842]
Q. Yesterday you mentioned in response to a question
I had asked you about the limits on the borrowing ca-
pacity of the producers, you indicated that majors were
going to the capital markets for about twenty-eight per-
cent of their needs. And if you want to refresh your
recollection about this, you might look on pages 4806
to 4807 of the transcript yesterday.
Did you mean by that testimony to indicate that the
majors could not expect to be able to borrow more than
about twenty-eight percent of their needs in the capital
market?
A. There is no way of knowing to what extent the
proportions will change.
497
[4,842]
Testimony of John G. Winger
I would say certainly the major companies are and
will continue to encounter increasing difficulties in ob-
taining funds from the capital market.
We must also recognize additional factors.
The petroleum industry goes in heavily for so-called
off-the-balance-sheet financing. A major part of this would
be
[4,843]
service station lease-back arrangements.
Now, these are obligations to pay. They are really a
hidden form of debt. It is a method of financing in lieu
of a capital expenditure. This, then, if we consider it as
a part of the debt, would increase the major companies
as a group—it would increase their debt-to-equity ratio.
And that then would indicate further that the industry
has perhaps reached the limits.
We increasingly hear now comments from management
that they will not borrow additional funds for capital
expenditures. They are going to live within their means.
Further, we need to recognize that borrowed capital is
an expedient taken for the purposes of timing, but in the
long run alll borrowed funds must. be repaid with funds
generated from operations.
Q. Isn’t it the fact that whatever limits there may be
on the producer’s ability to borrow capital, those limits
stem from the capacity of their operations other than
natural gas to generate funds?
A. Well, it is limited by their overall ability to gene-
rate funds.
Q. But iin that picture of the overall revenue, natural
gas is a very small part; isn’t that right?
A. It has been a small part.
Q. Yes.
498
[4,844]
Testimony of John G. Winger
[4,844]
Yesterday we mentioned it was less than fifty percent
of the total revenues.
A. No. Of the total revenue generated—and we must
go beyond the wellhead, because the funds are generated
as a result of the operations from the first time money
is devoted to the search to the final sale to the ultimate
consumer.
Of the total gross revenue generated from all opera-
tions, the sale of natural gas accounts for less than five
percent.
_Q. Well, doesn’t that mean, then, that whatever limi-
tations exist on the ability of producers to borrow capi-
tal in the markets stems from the generation of funds
by their operations other than the natural gas operations
since the rest of it represents about ninety-five percent
of their revenues?
A. It would stem from their ability to generate funds
from all operations. For the independent crude oil pro-
ducer it will generate from his sale of oil and gas at the
wellhead. For an integrated company it would flow all
the way through from the sale of all sorts of petroleum
products.
Q. But with respect to the contributions of natural
gas revenues to the total gross revenues of only five per-
cent, doesn’t it follow that the revenues generated by the
sales of gas play a very small part in the ability of the
producer to borrow capital in the market?
A. They have in the past, and that takes us right to
the core of the problem.
499
[4,845]
Testimony of John G. Winger
[4,845]
PRESIDING EXAMINER: Of that ninety-five percent
remaining, what percent of that is derived from the sale
of petroleum or petroleum products only?
THE WITNESS: Well, all of the ninety-five percent,
approximately sixty percent of the gross revenue can be
traced to the sale of gasoline alone, And we have in the
neighborhood of eight to nine percent that can be traced
to the sale of petrochemicals. And the rest would be the
sale of light and heavy fuel oils.
[4,853]
When the gas, however, began to reach all of the energy
market, it could no longer be considered in a by-product
status. But, from the standpoint of contributing financial
results, it is still in a by-product status.
Q. Referring to your testimony at the top of page
1461—and I am particularly referring to lines five down
to the end of that paragraph.
Are you there saying in effect that on the basis of Btu
content gasoline sells for about twenty-four times as
much as natural gas in the field?
A. Well, I haven’t made the calculation in that way.
It would be the relationship of the five cents to the sixty
cents of the revenue dollar.
.
s * * a
[4,858]
A. No, sir. The maintenance of reserves of both liquids
and gas was satisfactory from the standpoint of the na-
500
[4,888]
Testimony of John G. Winger
tion’s energy requirements up until the Mid-Fifties. There
has been
[4,859]
progressive deterioration since that time for both liquids
and gas.
Now, it is important to measure the inventories, and
proven reserves are in the nature of inventories. For any
commodity inventories must remain in a satisfactory re-
lationship to the expansion of the market, and we utilize
a reserves-to-consumption ratio.
The ratio for liquids has been poorer than for gas for
a longer period of time. But these are both trends that
obviously cannot continue indefinitely. They have run just
about as far as they can, in my opinion.
[4,862]
We do believe that the reserve-production ratios are -
now at minimal levels, both for liquids and for gas. It is
important to bear in mind that the gas industry as an
industry operates under a much higher debt-to-equity
ratio than the petroleum industry. They are able to do
that because they are a low-risk industry.
[4,888]
-
Q. Mr. Winger, you testified earlier that as a result
of a change in projections as indicated by later develop-
ments you have revised some of your earlier studies.
And I would assume you can indicate the extent to which
this is true. Some of the figures—and I would call your’
501 Z
[4,888]
Testimony of John G. Winger
attention particularly to this $150 billion figure on page
1463—may have changed. Is this a figure that will have
changed as a result of that change in the forecast from
1985 pushing that date forward to 1980?
A. It would depend upon the assumptions made in
that particular position.
If we were to set as an objective an expenditure
necessary to satisfy all of the nation’s requirements for
oil and natural gas without becoming proportionately
more dependent upon outside sources, then the figure
would have changed. It would have increased.
Q. As a result of your testimony that you gave this
morning, would you now change this $150 billion figure?
A. Yes. It would be higher under those circumstances.
Q. Could you give an indication of approximately what
range, the order of magnitude of that increase would be?
A. I could readily do it if I had the data before me.
I do not have the number in mind.
Q. Would it be substantial in comparison -with the
$150 billion?
[4,889]
A. It would be substantial.
Q. Now, just to be—
A. I can elaborate on that if you wish.
Q. Certainly, by all means.
A. We have tried to measure all of the sources of
natural gas from domestic and foreign sources, and as a
result we have concluded that by the end of this decade,
if there is no increase in the level of spending, that there
will be a deficit amounting to 30 billion cubic feet a day.
Now, this deficit has to be filed with some other source
of energy. The other sources will be oil and coal, most
likely. That, then, enlarges the demand for oil sub-
stantially over what we would expect under more nor-
502
[4,890]
Testimony of John G. Winger
mal circumstances. And if the industry is motivated pri-~
marily to find oil—and I underscore “if’—then that is
going to increase the expenditure very extensively. It
would have as a by-product, of course, the additional
discovery of gas.
Q. Now, this 150 billion which I assume now is a
minimum figure as a result of your earlier testimony,
just for) my own understanding, that is an investment
that is required domestically, in the domestic industry?
A. That is correct.
Q. Solely. And it represents investments that are made
exclusively in the production function. There would be no
investments here in transportation, marketing, refining,
any of
[4,890]
those things?
A. No, sir.
Q. It is all in the production function?
A. Strictly production.
Q. Mr. Winger, in making that estimate did you at-
tempt to quantify or consciously include or exclude the
Alaskan hydrocarbon province?
A. Yes, Alaska is included. The discovery of oil on
the north slope of Alaska meant that additional capital
funds would be devoted to that area. But it did not re-
sult in any increase in the available capital. It meant
that these funds would have to be diverted from an ac-
tivity somewhere else, most likely within the lower 48
states.
So when we speak of domestic expenditures we do in-
deed have all of the states included.
Q. Now, I would like to have at this time—I think it
may have been stated in your testimony. I don’t have the
figure exactly in mind. On the average, investment, as
503
[4,890]
Testimony of John G. Winger
you define that term, in the domestic petroleum natural
gas industry has not changed over the past ten years.
What has that level been? What is the current level?
A. The level of spending?
Q. I would say the current level, yes.
A. Well, I must qualify that.
The level of spending over this period has averaged
about
[4,891]
four and a quarter billion dollars, of which approximately
700 million represented leasing costs.
Now, the latter has doubled jin the last two years. So
the current level of spending: now is approximately $5
billion, and from your testimony_on 1463, it appears that
the minimum—under your testimony the minimum for
the foreseeable future will be at least 10 billion a year.
Would that be a fair statement?
A. That is correct. That is an average, starting with
seven billion, reaching approximately 13 billion by the end
of the period.
Q. So that the average deficiency at the present time
would be approximately five billion?
A. That would be correct.
Q. Now, you have touched on the subject of how that
five billion is to be accounted for, where the additional
five billion will come from. And as you indicated earlier
in your cross-examination, if prices for flowing gas, gas
which is on stream at the present time, were increased
10 cents per Mcf, you would generate approximately $2
billion.
A. In gross revenues.
Q. In grossrevenues. So that would essentially be
wellhead revenues, would it not?
A. That is true.
504
: : [4,905]
Testimony of John G. Winger
[4,904]
* * * *
Q. Now, would this analysis be the type of analysis
that would provide evidence or indicate whether or not
gas was
[4,905]
adequately priced, overpriced, or underpriced in the var-
ious end use markets?
A. To our satisfaction it provided evidence that it was
very much underpriced.
In which markets is it underpriced?
In all of the markets.
Is it underpriced—
Residential and industrial, or boiler fuel markets.
Is it underpriced in some more than in others?
Yes, sir.
Q. Which is the most underpriced, then?
A. It would be—it is easier to answer that the other
way around. It is least underpriced in the northeast sec-
tion of the nation.
MR. GOLDBERG: Gas is lease underpriced—
THE WITNESS: Gas is least underpriced in that area.
MR. GOLDBERG: That is where it costs most?
THE WITNESS: That is where it costs most.
This, again, will vary for specific cities. The cost of
gas in the metropolitan area of New York is very much
greater than the cost of gas in Albany, yet Albany is
further removed from the source. This has much to do
with the local distribution costs.
BY MR. MATTINGLY:
Q. What about in the industrial markets?
POPOPO
Bi
505
[4,906]
Testimony of John G. Winger
[4,906]
A. In the industrial market the cost of gas was lowest
nearest the source of production. In other words, at the
Gulf Coast. And this accounted for a heavy migration of
industry from other parts of the nation to the Gulf
Coast area.
If the price of gas were set on an economic basis, it
would be most costly again in the northeastern part of the
nation, but we know that gas has been sold on an in-
terruptible basis for less than the cost of transporting
it to the market.
Now, this is a necessary result of the kind of distribu-
tion where gas must be constantly on the move. And it
reflects the difficulties in storing this form of energy.
[4,908]
It is our impression from our contacts that as the
supply of gas becomes increasingly tight there will be a
withdrawal from the industrial market to the extent that
this is possible to prevent the greater proportion of the
gas to be channeled to the residential market.
Industrial consumers do have somewhat more latitude
in utilizing other sources of energy than the residential
market. They may be unwilling to give up the gas, they
may be very well forced to give up the gas, as several have
told us that they have been told after cut-off date in the
future when their needs can no longer be provided. And
this naturally would be manifested in an interest on the
part of industrial consumers to pay more to retain the
supplies of gas, to compete more effectively with the con-
sumer—residential consumer for available supplies. Now,
506
[4,916]
Testimony of John G. Winger
these are impressions based upon contacts. We have no
way of documenting this at the moment.
[4,916]
A. I wish I knew. We can’t see them. We can’t see the
petroleum industry generating enough for its own pur-
poses. The overall financial requirements of the petroleum
industry in the decade of the Seventies adds up to more
than $500 billion. And if the industry had an annual
growth in earnings in the Seventies equal to what it
achieved in the Sixties this would not be nearly enough.
It means a much larger annual growth in earnings than
we have witnesses in the past and this is not likely.
[5,127]
Testimony of Charles A. Larson
[5,127]
TESTIMONY OF CHARLES A. LARSON
* * * *
Q. Are you the same Charles A. Larson whose pre-
pared testimony appears in the transcript of this proceed-
ing commencing at page 2008?
A. Yes, I am.
Q. Are the answers given therein the answers you
would give if you were asked the questions appearing in
that?
A. Yes, with the exception of some changes resulting
from a change in my Exhibit 37.
Q. Would you please describe the changes you would
make?
A. The first change is at page 2017. The first full an-
swer, Exhibit 37 should be changed to Exhibit 37 Re-
vised.
Q. Has the revised exhibit been served on the parties?
A. Yes, it has.
PRESIDING EXAMINER: Instead of 37 Revised, let’s
make that 37-A.
MR. T. A. JONES: Very well.
(THE DOCUMENT REFERRED TO WAS MARKED
AS EXHIBIT NO. 37-A FOR IDENTIFICATION)
THE WITNESS: The next change appears at tran-
script page 2019. The third line change 5.44 to 5.69. And
on the same line change 4.12 to 4.21.
On the following transcript page, 2020, in the middle of
the page is a reference to 31 percent. That should be
changed to 29.1. And on the same line change 43.2 to
41.1.
508
[5,162]
Testimony of Charles A. Larson
[5,128]
And two lines below that, change 79.2 to 79.5.
On the same line, change 86.9 to 86.8.
I would like to make another change which resulted
just because of the time difference, and that is the
second line from the bottom I have testified in a second
ease for the Connecticut Natural Gas Corporation, so
after the Docket No. 10833 I would like to add “and
10981.” In other words, I have testified in two dockets
before the Connecticut Commission for that company.
BY MR. T. A. JONES:
Q. Mr. Larson, could you tell us briefly the reason for
the changes in the percentage numbers appearing on page
2019 and 2020 which you have just described?
A. The changes substantially result from a change in
determining the growth rate, namely that I had used the
linear least squares method to determine a line of best
fit and hence a growth rate, and I changed that to an
exponential lease squares method, which better approxi-
mates a growth rate. The linear method could be repre-
sented by the equation Y is equal to A plus BX. The
_ exponential would be shown by the equation Y is equal
to AB to the X power.
MR. JONES: Your Honor, I tender the witness for
cross-examination.
[5,162]
Q. And how large an increase in the wellhead price
could be piled on top of these other increases before some
signs of elasticity would be shown under your theory?
509
[5,162]
Testimony of Charles A. Larson
A. Well, in this present very tight energy market
where natural gas is not the only fuel which is in short
supply, but oils is in short
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