# Appendix — Mobil Oil Corp. v. FPC > Briefs, arguments, decisions, and more. URL: https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40386414_0301%3A05 ## Record - **Collection:** Supreme Court brief - **Document type:** Appendix - **Published:** January 1, 1974 - **Citation:** 417 U.S. 283 ## Text 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 3829 3831 3832, lines 1-18 3834, lines 20-25 3835-3836 3837, line 1-16 8838, lines 16-25 8839 8840, lines 1-17 $848, line 25 3844 3845, lines 1-14 8846, lines 5-19 3848, lines 15-25 0 “38851, lines 1-15 856 3869, lines 5-25 3870 3871, lines 1-23 3875-3876 3879 3886, lines 21-25 3891-3892 3983, lines 1-11, 17-25 3894-3897 3898, lines 1-6 3913, lines 18-22 3915, lines 17-20 3918, lines 23-25 3919, lines 1-14 3928, lines 1-22 3925, lines 20-25 3926, lines 4-15 3928, lines 15-25 3929, lines 1-16 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 4002, lines 22-25 4003-4054 4055, lines 1-22 4559, lines 1-6 4074, lines 3-25 4075, lines 1-19 4076-4077 4567, lines 14-25 4568-4570 4571, lines 1-23 4572, lines 15-25 4578-4574 4575, lines 1-18 4579, lines 22-25 4580-4581 4582, lines 1-23 4585 4586, lines 1-21 4589, lines 8-25 4590-4595 4600-4603 4605-4607 4608, lines 1-2 4614, lines 10-25 4615, lines 1-15 4620, lines 5-25 4625, lines 19-25 4626, lines 1-21 4631, lines 8-25 4632-4633 4634, lines 11-25 4637, lines 11-25 4638, lines 1-23 4639, lines 23-25 4640, lines 1 to end 4644, lines 10-25 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 4650, lines 6-25 4651 4652, lines 1-6 4688-4689 4690, line 1 4698, lines 13-18 4711, lines 17-22 4712, lines 1-11 4718, lines 1-2, 9-11 4730, lines 19-25 4781, lines 1-3 4734 4736, lines 3-19 4740-4762 4772, lines 7-25 4773, lines 20-25 4774, lines 7-8 4781, lines 3-22 4786, lines 19-25 4787, lines 1-5 4788, lines 14-25 4789-4797 4798, lines 1-17 4799, lines 19-25 4800, lines 1-23 4801, lines 20-25 4802 4803, lines 1-14 4806, lines 17-25 ' 4807-4808 4809, lines 1-4 4811, lines 19-25 4812-4813 4814, lines 1-15 4815, lines 1-17 4818, lines 12-15, 19-24 4828, lines 10-25 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 4839, lines 18-25 4 497 4842, lines 9-25 4 497 4848-4844 4 498-499 4845, lines 1-9 4 500 4858, lines 6-18 4 500 4858, lines 23-25 4 500 4859, lines 1-11 4 501 4862, lines 1-6 4 501 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 51638, lines 1-15 4 510 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 5926, lines 1-11 5927-5934 5935, line 22 5936-5941 5942, lines 1-19 5943-5976 5978-5999 6090 6091, lines 1-10 6104, lines 16-25. 6105-6106 . 6107, lines 1-18 6155 6156, lines 1-16 6163 6179, lines 9-25 6180 6181, lines 1-20 . 6186, lines 2-25 6187-6195 6312 6330, 6339 ' 6394-6399 6400-6408 6410 6416-6417 6419-6422 6431 6484, lines 4-9 6485, lines 17-23 6486, lines 4-25 6487 6488, lines 1-20 _ 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 6625, lines 1-17 6626, lines 24-25 6627-6630 6631, lines 1-12 | 6637, lines 8-25 6638-6640 6641, lines 1-17 6679, lines 6-25 6680 6681, lines 1-21 6682, lines 1-12 6692, lines 8-25 6693-6717 6718, lines 1-15 6725, lines 17-20 6734, lines 18-25 6735-6746 6747, lines 1-4 6763 6764, lines 3-25 6765-6769 6770, lines 18-23 6771 6772, lines 1-23 6773-6777 6781, lines 17-20 6782-6789 6790, lines 5-25 6791-6792 6793, lines 1-2 6794, lines 15-25 6795, lines 1-6 6798-6799 App. Vol. rhe LE LEP RE PA PP DP Pp rrp PhP Pp hah ee LL eR Pe ED a WALA MA Rah ah “at bance ils ab ache Leby ai ct Lite 55 natin SRG npaatlalighs wibhd gt Sd Ma as So Zs) fA Ts Nel ate SPE REET ETT 3 i ay 4 » 5 ; ? & how hes CMe tate yc as Bars 6 FRE, WAS et eR SEI MADR KC. be, 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 6984, lines 7-18 6985 _ 6987-6989 7145, lines 18-25 7146-7148 7149, lines 1-13 7229 7230, lines 24-25 7231, lines 1-15 7292, lines 18-25 7293, lines 1-17 7295 7328, lines 3-25 7324 7325, lines 1-8 7337, lines 1-8, 11-15 7370, lines 8-25 7371 7372, lines 1-12 7394-7395 7399, lines 18-15 7400-7401 7402, lines 1-24 7405, lines 5-25 7406, lines 1-12 7410, lines 8-25 7411 7412, lines 1-14 7414, lines 16-19 7423, lines 9-13 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 7428-7429 7430, lines 1-12 7431, lines 20-25 7432 7433, lines 1-5 7488, lines 6-22 7489, lines 1-9 7440 7441, lines 11-25 7442, lines 1-17 7448, lines 25, 7444-7451 | 7452, lines 1-10 7453, lines 3-13 7458, lines 24-25 7459-7461 7462, lines 1-12, 16-25 7463-7404 7465, line 1 7466, lines 8-25 7467 7468, lines 1-10, 20-22 7496, lines 22-25 7497, lines 1-23 7498, lines 15-23 7499, lines 1-14 7513 7515-7523 7525-7528 7529, lines 1-22 7530, lines 6-19 7533, lines 12-19 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. App. Vol. Pages 4 822 4 822 a 822 4 823 4 824 4 825 4 826-830 4 831-842 i ‘ a i ieee : a a +m 4 a ¥ $ 4 a D : Ps 4 « ay ee nd $n Fie | 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 d [Text truncated at 120,000 characters. The full text is on the page linked above.] --- Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40386414_0301%3A05. Public record. Not legal advice.