Opinion ID: 345561
Heading Depth: 2
Heading Rank: 2

Heading: Raw Field Data, Bid Calculation Data, and Bid Calculation Files

Text: 273 We now narrow our focus to two particular categories of documents which the District Court held need not be produced: (1) (r)aw field data and (2) bid calculation data and bid calculation files. 64 We shall first try to clarify what remains in dispute after the stipulations and then analyze the principal controversy remaining. 274 As to the first category of documents there appears to be no further controversy between the parties all parties having agreed that (t)he Order may be affirmed insofar as it excludes raw field data, subject to the FTC's right to seek access to or production of such data pursuant to paragraph 9 of said Order. . . .  65 The FTC and producers other than Superior also agreed that (t)he Order may be modified to expressly exclude maps or other documents relating to the suspected location of natural gas in currently unleased acreage. 66 This second stipulation agreeing to exclude such documents pertaining to currently unleased acreage seems to eliminate any controversy between the parties over bid calculation data or bid calculation files (hereinafter referred to collectively as bid files) 67 relating to acreage not currently leased by one of the appellees. 275 Unfortunately, as to bid files relating to acreage that is currently leased or owned by one of the appellees, and to the extent that these files contain information other than raw field data, a controversy still exists perhaps the major controversy in this case. These bid files, which would be liable to disclosure under specifications G, H, and I of the FTC's subpoena (as modified by the raw field data and treasure map stipulations supra ), include information which producers assemble in advance of a lease bid. The information is based upon limited geophysical information and almost never upon actual exploration. The producers consider the models they have developed for making lease bids the most valuable trade secrets they own, because of the large outlays which have gone into their development and the ease with which any producer could be outbid on leases if its competitors had access to the model. 68 Understandably, the producers argue strongly against disclosure of their bid files, since, according to them, the data contained therein would give a competitor easy access to their bid model. 276 Most important to the legal issues herein, they also assert that bid files are not relevant to any calculation of proved reserves, because these files only contain speculative estimates of producing capacity based on limited information. Once a producer obtains a lease and thus is able to drill exploratory wells, these bid estimates are no longer used by any company (except presumably to improve its bidding model or to analyze the bidding behavior of opponents). As a result, the producers contend that bid files could not be relevant to an investigation of conspiratorial and other practices aimed at underreporting proved reserves. 277 Bid files rarely, if ever, contain proved reserve estimates. 69 However, if they do, all appellees except Superior have agreed to produce any proved reserve data contained in their bid files. 70 278 The Trade Commission, on the other hand, argues that (t)he 'bid files' contain estimates of reserves, no matter how speculative or untested, and, as such, are plainly relevant to the analysis of gas reserve reporting which is part of the Commission's investigation. 71 How unproved reserve estimates, which are never reported, can be . . . plainly relevant to the (FTC's) analysis of gas reserve reporting . . . , (emphasis added) we leave to our colleagues to explain. 279 Our reading of the transcript of 13 December 1973 indicates that the District Court denied production of appellees' bid files on the theory that they were irrelevant to any type of investigation of reserve reporting. After probing FTC counsel to ascertain whether the FTC had any theories of possible relevance, the court stated, 280 . . . I hold that the bid files, the estimated unproved and unverified estimates, represented by the bid files are in no way relevant to the investigation or inquiry that you tell me you are making, with one exception. 281 If you can later come back to me with a situation where a company has been awarded a bid on a property and has delayed an unreasonable time in drilling on it so they could come up with a proper estimate, then you may apply and I will consider giving you the bid file on that particular one. 72 282 Since issuance of the District Court's orders, the Trade Commission has implicitly conceded the irrelevance of producers' bid files on at least two occasions. First, in FTC v. Continental Oil Co., 73 one of the cases originally consolidated herewith, the FTC initially appealed, but subsequently moved for dismissal, explaining that FTC representatives had held further discussions and negotiations with Continental, that Continental had agreed to submit further testimony relating to their production in compliance with the FTC's subpoena, as needed, and that the case was therefore moot. 74 According to appellees, Continental did not, however, agree to produce its bid files. 75 Second, as previously mentioned, the FTC has now offered, as a basis of settling its dispute with Superior, to modify specification G . . . to require Superior to produce only documents containing proved natural gas reserve estimates. 76 By agreeing that production of all subpoenaed documents other than bid files was satisfactory compliance for Continental and by offering to settle for production by Superior of only those documents containing proved reserved estimates, the FTC necessarily recognized the correctness of the District Court's determination that bid files are irrelevant. 283 In its supplemental brief on rehearing en banc, the FTC argues that resolution of the bid file relevance issue somehow hinges upon resolution of the collateral estoppel issue. 77 This both distorts the holding of the District Court and misstates appellees' position. This court's determination of the bid file issue (as well as its determination of all other relevance issues raised herein) should be entirely independent of its resolution of the collateral estoppel issue. Relevance and collateral estoppel are two of three wholly independent legal grounds for affirming the District Court's major limiting modifications. (As mentioned earlier, the third ground is burdensomeness.) 284 The affidavit of H. R. Hirsch, appended to Brief for Appellee, Mobil Oil Corp. (filed 8 Nov. 1974), lucidly explains why data included in the producers' bid files has no logical or scientific relevance to any investigation of reports made after the drilling and development of a lease has commenced. In response to this affidavit by a qualified expert with twenty years experience in the oil and gas industry, the FTC offers only the argumentative affidavit of an FTC attorney who states that he has seen some proved reserve data in bid files which he has inspected. 78 The FTC's failure to offer rebuttal testimony by another qualified expert leads us to believe that it has been unable to find an expert willing to endorse its unsound, unscientific, and illogical speculations about the possible relevance of bid file data. 285 The simple fact is that estimates based on drilling on actual physical penetration of geological structures are so superior to speculative bid file estimates based on various geophysical tests that they immediately and completely supersede the earlier estimates. Even if the FTC is completely free of collateral estoppel limitations (as a majority of this court holds) and is allowed to pursue the broadest investigatory purpose it or this court can now envision, only reserve estimates and reports based on drilling (where hydrocarbon-bearing structures have been penetrated) will be of any relevance. After drilling, all prior estimates (there are no prior reports since only proved reserve estimates are reported) become nothing but irrelevant, superseded, and misleading. 286 Of course, if after making a successful bid on a piece of property a producer does not drill promptly, or if after drilling and discovering proved reserves the producer does not promptly report its discovery, then there might be some cause to look into the company's bid files. 79 These possible delays in drilling and reporting, although not supported by any evidence before the District Court, 80 were exactly what the court had in mind when it made the following provision in both orders here under review: 287 The Court reserves its ruling as to any and all matters, contentions or issues not specifically disposed of by this Order. Jurisdiction over these proceedings is retained for the purposes of providing other and further relief as necessary. 81 288 Additionally, at the 13 December 1973 hearing, Judge Hart expressly notified the FTC that he would be receptive to a motion for the production of any bid file where the Commission could show him that . . . a company ha(d) been awarded a bid on a property and delayed an unreasonable time in drilling. . . .  82 Since through its subpoena, as enforced and modified by the District Court's Six-Company Order, the FTC would have at its disposal all the information necessary to make a showing of delayed drilling or delayed reporting 83 (if either such practice exists), the District Court's approach seems perfectly sound especially in light of the highly confidential nature of these files. 289 With regard to bid files, the FTC advances, in its supplemental brief on rehearing en banc, the following three theories of relevance: 290 (1) The bid files may be relevant to the calculation of proved reserves because they may contain reserve figures for adjacent tracts. 84 291 (2) The bid files may be relevant in establishing a lease history which, by permitting comparison of proved reserve figures for a tract with initial speculative estimates contained in bid files, might indicate that the proved reserve figures were in error or misstated if they were markedly lower. 85 292 (3) Bid files may be relevant to determine whether appellees have a practice of deferring drilling in certain circumstances to minimize the extent of proved reserves even though they regard their untested estimates to be of comparable degree of certainty. 86 293 In building up the informational foundation necessary to understand the FTC's bid file theories, we have necessarily touched upon these three theories to some degree. Now, without being unnecessarily repetitive, we will briefly examine and show the error of each theory. 294 1. Possible Existence of a Limited Number of Proved Reserve Estimates in a Few Bid Files 295 It is highly unlikely that a producer's bid files would ever include proved reserve estimates. In only one situation is this even hypothetically possible. If a company leased a tract adjacent to an open, unleased tract, and commenced drilling on its tract, perhaps that company could develop sufficient data to make proved reserve estimates for some portion of the adjacent open tract. If the company bid successfully on the open tract and obtained it, then these proved reserve estimates for the adjacent tract would be called for under the subpoena, as enforced by the District Court. If, however, the company did not bid successfully on the open tract, then it could conceivably have in its bid files proved reserve estimates for a tract which was still open or leased by another company. 87 296 In any event, the FTC's adjacent tract argument does not support its demand for appellees' bid files in toto particularly the highly confidential and sensitive documents reflecting bid methodology (i. e., appellees' bid models). At most, the FTC's argument would support an order directing them to extract and produce all proved reserve data (if any) found in their bid files. But at this point even this order would be a meaningless gesture, since all parties (except Superior) have agreed in their stipulations that the District Court's Six-Company Order may be modified by adding the following proviso : 297 Provided that, to the extent otherwise called for, any and all proved reserve data contained in bid calculation files and relating to tracts covered by (this subpoena) shall be produced. 88 298 2. Evaluating the Accuracy of Proved Reserve Estimates by Comparing Them to Earlier, Superseded, Speculative Estimates in Bid Files 299 We agree with appellees: The FTC's argument that comparing proved reserve estimates on a tract with earlier, superseded speculative reserve estimates may reveal something about the accuracy of the proved reserved estimates illustrates dramatically the danger of relying solely on legal imagination (as a majority of this court does) in a highly technical area such as gas reservoir engineering. 89 As the only qualified expert whose testimony was before the District Court explained, 300 (T)he speculative reserve estimates which are based purely on raw geological and geophysical data are often grossly inaccurate. Thus to suggest that they should be compared to proved estimates to see if there has been under-reporting is absurd. 90 301 The evidence and argument presented to the District Court permitted it to make the factual determination that the producers' bid files contained highly speculative estimates, which would be rapidly superseded by much sounder estimates, once the winning bidder could begin drilling. After the first well is drilled on a lease, no company relies on bid file data, nor is such data ever reported to the AGA. Only data relating to proved reserves is reported, and the essential ingredient in the definition of proved reserves is that the data is obtained by drilling, by penetration of the formation. 91 302 The proved reserves definition is accepted by the industry, the Power Commission, and the Trade Commission here. 92 Thus, even if the bid file data showed a gross disparity compared to the data on proved reserves submitted to the AGA, this would demonstrate nothing except that the company's original bid estimates were sadly in error, for by definition the proved reserve data must be based on geological information obtained by drilling at a later time than when the bid file data is assembled. 93 The preliminary and superseded data in the bid files has no relevance whatsoever in determining whether preliminary bid file estimates will later be moved into the more strictly defined category of proved reserves. 94 In the absence of any such correlation, the FTC's hypothesis that compilation of a lease history dating back to the initial speculative estimates might be relevant in ascertaining possible violations of Section 5 is plainly unsound. 95 3. Delays in Drilling or Reporting 303 The Trade Commission makes one final argument: that companies sometimes delay drilling in order not to acquire any proved reserve data which would supersede the speculative estimates in the bid files and which they would be obligated to report to the AGA. Even though the likelihood of such behavior (i. e., of a company paying millions of dollars for a lease and then permitting that lease to go undrilled) seems quite remote, 96 the District Court, as we have mentioned before, expressly provided for just such a circumstance. 97 Considering the highly sensitive and confidential nature of appellees' bid files, the District Court's approach seems particularly sound. Indeed, in the case of Continental Oil Co., even the FTC accepted this approach as satisfactory. 98 304 If a few instances of deferred drilling or reporting do actually exist, the FTC would be able to detect such behavior with the information called for by the subpoenas, as enforced by the District Court's order. 99 By no means, however, would a few such instances justify the blanket subpoena of all bid files (or even the subpoena of the contents of one entire bid file) by the FTC. We would affirm the District Court's ruling, since it amply preserves the FTC's interest in having access to those speculative reserve estimates in bid files involved in any case of delayed drilling or reporting, while at the same time it affords appellees protection against the forced disclosure of sensitive data where such information is irrelevant to any alleged delay in drilling or reporting.