Opinion ID: 345561
Heading Depth: 2
Heading Rank: 3

Heading: Summary on the Relevance Issue

Text: 305 How wide of the mark is the Trade Commission's understanding of the differing roles of different type reserve data a misunderstanding which unfortunately has infected the majority opinion is capsuled by this statement: But any estimate of reserves however defined on which a company relies in the course of its business is relevant to the company's practices in estimating and reporting reserves. 100 306 Of course a company relies on each of the estimates of reserves it makes, but at different stages of the natural gas business, and with different degrees of confidence and far different purposes. The most preliminary and superficial of exploratory techniques may yield some clues as to natural gas presence or absence. Reliance at this stage is expressed simply as a decision to spend more money on additional exploration. At a later stage, with data assembled from much more sophisticated techniques but short of drilling or penetration of the geologic formation, the company may rely on the preliminary data to the extent of bidding for a lease. 307 In bidding for a lease the company obviously has some preliminary reserve estimate on which it relies, for the purpose of bidding; otherwise, it would never bid or would make a total gamble. Not only is this reserve estimate never reported, not only is it never revealed to a competitor, but even within company walls it is a closely guarded secret. This preliminary reserve estimate is a product of the bid model of the company and the scientific data amassed on that individual tract, and constitutes the heart of the bid file. 308 At this point we note that the Trade Commission has never stated, or even hinted, that it suspects and is inquiring into collusive bidding by the gas producers. Nothing in the record suggests that. If that were an object of inquiry, the contents of the bid files obviously could be relevant, e. g., to show that from differing scientific calculations there strangely emerged similar bids, or that based on similar scientific data the companies bid and failed to bid. 309 But the inquiry of the FTC is into the reporting of proved reserves and at the bidding stage of developing a gas deposit there is no such thing as a PROVED reserve, and there is no reporting (or revealing) of such reserve estimates as the companies do have. Then when proved reserve data is obtained by penetration of the formation only all the preliminary reserve data is literally junked, it is relied upon no more by the companies, reliance is placed entirely upon the proved reserve data, which is reported to the AGA, and which is to be produced totally by the subpoenas as modified by the District Court. Anything else the FTC seeks in the way of reserve estimates is completely immaterial to the FTC's purpose of investigating the collusive or false reporting of proved reserves. 310 One other statement from the majority opinion will serve to illustrate why, in reading the briefs and hearing oral arguments, we have received the impression that the great problem in this case has been and still is the curtain of ignorance between the Trade Commission staff and counsel and the gas producers, sheer ignorance on the part of the investigators as to the science and economics of the natural gas industry which leaves them without any rational concept of relevance or direction to their inquiry. As the majority says (approvingly, we fear): 311 The Commission also suggests that bid files could be used to establish lease histories . . . . (I)f (the) 'speculative' estimates were consistently higher than the reported 'proved' estimates, and by a roughly equivalent amount this might well be indicative of anticompetitive practices. 101 312 In this statement the Trade Commission exhibits a basic misconception concerning the significance of any disparities between the estimates of preliminary and proved reserves. Repeated disparities of this variety are significant indeed, they are precisely the type of error which would cost a company millions of dollars and get a group of geologists fired and which have absolutely nothing to do with the kind of inquiry the Trade Commission is making here. If the preliminary or speculative estimates turn out in repeated instances to be widely different from later proved reserve estimates, there will be considerable soul-searching on the part of the company geologists and higher officials. If time after time the proved reserves delineated by drilling are different from the gas reserve estimates based on preliminary scientific data, what was wrong with the preliminary estimates? What was wrong with the bid model? The company will seek to find out, to correct its bidding on the next available leases, whether the error was in bidding too much or in bidding too little and seeing a profitable tract go to a competitor. But in doing so, we may be sure that the company will not breathe a word of it to a competitor or to the AGA. 313 This is a matter of accuracy of bidding calculations, it has nothing to with the accuracy of proved reserves, but it is the guts of competition in the gas industry. If bid files, bid models, bid calculation techniques are brought out into the public domain 102 by enforcement of the FTC's unmodified blunderbuss subpoena, then effective competition in both exploration and bidding will be discouraged. We had always assumed that the principal duty of the Trade Commission was to preserve effective competition; it appears in this case not to know the effect of what it is doing. 314 The most frightening aspect of this revealed lack of comprehension by the Trade Commission is to contemplate what the FTC will do with the bid file data, if the subpoenas are allowed to stand unmodified. Obviously, from the instances publicly known and cited to us by appellees herein, the FTC will discover in the files of every company many horrible examples of the grossest errors in preliminary calculation of reserves as compared to the proved reserve data later developed by drilling. Given the FTC's concept of relevancy as argued herein, what conclusions will the FTC draw? If a company originally estimated a hundred million cubic feet of recoverable gas, and made an appropriate bid thereon, and now reports only ten million cubic feet in proved reserves, will the FTC trumpet that the company is falsely underreporting proved reserves, because the original estimate was so different? If a company estimated and bid the same amount, drilled twenty dry holes, and abandoned the lease with proved reserves of zero the same logic would hold, although we would expect the FTC to have enough good sense not to claim on these facts that the company was deliberately underreporting proved reserves. If Company A estimates a hundred million cubic feet of recoverable gas on a tract, but decides not to bid on it because of a preference for other tracts in the same auction, and Company B is the successful bidder but later reports only ten million cubic feet of proved reserves, will the FTC accuse Company B of false underreporting of proved reserves? 315 The examples could be multiplied endlessly, with but only one question to be put to the FTC: Can the FTC draw a conclusion of false or collusive reporting from discrepancies between the proved reserve data and the preliminary reserve estimates? If the FTC thinks it can, then it is in the process of perpetrating a terrible hoax on the American people. If the FTC admits it cannot, then it concedes the irrelevancy of the preliminary reserve estimates for the purpose of its investigation. 316 The conclusion is inescapable: the preliminary estimates of reserves before drilling on which bids are made have no earthly relevance to proved reserve calculations based solely on drilling into the geological formation. Actual production from drilling is the proof, hence the term proved reserves; every estimate, no matter how much scientific thought has gone into it, made before is nothing but an educated guess it is not proof, and it has no bearing on the accuracy of the proved reserve figures, which alone are reported. 317 In sum, none of the theories of bid file relevance advanced by the FTC withstands analysis. The leading Supreme Court case on FTC investigations, United States v. Morton Salt Co., 103 makes clear that the burden is upon the FTC to prove that the bid files (and all other documents not related to proved reserves) 104 are reasonably relevant to its investigation, 105 This the FTC has not done, either here or in the District Court. The finding on relevance by the District Court is essentially factual in nature and cannot be overturned unless it was clearly erroneous or an abuse of discretion. 106