1 1 RP-1999-0047 2 3 THE ONTARIO ENERGY BOARD 4 5 IN THE MATTER OF the Ontario Energy Board Act, 1998, 6 S.O. 1998, c. 15, Schedule B; 7 8 AND IN THE MATTER OF an Application by Union Gas Limited 9 for a regulation designating the area known as the 10 Mandaumin Pool in the Townships of Enniskillen, Plympton 11 and the City of Sarnia, Lambton County as a gas storage 12 area; and for authorization to inject gas into, store 13 gas in and remove gas from the said Pool; 14 15 AND IN THE MATTER OF an Application by Union Gas Limited 16 for a regulation designating the area known as Bluewater 17 Pool in the Township of Moore and the City of Sarnia, 18 Lambton County as a gas storage area; and for 19 authorization to inject gas into, store gas in and 20 remove gas from the said Pool; 21 22 AND IN THE MATTER OF an Application by Union Gas Limited 23 for a regulation designating the area known as the Oil 24 City Pool, in the Township of Enniskillen, Lambton 25 County as gas storage area; and for authorization to 26 inject gas into, store gas in and remove gas from the 27 said Pool; 28 2 1 AND IN THE MATTER OF an Application by Union Gas Limited 2 for an order granting leave to construct natural gas 3 pipelines in the Townships of Enniskillen, Plympton, 4 Moore, Dawn-Euphemia and the City of Sarnia; 5 6 AND IN THE MATTER OF an Application by Union Gas Limited 7 to the Minister of Natural Resources for licenses to 8 drill or deepen 7 wells in the proposed designated 9 storage areas; 10 11 AND IN THE MATTER OF an Application by Union Gas Limited 12 for approval of the parties to, the period of, and the 13 storage that is the subject of proposed storage 14 contracts. 15 16 B E F O R E : 17 S.K. HALLADAY Presiding Member 18 J.B. SIMON Member 19 F.A. DROZD Member 20 21 Hearing held at: 22 Holiday Inn, 1498 Venetian Blvd., Great Hall 23 Centre/West, Sarnia, Ontario on Tuesday, 24 February 8, 2000, commencing at 0948 25 26 HEARING 27 28 VOLUME 1 3 1 APPEARANCES 2 JENNIFER LEA Board Counsel 3 CHRIS MACKIE/ Case Manager 4 BOB TREVAIL/ Board Technical Staff 5 ZORRA CRNOJACKI Board Technical Staff 6 7 APPLICANT 8 GLENN LESLIE/ Union Gas Limited 9 JO-ANN PATTERSON/ 10 KAREN HOCKIN 11 12 INTERVENORS 13 PAUL VOGEL/ LAMBTON COUNTY 14 ROBYN MARTTILA STORAGE ASSOCIATION 15 PHILIP WALSH/ CANENERCO 16 JOE GORMAN 17 18 19 20 21 22 23 24 25 26 27 28 4 1 Sarnia, Ontario 2 --- Upon commencing on Tuesday, February 8, 2000 3 at 0948 4 THE PRESIDING MEMBER: Good morning. Please 5 be seated. 6 MR. LESLIE: Good morning. 7 THE PRESIDING MEMBER: The Board is sitting 8 today in the City of Sarnia, Township of Lambton, to 9 hear the following application: 10 An application by Union Gas Limited for a 11 regulation designated as the area known as the Mandaumin 12 Pool in the Townships of Enniskillen, Plympton and the 13 City of Sarnia, in the County of Lambton as a gas 14 storage area; 15 An application by Union Gas Limited for a 16 regulation designating the area known as the Bluewater 17 Pool in the Township of Moore and in the City of Sarnia 18 in the County of Lambton as a gas storage area; 19 An application by Union Gas Limited for a 20 regulation designating the area known as the Oil City 21 Pool in the Township of Enniskillen in the County of 22 Lambton as a gas storage area; 23 An application by Union Gas Limited for 24 authority to inject gas into, store gas in and remove 25 gas from the areas designated as the Mandaumin, 26 Bluewater and Oil City Pools and to enter into and upon 27 the lands in these areas and to use the lands for such 28 purposes; 5 1 An application by Union Gas Limited to the 2 Ministry of Natural Resources for licences to drill 3 wells in these areas; 4 An application by Union Gas Limited for an 5 order granting leave to construct natural gas pipelines 6 in the Townships of Enniskillen, Plympton, Moore, 7 Dawn-Euphemia and the City of Sarnia, all in the County 8 of Lambton; 9 An application by Union Gas Limited for 10 approval of the parties to, the period of, and the 11 storage that is the subject of proposed gas storage 12 contracts. 13 My name is Sheila Halladay. With me today are 14 Anne Drozd and Judy Simon. 15 May I have appearances, please? 16 MR. LESLIE: Good morning. My name is Glenn 17 Leslie. I am counsel to Union Gas. 18 THE PRESIDING MEMBER: Good morning, 19 Mr. Leslie. 20 MR. VOGEL: Good morning, Madam Chair and 21 Panel Members. 22 My name is Paul Vogel. With me is Robyn 23 Marttila and we appear on behalf of the Lambton County 24 Storage Association. 25 THE PRESIDING MEMBER: Thank you, Mr. Vogel, 26 Ms Marttila. 27 MS LEA: Good morning. 28 Jennifer Lea, appearing for Board Staff. With 6 1 me are Chris Mackie and Zorra Crnojacki. 2 THE PRESIDING MEMBER: Thank you, Ms Lea, 3 Ms Mackie, Ms Crnojacki. 4 MR. WALSH: Good morning, Madam Chair. 5 My name is Philip Walsh. I am with CanEnerco 6 Limited. We are an intervenor in these proceedings. 7 With me is Joe Gorman. We don't anticipate asking any 8 question of Union's witnesses, but we reserve the right 9 to ask questions subject to the evidence we hear today. 10 THE PRESIDING MEMBER: Thank you, Mr. Walsh. 11 Before I begin, I notice that there are a 12 number of people here today who have not previously 13 appeared before the Board, and to all those people we 14 say welcome. 15 One of the reasons the Board comes to places 16 and holds hearings outside of Toronto is so that we can 17 have participation from local residents. So I would 18 encourage you, if you would like to make representations 19 before the Board, do so. 20 We are proposing to hear from interested 21 parties tomorrow morning at nine o'clock, however we 22 appreciate that there may be people who cannot make it 23 tomorrow morning at nine o'clock and therefore I suggest 24 if that is the case you speak with Ms Lea, Board 25 Counsel, and we can make arrangements to hear you later 26 this afternoon. 27 I am anticipating that we will initially sit 28 full days, from 9:00 to 12:30 in the morning and 2:00 to 7 1 5:00 in the afternoon, with appropriate breaks in the 2 mid-morning and mid-afternoon. 3 Before we begin, are there any preliminary 4 matters? 5 PRELIMINARY MATTERS 6 MS LEA: I have two of an administrative 7 nature. 8 First, the Board Secretary's office and Board 9 Staff have examined the Affidavits of Service and 10 Publication in this matter. The Board's directions for 11 service and publication appear to have been complied 12 with and so I believe the hearing is properly 13 constituted here and can proceed. 14 Secondly, Board Staff has prepared an exhibit 15 list which has been distributed to the parties and I 16 believe is on the dias. If anybody else wants a copy, 17 we do have some copies here also. 18 Thank you. 19 THE PRESIDING MEMBER: Thank you, Ms Lea. 20 Are there any other preliminary matters? 21 Mr. Leslie, it's your application. 22 MR. LESLIE: Thank you. 23 Actually, I do have two preliminary matters. 24 One relates to Dawn-Euphemia. There was a 25 letter sent to the Board, I believe yesterday -- I don't 26 know whether you have received it or not -- by Mr. Card, 27 who acts for Dawn-Euphemia. 28 Union has been in discussions with the 8 Preliminary Matters 1 Township. It appears that those discussions may result 2 in Dawn-Euphemia not proceeding with their intervention, 3 but we don't know that for sure yet. Mr. Card in his 4 letter asked the Board not to deal with their 5 intervention until you have heard further from him, 6 which we anticipate will be today. 7 THE PRESIDING MEMBER: Thank you, Mr. Leslie. 8 Board Staff, do you have a copy of that 9 letter? 10 MS LEA: No, we don't. 11 THE PRESIDING MEMBER: Mr. Leslie, could we 12 have additional copies, please? 13 MR. LESLIE: Yes, we have some additional 14 copies. 15 I'm not sure Mr. Card would want this on the 16 record. I have no objection. It was sent to the Board, 17 I just don't know how he wanted it dealt with beyond 18 that, that's all. 19 THE PRESIDING MEMBER: I appreciate that, 20 Mr. Leslie. 21 Then what I propose you do is, because 22 obviously we were travelling yesterday, Board Staff -- 23 MR. LESLIE: I will give copies to -- 24 THE PRESIDING MEMBER: -- so if we could just 25 see it. 26 MR. LESLIE: Yes. 27 THE PRESIDING MEMBER: We won't make it an 28 exhibit or anything, give it official status. 9 Preliminary Matters 1 MR. LESLIE: We will give copies to Board 2 Staff and then you can do what you like with it really, 3 but I thought I had better say that -- 4 THE PRESIDING MEMBER: Thank you, Mr. Leslie. 5 MR. LESLIE: In addition, Madam Chair, we have 6 been involved in discussions with the Lambton County 7 Storage Association, who are represented by Mr. Vogel, 8 as you know. As a result of those discussions we have 9 reached understandings on a variety of issue which the 10 Lambton County Storage Association has raised with us. 11 The resolution of those issues is recorded in 12 a document which was being prepared this morning and 13 that is why we asked you if we could have an indulgence 14 and not start right away. 15 We propose to file that document with the 16 Board so that there will be a record of the agreement 17 reached between Union and the Lambton County Storage 18 Association, and assuming that there is approval for the 19 facilities, or substantial approval for the facilities 20 and the project does go forward, then I would anticipate 21 that the commitments that Union has given would form 22 part of the conditions of approval, I guess. 23 I should say that Union's agreement in this 24 regard is conditional and subject to receiving 25 outstanding consents from landowners of lands which 26 will, under the proposed project, be subject to 27 transmission easements. Mr. Vogel does act for those 28 landowners or for the -- those landowners are members of 10 Preliminary Matters 1 the Lambton County Storage Association I guess is a 2 better way to put it. 3 In addition, I should advise the Board that 4 Mr. Vogel and I have reached an agreement on how costs 5 should be dealt with. 6 We propose to pay the Lambton County Storage 7 Association a lump sum. That amount will, under our 8 proposal, be credited, or act as a credit, to any costs 9 that are awarded either in these proceedings or in the 10 proceedings that are contemplated by Mr. Vogel's 11 section 38 application. So that in effect we will 12 either resolve or you will be asked to assess the costs 13 as they relate to the Lambton County Storage Association 14 of both these proceedings and the compensation 15 proceedings, probably as in the aggregate, and then the 16 amount that we are going to pay Mr. Vogel will operate 17 as a credit in payment of whatever that amount is. 18 That's the deal. 19 We will file with you -- the Schedule of 20 Resolved Issues is how it is styled. 21 Do I have that right, Mr. Vogel? 22 MR. VOGEL: Yes, Madam Chair, that is correct. 23 We have the Schedule of Resolved Issues which 24 we can file with the Board now and I suggest that that 25 be given an exhibit number. 26 MS LEA: Exhibit 11.2, please. 27 EXHIBIT NO. 11.2: Document entitled 28 "Schedule of Resolved Issues" 11 Preliminary Matters 1 MR. VOGEL: Madam Chair, you will see in 2 reviewing this schedule that it records, as Mr.Leslie 3 has indicated, the resolution of various facilities 4 related matters as between Union Gas and LCSA. You also 5 note in reviewing this schedule that the compensation 6 issues in accordance with the Board's direction last 7 week have been not resolved as part of this hearing, but 8 rather are to be addressed in the context of LCSA's 9 pending section 38 application. 10 With respect to Mr. Leslie's comments 11 concerning Union's agreement being conditional upon the 12 necessary agreements being provided, on behalf of LCSA I 13 have indicated to Mr. Leslie, and I am indicating to the 14 Board, that I have been provided by the landowners 15 affected with assurances that those agreements will be 16 made available to Union. 17 THE PRESIDING MEMBER: Thank you, Mr. Vogel. 18 MR. VOGEL: Specifically, those are the 19 transmission easement agreements. 20 THE PRESIDING MEMBER: Thank you. 21 Mr. Vogel, does this mean that all of the 22 outstanding transmission easement agreements will have 23 been dealt with by the members of your association or 24 are there still other outstanding easement agreements? 25 Do you know? 26 MR. VOGEL: That is probably a question best 27 addressed to Mr. Leslie. 28 THE PRESIDING MEMBER: All right. I 12 Preliminary Matters 1 appreciated that after I asked you. Pardon me, Mr. 2 Leslie, I should have addressed it to you. 3 MR. LESLIE: The consents we anticipate 4 getting from Mr. Vogel's membership, Mr. Vogel's client, 5 will be all the consents we will require in order to 6 proceed. 7 THE PRESIDING MEMBER: Thank you, Mr. Leslie. 8 MR. VOGEL: Madam Chair, if I may, finally, 9 the filing of this schedule of resolved issues, LCSA -- 10 it's not LCSA's intention to further participate in the 11 facilities portion of the application. As I say, we 12 will be pursuing compensation issues in connection with 13 the section 38 application. 14 In view of that, I do at this time request 15 leave of the Board to withdraw from the hearing. 16 MS LEA: Mr. Vogel, can I ask you something 17 before you do that. What is the status then of the 18 evidence that you have filed with respect to this 19 hearing? I understand that you don't intend to pursue 20 that evidence at this hearing from what you said, but 21 does the Board need to consider or will it have to 22 consider it with respect to the section 38 application? 23 Sorry, I haven't really thought this through 24 yet. Perhaps you can assist me. 25 MR. VOGEL: Yes. As you will recall, in 26 accordance with the Board's direction last week, the 27 record of these proceedings is available to the parties 28 to be used in any subsequent proceeding, including the 13 Preliminary Matters 1 section 38 application. 2 My submission to the Board is that we simply 3 leave the prefiled evidence on the record here and it 4 will form part of this record which is then available to 5 the parties to use in subsequent proceedings. 6 MS LEA: The only concern I have about that, 7 Mr. Vogel, I just want to make it clear or understand 8 your submission correctly. 9 You are not asking the Board to make any 10 finding with respect to the prefiled evidence that you 11 have filed in the interrogatories about the issues you 12 have raised, for example, the safety and risk assessment 13 issues. You are not asking the Board to make any 14 finding and it is your belief that the Board can make 15 its decision in this application without making a 16 finding on those matters here. 17 MR. VOGEL: Yes, that's correct, Ms Lea. You 18 will find that many of those issues, including the 19 safety issue, are dealt with in the schedule of resolved 20 issues. 21 MS LEA: Thank you. I'm sorry. I just got it 22 so I haven't read it. 23 MR. VOGEL: No. I appreciate that, but many 24 of those issues are dealt with in this schedule of 25 resolved issues, so we are not asking the Board to make 26 a determination on those issues. To the extent that 27 they are relevant to the compensation issues, they will 28 be dealt with in the compensation hearing. 14 Preliminary Matters 1 MS LEA: Thank you. 2 THE PRESIDING MEMBER: Mr. Vogel, perhaps you 3 can help me. The compensation issues under your section 4 38 application, you are satisfied with the compensation 5 issues as they have been resolved for this particular 6 application. 7 MR. VOGEL: You will see in reviewing, when 8 you have an opportunity to review the schedule of 9 resolved issues, Madam Chair, that all of the 10 compensation related issues have been put over to the 11 section 38 application. 12 THE PRESIDING MEMBER: Thank you, Mr. Vogel. 13 MR. LESLIE: Can I just clarify a little bit. 14 It may not be necessary. 15 The compensation issues that will be subject 16 to this section 38 hearing really relate to storage and 17 storage lands. There is also compensation in connection 18 with easements that are obtained to put in a 19 transmission line. They are dealt with in the document 20 we filed this morning in a final way. That is to say 21 they are not being deferred to the section 38 hearing. 22 MR. VOGEL: That's correct. The section 38 23 application relates solely to the storage facilities and 24 fair and equitable compensation with respect to storage 25 facilities under section 38. 26 THE PRESIDING MEMBER: Mr. Vogel, is that for 27 additional compensation? 28 MR. VOGEL: That is for fair and equitable 15 Preliminary Matters 1 compensation, yes. 2 THE PRESIDING MEMBER: Yes. Well done. I 3 appreciate that. Additional -- I understand. Thank 4 you. 5 Thank you, Mr. Vogel. We appreciate your 6 participation in the hearing so far. 7 MR. VOGEL: Thank you, Madam Chair. 8 THE PRESIDING MEMBER: Before we begin, are 9 there any further preliminary matters? All right. 10 Mr. Leslie. 11 MR. LESLIE: Madam Chair, the first panel is 12 comprised of Mr. Joe Marusic, who is sitting closest to 13 the Board, Ms Lynn Galbraith, who is sitting to Mr. 14 Marusic, Laura Callingham and Mr. Mallette, Mr. Gerry 15 Mallette. I wonder if the witnesses could be sworn. 16 SWORN: JOSEPH MARUSIC 17 SWORN: MS LYNN GALBRAITH 18 SWORN: MS LAURA CALLINGHAM 19 SWORN: GERARD MALLETTE 20 EXAMINATION-IN-CHIEF 21 MR. LESLIE: Ms Galbraith, if I could start 22 with you. 23 MS GALBRAITH: Sure. 24 MR. LESLIE: You are Union Gas' Group Manager, 25 Storage and Transportation Sales and Service. 26 MS GALBRAITH: Yes, I am. 27 MR. LESLIE: And your evidence for purposes of 28 these proceedings is found in section 2, and that deals 16 UNION GAS PANEL 1, in-ch (Leslie) 1 with the need for the facilities. 2 MS GALBRAITH: Yes, it does. 3 MR. LESLIE: And you are also conversant, I 4 understand, with the contracts underpinning these 5 facilities. 6 MS GALBRAITH: Yes, sir, I am. 7 MR. LESLIE: Ms Callingham, you are Union Gas' 8 Team Leader, Financial Analysis. 9 MS CALLINGHAM: Yes. 10 MR. LESLIE: And your evidence is found in 11 section 6 of the prefiled evidence. 12 MS CALLINGHAM: That's correct. 13 MR. LESLIE: And that deals with project costs 14 and economics. 15 MS CALLINGHAM: Yes, it does. 16 MR. LESLIE: And you adopt that evidence? 17 MS CALLINGHAM: I do. 18 MR. LESLIE: Mr. Mallette, you are Union Gas' 19 Manager, Pipeline Products. 20 MR. MALLETTE: Yes, I am. 21 MR. LESLIE: And your evidence for purposes of 22 your first appearance in these proceedings is found in 23 section 6 and that deals with the cost of the 24 facilities. 25 MR. MALLETTE: Yes, that's correct. 26 MR. LESLIE: And do you adopt that evidence? 27 MR. MALLETTE: Yes, I do. 28 MR. LESLIE: Mr. Marusic, you are Union Gas' 17 UNION GAS PANEL 1, in-ch (Leslie) 1 Chief Storage Planning Engineer. 2 MR. MARUSIC: Yes, I am. 3 MR. LESLIE: And your evidence also deals with 4 the cost of the facilities and is found in section 6 of 5 the prefiled evidence. 6 MR. MARUSIC: Yes, that's correct. 7 MR. LESLIE: Do you adopt that evidence? 8 MR. MARUSIC: Yes, I do. 9 MR. LESLIE: Ms Galbraith, I should come back 10 to you. 11 I understand there is a correction that needs 12 to be made to your evidence before you can adopt it. 13 MS GALBRAITH: Well, actually, I believe there 14 are two corrections that need to be made. 15 I had some discussions with Ms Lea. Two of 16 the contracts that we filed, Carthage and Duke, were 17 actually contracts that represented the results of the 18 Phase I decision for the Century Pools. We had 19 originally done our contracts all at once. We filed the 20 appropriate amending agreement to the original 21 contracts, but for a practical matter in dealing with 22 the customers we split their contracts into two, one for 23 year -- the service starting in 1999, one for the one 24 starting in 2000. So we have the appropriate amending 25 letter. We are just going to make sure we have the 26 appropriate contract that that letter amends. 27 In the evidence we have the contracts that we 28 were directed to rewrite currently in evidence. 18 UNION GAS PANEL 1, in-ch (Leslie) 1 MR. LESLIE: Thank you. 2 Subject to that, do you adopt your evidence, 3 Ms Galbraith? 4 MS GALBRAITH: I sure do. 5 MR. LESLIE: Madam Chair, I do have one or two 6 questions I would like to put to the panel, mainly by 7 way of clarification in examination-in-chief. 8 Mr. Mallette, Union filed with the Board, on 9 January 31, revised evidence which deals in part with 10 revisions to the forecast costs of the facilities that 11 are being proposed. I understand that you are familiar 12 with some of those cost changes. I wonder if you could 13 give the Board some additional detail on the changes in 14 the costs as they relate to the gathering and 15 transmission lines. 16 MR. MALLETTE: Yes. The most significant 17 changes were to the transmission and gathering of 18 pipelines wherein there was approximately a $2.2 million 19 reduction in cost. 20 Just to go through some of the items that 21 would be found, on section 6 of Schedule 3 -- 22 MS LEA: This is in the revised evidence, sir? 23 MR. MALLETTE: Yes, that's correct. 24 MS LEA: Thank you. 25 MR. MALLETTE: The pipeline material costs 26 have been adjusted to reflect actual purchase orders for 27 the pipe which resulted in a reduction in the cost of 28 close to $500,000. 19 UNION GAS PANEL 1, in-ch (Leslie) 1 The fittings and miscellaneous materials, 2 after detail design was completed we found that some 3 additional costs there of approximately $200,000 were 4 required to provide the materials for the detail design. 5 Because of those cost adjustments, the store's 6 overhead increased by approximately $30,000. 7 In the construction and labour area, the cost 8 to lay the pipe, the mainline construction contract has 9 been tendered, the contract has closed but has not yet 10 been awarded, so we have a higher level of confidence in 11 our costs, and due to some very favourable costs that 12 came in -- or bids that came in, that reduced by about a 13 million dollars. Incidentally, I'm referring here to 14 the Mandaumin and Bluewater pool only. And the Oil City 15 actually has similar cost adjustments made to it. I can 16 go through those as well. 17 In the miscellaneous contract waiver there was 18 a bit of a scope change there where, once again, with 19 detail design and detailed considerations after land 20 negotiations it was determined that additional survey 21 work, tile work and so forth was required adding 22 approximately $500,000 to that line item for Mandaumin 23 and Bluewater. 24 There were also what I would call somewhat 25 minor adjustments to the company labour and land 26 purchase, easement and damage costs with the net result 27 that costs did decrease by approximately $900,000 at the 28 subtotal. And the contingency was also reduced to 5 per 20 UNION GAS PANEL 1, in-ch (Leslie) 1 cent now that we have a greater level of cost certainty, 2 primarily in materials and the construction labour area. 3 Again, going to the top and going down, I will 4 not go through the approximate dollar decreases for Oil 5 City specifically, but there was an approximate $600,000 6 reduction at the bottom line for that project, again 7 with the total result being approximately $2.2 million 8 overall reduction. 9 MR. LESLIE: Thank you, Mr. Mallette. 10 Madam Chair, I should perhaps point out, 11 because this confuses me and it may confuse others, that 12 Mr. Mallette's area of responsibility is gathering and 13 transmission pipelines, and that the same types of 14 information with respect to engineering and costs, as 15 they relate to the storage facilities per se, the wells, 16 the roads to the wells, that sort of thing, is really 17 something that either Mr. Pardy or Mr. Marusic can deal 18 with, and that is the way they divide it up. 19 So that may help people focus their questions. 20 THE PRESIDING MEMBER: Thank you, Mr. Leslie. 21 MR. LESLIE: Mrs. Galbraith, a little bit of 22 background, if you will. 23 Could you give the Board your assessment of 24 the current state of competition in the market for 25 storage, both in terms of alternative storage facilities 26 and substitutes for storage? 27 MS GALBRAITH: Yes. I would be happy to. 28 We deal in a very highly competitive market 21 UNION GAS PANEL 1, in-ch (Leslie) 1 for natural gas and gas storage in the Greater Great 2 Lakes Basin. The scope of our market area really would 3 be an area I would consider east of Illinois, through 4 Ohio, Pennsylvania, straight to the east coast, and 5 north of that including all of Ontario and Quebec. 6 Dawn, Ontario is a hub and it is probably -- 7 well, definitively the most liquid market centre that 8 there is in the east. About 80 to 100 active players 9 are at Dawn every day buying and selling our gas 10 molecules, substitutes for storage, paper, hedging 11 transactions. 12 This really is quite a testament, I believe, 13 to the competitive marketplace for natural gas in 14 Ontario. Parties are able to compete in Ontario for 15 storage and gas products because of the diversification 16 and convergence of the pipelines, the different gas 17 supply basins and the storage facilities we have here. 18 In the area I described, there is 19 approximately 1.5 trillion cubic feet of developed 20 storage. This is something that has been put on the 21 record in prior storage hearings. It doesn't mean that 22 it all trades every year. Most of it is under long-term 23 commitments or held by LDCs for their end-use markets. 24 Physical storage is obviously the most 25 one-on-one analysis of a competitive product. In our 26 basin last year, between the four major LDCs in Ontario 27 and Michigan, about 20 BCF of short-term product was put 28 into the marketplace. That was actually a very low 22 UNION GAS PANEL 1, in-ch (Leslie) 1 number. Generally, that number is more in the range of 2 40 BCF. However, coming out of two very warm winters, 3 it was a little harder to find storage available to take 4 to the short-term market. 5 In the bigger area, the geographic area I 6 described, last year 47 BCF of storage was placed by 7 various companies, either in a long-term or a short-term 8 market basin. And that 47 B is independent of the prior 9 20 BCF number I referred to before. 10 Storage also competes against parties who -- 11 who hold the product that sell winter gas or make 12 arrangements to transport gas under winter peaking 13 services, interrupting oil loads to meet peak markets, 14 purchasing winter gas or using other transportation 15 alternatives. 16 There is also a product out there called 17 virtual storage which is really storage that doesn't use 18 physical underground storage and it's really a matter of 19 lining up the party who burns gas in the summer with the 20 party who burns gas in the winter and swapping their gas 21 out between them. There is probably 15 DCF of that type 22 of transaction traded in our market area in any one 23 year. 24 Now, I mention this because I think it's no 25 accident that storage and gas is so competitive and so 26 transparent. It has certainly been a goal both of Union 27 and this province to foster deregulations and to 28 encourage the free nature of gas in this marketplace. 23 UNION GAS PANEL 1, in-ch (Leslie) 1 I am very encouraged to see the number of 2 companies who are not LDCs or local distribution 3 companies who are stepping up to the plate and diversing 4 their own gas supply portfolios with long-term storage 5 such as what we have had here. Because what they are 6 doing is they are taking the role the LDC has been 7 trying to divest of and they are saying, "I'm making a 8 commitment to growth in Ontario and I'm making a 9 commitment to the end use market in Ontario." They are 10 taking on a risk function that -- on a long-term basis, 11 and I think that should be very encouraging to this 12 Board. 13 Storage has always been a valued asset of this 14 province. Certainly we have position papers from the 15 House since 1963 that were really quite wide reaching in 16 scope for, you know, people back then when I was just a 17 little girl. And it certainly has come true, many of 18 the things that they have said. 19 I guess I just really want to close with 20 physical storage is a vital asset to this province and 21 to the markets in this province. Nothing replaces the 22 ability to have gas in your market area. The other 23 alternatives really rely on, you know, supply basins or 24 playing with someone else's gas, whereas physical 25 storage and the development of physical storage allows 26 gas that is produced 2,000 miles away to be sitting here 27 ready, willing and able to meet the market in Ontario, 28 which the bulk of these storage contracts we believe we 24 UNION GAS PANEL 1, in-ch (Leslie) 1 will be serving. 2 MR. LESLIE: Thank you. Ms Callingham, there 3 was a question asked and a motion was argued last week 4 about the effect of any increases in compensation paid 5 to landowners on the economics of the project that is 6 being proposed here. The question was raised with me by 7 Ms Drozd. 8 You have taken a look at the effect of a 9 change in the level of compensation with a view to 10 measuring what ramifications that would have for the 11 economic feasibility of the project. Could you give the 12 Board the benefit of the work you have done in that 13 regard? 14 MS CALLINGHAM: Yes. I determined that every 15 one per cent increase in the compensation, the annual 16 compensation that is paid to landowners would decrease 17 the net present value of this project by $13,000. 18 MR. LESLIE: And what is the net present value 19 of the project now? 20 MS CALLINGHAM: It is $6 million. 21 MR. LESLIE: And if I change it by two per 22 cent as opposed to one per cent, can I just multiply it 23 by the number you gave us by two? 24 MS CALLINGHAM: Yes. 25 MR. LESLIE: That is 13 becomes 26? 26 MS CALLINGHAM: Yes. That is correct. That 27 can be used as an impact on any range of alternative 28 proposed increases. 25 UNION GAS PANEL 1, in-ch (Leslie) 1 MR. LESLIE: Thank you, Madam Chair. Those 2 are all the questions I have. The witnesses are 3 available for questioning by others. 4 THE PRESIDING MEMBER: Thank you, Mr. Leslie. 5 Ms Lea. 6 EXAMINATION 7 MS LEA: Thank you, Madam Chair. 8 I think the first questions that I have are 9 for Mrs. Galbraith. 10 Can I begin by saying that we appreciate the 11 evidence you gave at a technical conference and I'm 12 assuming that you adopt that evidence for the purpose of 13 this proceeding so we don't have to go through it again. 14 MS GALBRAITH: Okay. Yes, I do adopt it. 15 MS LEA: Thank you. Okay. 16 Now, there are a couple of things from the 17 evidence you have given here this morning that I need to 18 follow up on. One of them has to do with the benefits 19 of the storage development that you are proposing. I 20 wonder if we could at the look at the Board Staff 21 Interrogatory No. 7 together. That was I think in the 22 first set of interrogatories that we sent. And I am 23 looking at page 2 of that and I'm trying to understand 24 actually not the volumes at the moment, but from reading 25 this it looks as if none of the Storage will be used for 26 Union's infranchise customers. Is that right? 27 MS GALBRAITH: None of the storage is 28 contracted by Union's infranchise customers. I don't 26 UNION GAS PANEL 1, ex (Lea) 1 think that any of us can make the assumption that this 2 gas will not be sold either to Union's infranchise 3 customers or to other customers in the Province of 4 Ontario. 5 MS LEA: That is what I'm trying to 6 understand. These parties that are listed here under 7 the Phase II contract: Carthage, Duke, PG&E, Coast. I 8 gather those parties are not Ontario companies. Duke 9 is, I understand, from Calgary. Carthage from Michigan. 10 P&G Energy from Houston. Who do they serve? 11 MS GALBRAITH: Actually PG&E is California I 12 think. 13 MS LEA: California. Okay. Who is it that 14 they serve? Where will these storage volumes be 15 entering the market for burning, for use? 16 MS GALBRAITH: Well, we usually see them just 17 at Dawn and then we see them sold again at Dawn and then 18 they may be transported by others to northern Ontario, 19 to GMI for consumption in Quebec, to consumers or to 20 Union itself on behalf of its core market. 21 MS LEA: So it would be true to say then that 22 we don't know whether or not any of these volumes will 23 be used for Union's infranchise customers or how much of 24 the volume will be used by Ontario customers in general. 25 Would that be true? 26 MS GALBRAITH: I think it is true to say that 27 the gas marketplace has become much more North American 28 in grid and it is much more difficult to tell where the 27 UNION GAS PANEL 1, ex (Lea) 1 molecules are being burned. But I have no doubt that 2 the reasons these markets are holding storage at Dawn is 3 to serve Ontario. The economics make the most sense 4 that you hold storage at the centre of the nearest 5 adjacent market that you will serve. 6 I also have no doubt that they will take 7 advantage of opportunistic situations to move some of 8 this gas into the United States. But I believe foremost 9 their focus is to sell this gas in Ontario. 10 MS LEA: Can you tell me if -- if none of this 11 storage -- let us presume for a moment that none of it 12 is directly used by Union's ratepayers, is there, 13 nevertheless, a ratepayer benefit in the development of 14 the storage product? 15 MS GALBRAITH: There is a short-term benefit 16 to the ratepayer dependent on how the Board would 17 dispose of the market premium that is generated. These 18 long-term storage contracts are provided under the C-1 19 rate schedule which allows the opportunity to capture 20 the marketplace price for storage which is a premium 21 over the incremental cost of this project by definition 22 that results in a net benefit. 23 There is the secondary benefit to Ontario that 24 the more firm players holding a spot in Ontario at the 25 trading point Dawn, it allows for greater price 26 discovery, and the greater the price discovery, the more 27 choices you have to buy and sell your gas. So it is a 28 buying opportunity for Ontario customers and a 28 UNION GAS PANEL 1, ex (Lea) 1 mitigating opportunity against costs, you know, in the 2 event of downturns. 3 MS LEA: Can I go back to Union's ratepayers 4 for a moment. I understand from the Board's EBRO 499 5 decision that there is a deferral account. Is that 6 correct? 7 MS GALBRAITH: Yes, ma'am, there is. 8 MS LEA: Okay. And that -- the deferral 9 account which is a long-term storage premium account, is 10 being held for later disposition and it is that account 11 that holds this premium that you spoke of? 12 MS GALBRAITH: Yes, ma'am. 13 MS LEA: Okay. The filings, as I understood 14 it, that we have at present for the fiscal 1999 forecast 15 of $2,290,000 in that account, do you know whether or 16 not that is accurate? 17 MS GALBRAITH: I think, subject to the exact 18 number, I would say it is pretty darn close. 19 MS LEA: Do you know what the fiscal 2000 20 forecast is, roughly, presuming that these open season 21 storage contracts are approved? 22 MS GALBRAITH: Not without checking. 23 MS LEA: What about without approval of these 24 contracts? 25 MS GALBRAITH: It will be no greater than what 26 it is this year. 27 MS LEA: Okay. Would you be willing to 28 provide, by way of undertaking, the anticipated deferral 29 UNION GAS PANEL 1, ex (Lea) 1 account balance for 2000 if these storage contracts are 2 approved? 3 MS GALBRAITH: Yes, I would. If I could give 4 that by way of just giving it to someone to read into 5 the record. 6 MS LEA: Certainly, in any way that seems best 7 to you to provide it. 8 We will call that Undertaking 16.1, please. 9 UNDERTAKING NO. 16.1: Ms Galbraith 10 undertakes to provide the anticipated 11 accumulated deferral account balance for 12 2000 if these storage contracts are 13 approved 14 MS GALBRAITH: That is the accumulated 15 deferral balance or only that balance which accrues 16 during calendar 2000? 17 MS LEA: Why don't you give us the 18 accumulated, although we can add the figure otherwise, 19 however it is best to you. 20 MS GALBRAITH: Okay. 21 MS LEA: Let's do the accumulated, please. 22 Undertaking 16.1, thank you. 23 Now, just to deal with the storage premium for 24 a moment, how is that premium determined? Do I 25 understand correctly that it's the premium earned over 26 the approved M12 rate? 27 MS GALBRAITH: Yes, it is. 28 MS LEA: Okay. Has Union yet reached a 30 UNION GAS PANEL 1, ex (Lea) 1 position as to how that premium should be shared between 2 the shareholder and the ratepayer? 3 MS GALBRAITH: We have not put forward our 4 proposal at this time, now. 5 MS LEA: When will that proposal be put 6 forward? 7 MS GALBRAITH: I imagine it will be dealt with 8 as part of the PBR unbundling process. 9 MS LEA: So you are not in a position at this 10 time to tell me what your proposal is going to be? 11 MS GALBRAITH: I can tell you that I don't 12 know what the proposal will be. 13 --- Pause 14 MS LEA: Mr. Mackie reminds me that we did 15 have some evidence that Union's proposal was that it go 16 75 per cent to the ratepayers and 25 per cent the 17 shareholders. I don't know whether that information is 18 still current or outdated. Can someone confirm that 19 for us? 20 MS GALBRAITH: I can confirm that for you. 21 Those percentiles, the 75/25 percentiles relate only to 22 excess or earnings above the transactional forecasts. 23 They have no correlation whatsoever to the premium 24 account. The premium account stands on its own. 25 MS LEA: I don't think I understand what you 26 mean by the "transactional forecasts". 27 MS GALBRAITH: The short-term revenues, the 28 C1 short-term transportation, Union has an approved 31 UNION GAS PANEL 1, ex (Lea) 1 methodology in place with the Board where we forecast 2 our short-term storage and transportation business, and 3 then we share that 90/10, customer receiving 90 per cent 4 of the benefit, 10 per cent being given to Union. 5 Union bears the risk 100 per cent in the event 6 it does not meet the short-term forecast and in the 7 event that we exceed the forecast the customer gets 8 75 and the Union shareholder gets 25. 9 But it does not relate to the long-term market 10 premium. We do not have a proposal at this point in 11 time on this position, we merely have a deferral account 12 for it. 13 MS LEA: Thank you. That's helpful. 14 Now, I need some further explanation of the 15 change or modification in your evidence you gave this 16 morning about the contracts and the amending letters. 17 I'm sorry, I didn't understand what you were telling me. 18 I think the issue arose because there seemed, 19 to Board Staff, to be an inconsistency between the 20 amending letter and the contract for Carthage. 21 Perhaps you could begin at the beginning again 22 and explain what has happened and then I will see if I 23 have any questions remaining after that. 24 MS GALBRAITH: Okay. What happened -- and I 25 will just give a brief little history here -- was when 26 we did the Phase I hearing we had actually requested 27 that the Board approve the storage contract for both 28 Phase I and Phase II of the facility development, which 32 UNION GAS PANEL 1, ex (Lea) 1 would have been consistent with the way that we had gone 2 out to market for these storage developments. 3 We marketed Phase I and Phase II as a joint 4 effort and we had parties submit bids related to service 5 starting in 1999 and service starting in 2000. Some of 6 the customers, Duke and Carthage, were awarded storage, 7 because they had the best bids for both 1999 and 2000. 8 When we bid the contract with Duke and 9 Carthage that were filed in the Phase I application, we 10 only had one contract for both phases because we had 11 hoped that the Board would approve the contract -- not 12 facilities, just the contract -- at that point in time. 13 After a long period of time the Board did not 14 approve that and asked us to refile the contract with 15 just the Phase I volume and make another contract for 16 the Phase II volumes. 17 As an interim measure, we sent to the 18 customers a letter saying "We will be amending your 19 contract this way", and that is the letter that you see 20 in this filing that -- 21 MS LEA: Okay. I'm just going to interrupt 22 you. Let's be very clear about what letter we are 23 talking about. 24 MS GALBRAITH: The letter dated -- under 25 section 4 -- under Tab 4 under section 2, we have the 26 letter that -- 27 MS LEA: Section 2, Tab 4, yes. 28 MS GALBRAITH: Yes. We have the Duke Energy 33 UNION GAS PANEL 1, ex (Lea) 1 Marketing letter dated March 26th, but we have -- I will 2 just stop a minute to explain what we did with our 3 customers, was we talked to them and we said "You know, 4 wouldn't it be much easier if we just gave you a clean 5 contract for 1999 and a clean contract for 2000 instead 6 of having all these amendments floating around" -- 7 that's what we have back at the shops now -- so when we 8 put this information in, we just put in the wrong 9 contract. 10 MS LEA: Okay. So we have, then -- pardon me 11 for going slowing through this, I just want to make 12 sure. 13 There is a contract for Duke that is filed 14 here and it is contract No. LST-007. Am I right? 15 MS GALBRAITH: Yes, you are right. 16 MS LEA: Okay. Then it has amending letters 17 that precede it in the filing -- 18 MS GALBRAITH: Yes. 19 MS LEA: -- dated March 26,1999. Okay. 20 So should we remove one of those things? 21 MS GALBRAITH: I'm going to see what my staff 22 sends me this morning and we will remove dependent on 23 what we get. 24 MS LEA: Okay. You may then have to follow up 25 with us a little bit so we understand clearly. 26 The next thing we have in that section is the 27 Carthage. There is a letter -- two letters actually, 28 but I think the amending letter that is relevant is 34 UNION GAS PANEL 1, ex (Lea) 1 dated March 26th, 1999 again. 2 MS GALBRAITH: Yes. 3 MS LEA: The Carthage contract is No. LST-006. 4 MS GALBRAITH: Yes. 5 MS LEA: Okay. We may be receiving an 6 amendment to that -- a new contract to sub in there 7 also? 8 MS GALBRAITH: Yes, ma'am. It was Carthage. 9 You had raised Carthage with me, and I thought, "Man, I 10 will bet there is the same thing with Duke", and sure 11 enough. 12 MS LEA: The reason, Board Members, that this 13 came to our attention is that in the review of the 14 contracts it became apparent that the amendment was 15 given in BCF and the original was in gigajoules, one or 16 the other. That led to the query. 17 So, as I understand Ms Galbraith's evidence, 18 this inconsistency arose from the filing of the contract 19 as she has explained it. 20 So I think, Ms Galbraith, we may have to wait 21 to complete my questions about this until we see the new 22 contract, just so that I'm sure that I understand it. 23 MS GALBRAITH: Yes. I trust we will all be 24 much more satisfied with what we see. 25 MS LEA: All right. We just have to be sure 26 that we understand what you are asking the Board to 27 approve. 28 MS GALBRAITH: Yes. 35 UNION GAS PANEL 1, ex (Lea) 1 MS LEA: Now, as I understand the way this is 2 set up, there is a contract for the Phase I volume and 3 also a contract for the Phase II volumes for each of 4 those two customers? 5 MS GALBRAITH: That is what I'm going to end 6 up with as the final product. I'm not saying that that 7 is what you will see this morning, you may see this 8 letter agreement. 9 MS LEA: I understand. 10 However, you could file the Phase II volume 11 contract at a later time if we don't get it this 12 morning? 13 MS GALBRAITH: Yes, and for sure when it's -- 14 certainly when it is approved and signed by the customer 15 would be a wonderful time to submit it. 16 MS LEA: All right. 17 These contracts are not even at the stage 18 where they are necessarily signed. You have made 19 arrangements with the customers to sign them. 20 MS GALBRAITH: Yes. We agreed to execute. 21 Our interpretation, the old section 23- - 22 MS LEA: Yes. 23 MS GALBRAITH: And it has always been our 24 interpretation that we agree to sign, but even now our 25 legal counsel internally, because we said "Well, why 26 don't we at least get the customer to sign the contract, 27 it's conditional", and she is uncertain that the Act 28 even permits us to go that far. She will probably 36 UNION GAS PANEL 1, ex (Lea) 1 actually give you a shout about that, Ms Lea. 2 MS LEA: That's possible. In any event, what 3 I'm trying to understand though is what is the volume 4 amount that you want the Board to approve for this 5 stage? I gather it is that amount which is contained in 6 these amending letters. 7 MS GALBRAITH: Yes, it is. Westcoast and 8 PGNE. 9 MS LEA: Right. I'm only dealing with the 10 Duke and Carthage group for just a moment. 11 MS GALBRAITH: Yes. 12 MS LEA: So that the amount contained in the 13 amending letters of March 26 for each of Duke and 14 Carthage are -- 15 MS GALBRAITH: Are each 2 BCF. 16 MS LEA: Yes. 17 MS GALBRAITH: Fifty-six, 656 and 10(3)m(3). 18 MS LEA: Thank you. Now, for the other 19 customers then, no problem with those, I gather. 20 MS GALBRAITH: No. They only had phase II 21 storage. They were quite clean. 22 MS LEA: Okay. Thank you. One moment, 23 please. 24 All right. I have a note here that the 25 contracts will be executed by Union pending the outcome 26 of these applications. I guess that's the situation 27 there. 28 MS GALBRAITH: Yes. We do feel that we have a 37 UNION GAS PANEL 1, ex (Lea) 1 firm and binding agreement in place as the result of the 2 open season tender. It does have conditions associated 3 with it, but we would go to court in the event that the 4 customers didn't sign were we to receive all approvals. 5 MS LEA: All right. Can we attach then an 6 undertaking number, please to the filing of those 7 contracts. That would be Undertaking 16.2, please, and 8 that would be the filing of the phase II proposed 9 contracts with Duke and Carthage. 10 UNDERTAKING NO. 16.2: Ms Galbraith 11 undertakes to file Phase II Proposed 12 Contracts with Duke and Carthage 13 MS LEA: Thank you. Now, one matter I think 14 that was raised at the technical conference and I wanted 15 also to discuss briefly with you here was the question 16 of what happens if the Board doesn't recommend 17 designation of all three of these pools. 18 My understanding is that the loss of even one 19 pool in this development would mean that you could not 20 satisfy all your contracts, that your contracted volumes 21 will take up the space of two pools plus some of the 22 third. Am I right about that? You need all three pools 23 to service these contracts. 24 MS GALBRAITH: Yes. 25 MS LEA: Okay. If the Board chose, for 26 example, not to recommend designation of one of the 27 pools, which contract would Union recommend to the Board 28 not be approved of these? Have they been ranked in your 38 UNION GAS PANEL 1, ex (Lea) 1 mind at all? 2 MS GALBRAITH: No. They have not been ranked 3 and, quite frankly, I would -- prior to not serving 4 these contracts, I would go into the market and see 5 whether or not I could acquire an equivalent service to 6 honour the contracts. 7 MS LEA: Okay. 8 MS GALBRAITH: Sometimes we are looking for a 9 very simple answer with whom then would I serve, which 10 one wouldn't I do. My problem in answering this 11 question is these are long term commitments. 12 When I go out to the market to buy product, I 13 can buy it shorter term, I can buy it longer term, 14 depending on when it happens. My economics may be very 15 good or they may not be very good at all in which case, 16 you know, I'm not sure if I would recommend that we 17 proceed at a loss position. 18 If I were to put into the position where the 19 Board did not approve the contracts and I had no 20 certainty as to the timing of when those projects, that 21 next pool or the one pool didn't come online, so if it 22 was a matter of it will be next year, that will have a 23 different bearing on my decision than if the uncertainty 24 is manned. This likely will never be approved. 25 I have a different risk profile I am going to 26 look at. But if we ultimately boil down to where I was 27 so unclear in my mind that 2 BCF would not be developed 28 or available for five years and that the economic 39 UNION GAS PANEL 1, ex (Lea) 1 alternative of a five year alternate storage project was 2 so expensive that I would lose money, my proposal would 3 be to prorate the storage between all of the contracts, 4 including the short term. 5 MS LEA: Thank you. One moment. I need to 6 think about that answer. 7 --- Pause 8 MS LEA: Okay. As I understand it then, your 9 first option, depending on the level of uncertainty that 10 you assess, would be to seek alternate supply, a 11 replacement for storage in the market. If you believed, 12 however, that the storage might never be developed, then 13 you would attempt to renegotiate the contract such as to 14 allow you to prorate the loss, if I can put it that way, 15 of the storage volume you anticipated among these 16 contract holders. 17 MS GALBRAITH: In your second example, my 18 decision would also be based on not being able to obtain 19 the alternate supply economically. Okay? 20 MS LEA: Yes. 21 MS GALBRAITH: If I can get it economically, 22 and I consider economically basically to include up to 23 break-even or even possibly a small loss, I would honour 24 the contract. 25 MS LEA: Thank you. Can you give us any 26 assistance as to how economic these alternatives often 27 are in the market or is it possible to say so in a 28 general way? 40 UNION GAS PANEL 1, ex (Lea) 1 MS GALBRAITH: In the phase I application, 2 because of the CanEnerco contract that was entered into 3 and our desire to meet all the contracts that we had 4 contracted for in the open season, we did go out and 5 purchase a five year contract in the marketplace and it 6 essentially was on a break-even basis for that piece. 7 The wonderful thing about the open season is 8 generally you get a market price for the service, so if 9 people are willing to pay Union 58 cents for a product, 10 they would be willing to pay someone else 58 cents for 11 the product. I generally can expect, if my timing is 12 relatively current, to be able to purchase it on the 13 market at a similar price because it is a competitive 14 product. 15 MS LEA: All right. Then in order to 16 understand your position, I will then just put this to 17 you. If the Board were to decide not to approve each 18 and every one of these three pools, nevertheless you are 19 still going to ask them to approve all of the storage 20 contracts that you have put forward because you believe 21 that you could possibly satisfy those volumes by other 22 means. In other words, a failure to approve one pool 23 does not mean that you want to withdraw any of the 24 contracts from approval. 25 MS GALBRAITH: I will not withdraw any of the 26 contracts from approval and I do want to expand on this 27 point. 28 MS LEA: Yes. 41 UNION GAS PANEL 1, ex (Lea) 1 MS GALBRAITH: This issue came up quite a bit 2 in post-discussions after the Century 1 pool hearing and 3 the discussion of whether or not we would go out and 4 purchase product or whatever. It is our opinion that 5 when we purchase a storage product and then resell it 6 that that is not storage that is subject to the approval 7 of this Board. 8 On the other hand, it doesn't hurt to have the 9 approval, so given the choice that right now I believe 10 that these contracts, and I am hopeful that they will be 11 met by physical Ontario storage, if I end up having less 12 storage approved on a physical basis, I will replace it 13 and I will not peg it against a specific contract. 14 I don't view that the Board approving the 15 contract gives us an unequivocal right in the future to 16 say "Oh, my gosh, now we are entitled to develop this 17 much more physical storage". 18 MS LEA: Thank you. My last question, I 19 think, for you deals with something that you and I 20 discussed a few moments and that is the possibility that 21 some of these contracts will serve Ontario customers. 22 You filed in this case your peak storage 23 allocation policy at section 2, schedule 3 or tab 3 -- 24 sorry, my notes aren't clear. In that peak storage 25 allocation policy, there is a priority listing for peak 26 storage and long term storage services which gives 27 priority first for Ontario gas distribution companies, 28 an end user, then for Canada and, third, for foreign 42 UNION GAS PANEL 1, ex (Lea) 1 interests. 2 Does that policy apply to the storage 3 contracts you are dealing with in this application? 4 MS GALBRAITH: Yes, ma'am, it does. 5 MS LEA: Can you comment then as to whether 6 the Board should assign any priority to any of these 7 contracts based on the priority listed in that policy? 8 MS GALBRAITH: They most definitely should 9 not. 10 MS LEA: And the reason for that? 11 MS GALBRAITH: Because this has not become an 12 equal -- these contracts are not all equal value. So 13 you are saying which way should they go. After a 14 customer has been sitting out in the marketplace for 15 over two years with a promise to get to a hearing and do 16 something, as a matter of fairness and equity, I feel 17 all of these customers are providing us an equivalent 18 equity and patience in the amount of time that this is 19 all gone. That is nobody's fault, right. 20 But this is a decision that is made before we 21 award the storage. It is not a decision to be made 22 after we have accepted. We have a contract with the 23 customer that says, "Subject to these things, we accept 24 this." This deals to allocation of the storage prior to 25 acceptance of the storage. 26 MS LEA: Okay. So as I understand your answer 27 then, what you are saying is that Union looked at its 28 peak storage allocation policy at the time that it 43 UNION GAS PANEL 1, ex (Lea) 1 awarded these contracts, and that this peak storage 2 allocation policy is not a factor for this Board to 3 consider then in the approval of these contracts at this 4 stage? 5 MS GALBRAITH: Only if they feel that there 6 are contracts, that there is an Ontario gas -- you know, 7 I guess the question would be, you know, how do you 8 define the equal value? What did the Ontario gas 9 distribution companies bid for this storage? Could you 10 have viewed that in your allocation of the storage that 11 you awarded? And we actually in the Phase I hearing had 12 quite a bit of discussion on how we had the process to 13 determine how we allocated the storage, and I thought we 14 were satisfied with that. 15 MS LEA: So with the Phase II volumes then, 16 was there any issue that Union had to consider about 17 allocation for Ontario first and Canada second and 18 foreign interests third with respect to these Phase II 19 volumes? 20 MS GALBRAITH: No. 21 MS LEA: All right. Thank you. 22 I wonder if I could turn to a few questions 23 about the DCF analysis. Ms Callingham, I think that is 24 yourself? 25 MS CALLINGHAM: Yes. 26 MS LEA: There are a few things I just want to 27 confirm to make sure my understanding is correct. 28 I gather that the revenues from this for this 44 UNION GAS PANEL 1, ex (Lea) 1 project are derived from the open season process and not 2 from a -- from a set rate. Is that right? 3 MS CALLINGHAM: The revenues are based on the 4 prices that are under the contracts that we are asking 5 approval for. 6 MS LEA: Okay. 7 MS CALLINGHAM: The demand -- the demand rate. 8 MS LEA: Okay. Thank you. 9 Do I understand correctly that the average 10 unit revenue over the 30 year period that you have 11 assumed is equal to $15.33 per 10(3)m(3) or has that 12 changed? I think that is the revised figures. 13 MS CALLINGHAM: Could you repeat your 14 question? I'm not sure how it relates to the revenue -- 15 MS LEA: Yes, okay. I may not be expressing 16 myself well. I will try again. 17 MS CALLINGHAM: Okay. All right. 18 MS LEA: The average unit revenue over the 30 19 year period that gives you a break even is $15.33 per 20 10(3)m(3)? 21 MS CALLINGHAM: That would represent the 22 minimum price on average that you would need each and 23 every year from year 1 through 30 to fully recover all 24 your costs. 25 MS LEA: Thank you. 26 MS CALLINGHAM: It is basically a levelized 27 cost rate that was determined. It is not -- it has 28 nothing to do with the projection of revenues that we 45 UNION GAS PANEL 1, ex (Lea) 1 have on the base case. 2 MS LEA: I think -- I think I understand your 3 answer and I will accept your wording rather than mine. 4 MS CALLINGHAM: Okay. 5 MS LEA: Now, I think that Union's evidence is 6 that the average rate they anticipate to achieve over 7 the 30 year period is $18.66 or .67 dollars? 8 MS CALLINGHAM: The -- the revenue strains 9 produce an average grade, a weighted average grade of 10 $18.66. That is -- reflects the actual prices under 11 contract for the long-term contracts under the open 12 season and that price of those contracts average 20.621. 13 MS LEA: Okay. I gather that your estimate is 14 that this project will break even in 19 years and the 15 products are clearly economic on that basis? 16 MS CALLINGHAM: Yes. 17 MS LEA: Now, if Union does not achieve the 18 revenue that it anticipates from these contracts and 19 there is some kind of shortfall, is it Union's 20 shareholder or the ratepayer or both that are at risk 21 for this shortfall? 22 MS CALLINGHAM: There -- it isn't possible 23 that there would be a shortfall associated with the 24 revenues that we are going to generate under these 25 contracts. 26 MS LEA: Can you explain that answer? 27 MS CALLINGHAM: The bid prices that were 28 accepted and approved in the contracts are well in 46 UNION GAS PANEL 1, ex (Lea) 1 excess of cost-based rates. And it's -- there would 2 never be a deficiency. 3 MS LEA: As long as the contracts are complied 4 with? 5 MS CALLINGHAM: Well -- 6 MS GALBRAITH: The contracts will be complied 7 with. The contracts are only applicable to the first 8 six years here. However, the C-1 range rate allows for 9 taking to market a service at a rate that we know we 10 market in the market which is above Union's cost of 11 service rate. 12 MS LEA: So your confidence in the future is 13 such that there is no possibility that there could be a 14 shortfall? 15 MS CALLINGHAM: That is correct. I guess to 16 help explain it further, I mean for the first six years 17 80 per cent of this space has been sold at fixed prices 18 that we know about. 19 MS LEA: Yes. 20 MS CALLINGHAM: That are, you know, it is at 21 $20 and the cost -- the minimum rate that we could 22 charge under approved rate schedules is 14. So you know 23 that you are getting $6 more than what your -- the 24 minimum you can charge over the first six years for 80 25 per cent of the space. 26 So it's only the balance that is currently 27 uncontracted that we plan to sell in either the short or 28 long-term market that is subject to a variation in price 47 UNION GAS PANEL 1, ex (Lea) 1 than what we have reflected in our base case estimate. 2 And this project would not fall below one if we used the 3 minimum price of $14 on all the uncontracted space for 4 each and every year over the next 30 years. If we never 5 change the rate for the next 30 years, it would still be 6 a profitable project. 7 MS LEA: How close do you get to a breakeven 8 after the six years of contracted revenue? 9 MS CALLINGHAM: I don't know. I would have to 10 look. 11 At the end of the sixth year of the project we 12 still had a negative net present value of $14 million. 13 Is that what you are looking for, Ms Lea? 14 MS LEA: Yes, I guess. I am -- as a layman, I 15 find it difficult to convert net present value into how 16 close are you to breaking even. But that is all right. 17 MS CALLINGHAM: We would still need to recover 18 $14 million before we would break even. 19 MS LEA: Yes. I understand that. I am just 20 trying to go along the -- go along the range here. That 21 is fine. 22 I guess that there are two factors to be 23 considered here. The certainty of the revenues and 24 there is also the certainty of the cost estimates and 25 what happens if those rise. Have you performed any 26 sensitivity on cost -- cost changes? 27 MS CALLINGHAM: The only sensitivity analysis 28 that was completed on the cost side is outlined in 48 UNION GAS PANEL 1, ex (Lea) 1 section 6, schedule 5. It is on the capital costs. 2 However, in light of the recent changes that 3 have been provided in the blue page, updated and 4 described by Mr. Mallette this morning, it would be my 5 view that there is very little downside risk on 6 economics associated with any increases in capital 7 costs. Virtually the construction contracts for 8 tender -- a lot of the design is done, the costs are 9 known now and there is still a five per cent contingency 10 built in in the event of any upside. So we don't 11 foresee that there would be any increase in capital cost 12 than what we have provided in the blue page update. 13 MS LEA: You are saying that your certainty 14 about cost variation is higher now since the blue page 15 update? 16 MS CALLINGHAM: Yes. 17 MS LEA: You provided us, in Interrogatory 18 No. 89, with a breakout of the profitability of each of 19 the pools and some of them combined. I wonder if we 20 could look at Interrogatory 89. 21 Now there is both the original 22 Interrogatory 89 and an updated blue sheet. Am I 23 correct? 24 MS CALLINGHAM: That's correct. 25 MS LEA: Okay. Thank you. 26 Now, in terms of the improvement in the 27 profitability index between the original 28 Interrogatory 89 and the revised Interrogatory 89, the 49 UNION GAS PANEL 1, ex (Lea) 1 profitability index for the Oil City Pool was 1 in the 2 original, it is now 1.12; for Mandaumin it has gone from 3 1.14 to 1.18; and for Bluewater from 1.11 to 1.19. 4 Is the improvement and profitability about 5 equally divided among the pools or is there one that is 6 increased more than the others? 7 MS CALLINGHAM: I think the better number to 8 refer to, if you are going to talk about profitability 9 and the impact, is the actual dollars -- 10 MS LEA: Okay. 11 MS CALLINGHAM: -- rather than a ratio, which 12 is simply inflows divided by outflows. 13 The dollar value is probably the true way to 14 look at what the potential impact is. 15 MS LEA: Okay. And where are we looking? 16 MS CALLINGHAM: Are you asking if it is 17 proportionate to the way it was before? 18 MS LEA: Yes. That's what I'm asking. 19 MS CALLINGHAM: I would not think so. I think 20 that the bulk of the changes, as described by 21 Mr. Mallette, were in Mandaumin and Bluewater as far as 22 any capital costs, and Oil City was somewhat less in 23 proportion. 24 I haven't looked at that specifically. It 25 wasn't relevant to -- 26 MS LEA: I beg your pardon? 27 MS CALLINGHAM: It wasn't relevant to me when 28 I was updating it. It's the reflection of what we 50 UNION GAS PANEL 1, ex (Lea) 1 actually think is going to happen now in each of the 2 pools on the cost side. 3 MS LEA: Yes. You were reflecting the cost 4 changes, am I right -- 5 MS CALLINGHAM: That's correct. 6 MS LEA: -- that Mr. Mallette has been talking 7 about? 8 MS CALLINGHAM: Yes. 9 MS LEA: All right. 10 So there has been an increase in profitability 11 for each of the pools with Mandaumin and Bluewater 12 having a slightly higher increase in profitability than 13 Oil City, is about the summary of it. Is that correct? 14 MS CALLINGHAM: I will take your word for it. 15 I haven't done a straight comparison between the two. 16 MS LEA: All right. Thank you. 17 MR. MARUSIC: If I can add something there. 18 MS LEA: Yes. 19 MR. MARUSIC: One way you might look at it is 20 to look at the difference in the net present value of 21 each of the pools between the original filed evidence 22 and the blue page update. 23 MS LEA: Yes. 24 MR. MARUSIC: For example, in the original 25 filing, the Oil City net present value was zero and in 26 the blue page update that number is now $1 million 27 positive. So that gives you a sense for what has 28 happened to the costs for each of the particular pools. 51 UNION GAS PANEL 1, ex (Lea) 1 I don't know if that helps you or not. 2 MS LEA: Yes, it does. No, I can add the 3 figures, sir. It's just that sometimes I ask questions 4 to which the answers may seem a little obvious to the 5 witnesses, but I would ask them to have patience so it 6 gets on the record, please. Thank you. 7 Thank you, sir, for you help. 8 Now, Mr. Mallette, you were telling us this 9 morning, and we can see from these schedules, that much 10 of the reduction in capital costs is attributable to 11 reduced pipeline costs. Is that correct? 12 MR. MALLETTE: Yes, that's correct. 13 MS LEA: Okay. 14 I'm sorry. Just reiterate for me the status 15 of the contracts that have occurred since your original 16 filing with respect to the cost of the pipelines. Have 17 you got firm contracts now, subject to Board approval? 18 MR. MALLETTE: With respect to the instruction 19 contract, the mainline construction contract, we do not 20 have firm contracts as of today. However, the bid 21 package has gone to the contractors. We have received 22 bids from a series of contractors, a number of 23 contractors. We are analyzing them and getting some 24 clarifications as we speak here. We anticipate within 25 the next couple of weeks we will be in a position to 26 award the contract, but we have not yet awarded the 27 contract to a single contractor. 28 MR. LESLIE: Madam Chair, I'm sorry to 52 UNION GAS PANEL 1, ex (Lea) 1 interrupt. 2 I have been asked if it would be possible to 3 have a break now, either the morning break or just a 4 short break, to accommodate one of the witnesses. 5 MS LEA: Certainly. 6 THE PRESIDING MEMBER: Certainly. We will now 7 break for 15 minutes. 8 MR. LESLIE: Thank you very much. 9 --- Upon recessing at 1105 10 --- Upon resuming at 1125 11 THE PRESIDING MEMBER: We are missing 12 Mr. Leslie. Is he on his way? 13 There he is. 14 Ms Lea. 15 MS LEA: Thank you, Madam Chair. 16 Mr. Mallette, we were looking at the changes 17 in costs. I would like to continue with that line of 18 questioning, please. 19 I was looking at section 6, Schedule 3, which 20 I think you referred us to earlier, and I'm looking at 21 both the original and the revised. There are just a few 22 things that I wanted to check with you. 23 You have indicated that there has been a 24 significant reduction in the cost to lay pipe in the 25 pools, however, the percentage reduction in the cost for 26 the Oil City Pool is quite a bit higher than that in the 27 Mandaumin and Bluewater Pools. It's about 38 per cent 28 for Oil City and about 11 per cent for the others 53 UNION GAS PANEL 1, ex (Lea) 1 according to our calculations. 2 Can you tell me why the reduction in the case 3 of the Oil City Pool is so much greater? 4 MR. MALLETTE: Well, looking specifically at 5 the contract price, which you accurately identified as 6 being a significant change, these are simply reflective 7 of the bids that were received. We put the contract out 8 to an open bid, and the prices came back to us and we 9 have simply reflected them in these costs. 10 I believe that we have benefitted from a very 11 good, competitive contracting market, and why one is a 12 little more than the other, I can't really say. It's 13 simply reflective of the bids that we have received. 14 MS LEA: So I understand, then, that the same 15 contractor is not doing the Oil City Pool as it is doing 16 the Mandaumin and Bluewater Pools? 17 MR. MALLETTE: We actually bid it both ways, 18 so a contractor could bid on both projects or individual 19 projects. At this point, since they are not awarded, I 20 can't say whether they are both going to go to the same 21 contractor or whether there will be two separate 22 contractors. 23 MS LEA: Okay. 24 What I'm trying to understand is why was 25 your -- maybe it's the estimate that was in error the 26 first time. We have we got a large reduction for Oil 27 City and a moderate reduction for the other two pools. 28 MR. MALLETTE: Again, it is market forces that 54 UNION GAS PANEL 1, ex (Lea) 1 are at play here, and I really can't speculate as to why 2 one is a percentage -- the percentage decrease for one 3 is greater than the other. 4 MS LEA: One would assume the same market 5 forces apply to all three pools. 6 MR. MALLETTE: Yes. Theoretically that's 7 true. 8 Our original costs were based on historic bid 9 prices that we had received and had on other projects. 10 In this particular case, we seemed to, as I say, 11 benefitted from a market that is very competitive, and 12 the contractors have allocated the costs in this way. 13 MS LEA: Maybe there is a change in the piping 14 planned for the Oil City Pool. 15 I'm not suggesting there is anything sinister 16 here. I just don't understand the degree of difference. 17 You have no other information than that? 18 MR. MALLETTE: I really don't. There has not 19 been a significant scope change in play here. 20 MS LEA: Okay. 21 MR. MALLETTE: We were very surprised as well 22 to see these very good prices come back to us. 23 MS LEA: Well, I can ask the panels that deal 24 with the construction as to whether there has been some 25 significant change that you may not know of. 26 MR. MALLETTE: I will be testifying to that as 27 well and -- 28 --- Laughter 55 UNION GAS PANEL 1, ex (Lea) 1 MR. MALLETTE: I can state right now that 2 there has not been a significant scope change here. 3 MS LEA: Okay. One moment. 4 --- Pause 5 MS LEA: Mr. Mallette, in the revised evidence 6 you have indicated that a contractor can do all the 7 pools or one or more of them. In the updated evidence 8 you have provided, which you have indicated is a pretty 9 certain estimate of the cost, what did you assume here, 10 or did it matter? Did you assume that one contract was 11 doing them all or that they were to be severally 12 completed, or did it not matter to the cost? 13 MR. MALLETTE: I would have to say that it 14 does not matter to the costs. 15 As I stated, the contracts are not awarded and 16 I do not believe I am at liberty here, for contractor's 17 competitive purposes, to identify whether it would be 18 one contract or two what looks good right now. 19 We are clarifying the bids. There are still 20 some questions to be answered by the contractors and we 21 have not yet awarded. I believe if I was to give an 22 indication that it was going to go one way or the other 23 that may compromise that bidding process. 24 MS LEA: Right. I'm not asking for that 25 disclosure, I was merely asking what your assumption had 26 been in creating this schedule. 27 As I understand your evidence, your answer is: 28 It doesn't matter. Am I right? 56 UNION GAS PANEL 1, ex (Lea) 1 MR. MALLETTE: Yes, that's correct. 2 MS LEA: Thank you. 3 Turning to the miscellaneous contract labour 4 line on both of these schedules, this line there seems 5 to have been an almost doubling of the costs, at least 6 in the Mandaumin and Bluewater side, and a significant 7 increase in Oil City. Can you tell us what led to that 8 increase? 9 MR. MALLETTE: Yes. Primarily there are three 10 areas that have increased in the scope that is covered 11 in this area. This is not the prime contract, the 12 contract that lays the pipe. This has to do with other 13 ancillary contracts. 14 In this case, the significant changes have 15 occurred in the survey contract, in tiling work that due 16 to additional research that has been done examination of 17 the tile that is out there the work that is going to be 18 needed to be done there. 19 There has been a scope increase. 20 As well as in negotiation of the land 21 agreements, we have also decided that there is probably 22 a little additional work than we had initially 23 contemplated to take care of all our obligations under 24 the agreements. 25 MS LEA: Okay. Thank you. 26 With respect to the land purchases, easement 27 and damages line in Mandaumin/Bluewater, these costs 28 have dropped significantly, but in Oil City they have 57 UNION GAS PANEL 1, ex (Lea) 1 increased. Again, it is a significant increase. 2 Can you assist us as to the reasons for that? 3 MR. MALLETTE: Yes. In the case of Mandaumin 4 and Bluewater the costs have dropped approximately 5 $200,000. In that case there is actually less land than 6 we had initially thought once the routing details were 7 worked out. 8 In the case of Oil City -- well, there was 9 more. So once again a bit of a scope adjustment. 10 I would not say that this is unusual from the 11 sense of going from the initial environmentally provided 12 route to identifying exactly where all of the easements 13 are going to be required, a temporary workroom and 14 actual details of installation. So these are 15 adjustments that are made in going from the original 16 proposal to the detail design that will be installed. 17 MS LEA: There seems to be a tripling of the 18 costs for Oil City. Am I right? Does that mean that 19 there is triple the amount of land involved than it was 20 before? 21 MR. MALLETTE: I suppose on a percentage basis 22 that is correct, however in actual dollars we are 23 looking at about $70,000 increase here. So I think the 24 net significance of a dollar is not unexpected. 25 MS LEA: What I'm trying to understand is, 26 maybe in terms of the whole project it is not that 27 significant, sir, but it's the tripling of those costs. 28 That, you know, jumps out from the page. 58 UNION GAS PANEL 1, ex (Lea) 1 Is there triple the amount of land involved or 2 what is the reason for that tripling of costs? 3 MR. MALLETTE: Yes, there is more actual 4 easement land than initially thought. 5 MS LEA: There is more land you said? 6 MR. MALLETTE: I'm sorry, I'm not sure if it 7 is exactly triple or not. 8 MS LEA: Okay. No, I understand. 9 Does that figure that we are looking at on 10 these schedules also include the gas storage leases? 11 MR. MALLETTE: No, they do not. 12 MS LEA: Will there be someone who can assist 13 us as to where the additional land is, and so on, so we 14 just understand the reason for those costs, maybe not on 15 this panel, but -- 16 MR. MALLETTE: We can take a look and see if 17 we can identify the earlier values substantiating these 18 numbers versus the current ones. 19 MS LEA: Are you saying to me that the cost of 20 the same land has tripled or there is a greater amount 21 of land and there is a greater amount of cost per unit 22 land? 23 MR. MALLETTE: As I say, I guess we would have 24 to do a little more accounting here to come up with a 25 balance sheet that would show you exactly where 26 everything lands. 27 MS LEA: I don't need an exact accounting, I 28 just need to have a basic understanding of what caused 59 UNION GAS PANEL 1, ex (Lea) 1 what appears to us to be a large increase. 2 So if you could undertake to do that -- and 3 you are quite welcome to fulfil that undertaking just by 4 further testimony from another panel or whatever, just 5 so that I don't forget the question. 6 As I say, an exact accounting, for my purposes 7 at least, is not required, just an understanding of how 8 we got a tripling of those costs. 9 That is 16.3, if it please the Board. 10 THE PRESIDING MEMBER: Thank you. 11 MS LEA: What will we call that? Explanation 12 regarding increased cost of land purchase in the Oil 13 City Pool. 14 UNDERTAKING NO. 16.3: Mr. Mallette to 15 give an explanation regarding increased 16 cost of land purchase in the Oil City 17 Pool 18 MS LEA: It may be land purchase or it may be 19 another factor, you just let us know. Thank you. 20 All right. The last thing on this chart that 21 I wanted to ask, the contingency fees have been reduced 22 from 10 per cent to 5 per cent. Is that because you are 23 now more certain of your costs? Is that the reason for 24 that change? 25 MR. MALLETTE: Yes, that is correct. 26 MS LEA: Thank you. 27 Now, there is something else that I didn't 28 understand in the addendum that you filed with your new 60 UNION GAS PANEL 1, ex (Lea) 1 evidence. If you could have a look at that, please. 2 I'm looking at paragraph 12 of the addendum, 3 the recently filed revised evidence addendum. In 4 paragraph 12 of that addendum you state: 5 "Costs for compressor fuel and operations 6 have been eliminated from the operating 7 and maintenance expenses." (As read) 8 I don't even know that I'm sure what these 9 costs are exactly. I thought they were costs for 10 compressor fuel, and so on, to move -- to compress the 11 gas. Intuitively one would think that they should be 12 included in the cost. 13 Can you give me an explanation of that 14 sentence and what it is all about, or can someone? 15 MS CALLINGHAM: Under the terms and conditions 16 of the open season, long-term contracts that we are 17 asking for approval for, the customers are required to 18 provide their own fuel and pay commodity fees based on 19 the rate M12 rate schedule that's in effect as approved 20 by the Board from time to time. 21 MS LEA: Yes. 22 MS CALLINGHAM: Those charges are not included 23 in the revenues. The only charges included in the 24 revenues in the BCF analysis are the demand charges, 25 exclusive of any commodity charges that are recovered 26 under M12. It is therefore appropriate to exclude the 27 costs associated with fuel in order to provide a proper 28 match. 61 UNION GAS PANEL 1, ex (Lea) 1 MS LEA: Let me see if I can give you back 2 that so I know that I understand it. 3 MS CALLINGHAM: Okay. 4 MS LEA: Under the M12 rate schedule customers 5 pay their own fuel costs for compression? 6 MS GALBRAITH: They provide their own fuel. 7 MS LEA: Their fuel costs, okay. So therefore 8 there is no revenue derived from that charge. 9 There is no revenue derived from that charge. 10 Am I right? 11 MS CALLINGHAM: They pay for it based on a 12 ratio, based on the rate 12 rate schedule. That would 13 be correct. 14 MS GALBRAITH: They give us in kind the fuel 15 that we require to move their gas either in or out of 16 storage, so either in the economics we need to show the 17 fuel in kind as a revenue match against the cost or we 18 need to have nothing. 19 MS LEA: Okay. You have chosen to not list 20 either the revenue nor the cost. 21 MS GALBRAITH: That's right. 22 MS LEA: I understand. Now, what I didn't 23 understand though was if that hadn't been M12 -- these 24 contracts are not M12 contracts. Can you just tell me 25 whether the same thing is applying to these contracts? 26 What happens, please? 27 MS GALBRAITH: Under the open season we 28 contracted for long term service. If you want to refer 62 UNION GAS PANEL 1, ex (Lea) 1 to the open season package, one of the terms and 2 conditions of service was that each customer will pay 3 the commodity rate in effect, sometimes kind because 4 fuel ratios do change over time and we did not want to 5 be in a six year contract where the fuel ratio would go 6 up or down. 7 Part of the C1 overall price was the inclusion 8 of the fuel which we linked when M12 cost of service 9 fuel rate, so that if you look at the net impact of the 10 demand charge, plus you know, if you look at commodity 11 rates where we do provide fuel for some M12s, not very 12 many really, just Kingston, it stays within the range, 13 but it gives us a mechanism to keep their fuel payments 14 on the same playing field as other customers using 15 storage services on our system. 16 MS LEA: If you had elected instead to show 17 both the revenues and costs related to this item, would 18 it have any effect on the economic analysis? 19 MS CALLINGHAM: It shouldn't. The M12 is a 20 cost based rate and conceptually we should not be 21 impacted by the margins in those costs. Our margins 22 should not be impacted. 23 MS LEA: I'm a little hesitant because of the 24 word "conceptually". I understand what you are telling 25 me. What I'm asking is have you tried and is that in 26 fact what happened? 27 MS CALLINGHAM: I didn't try. It's a far more 28 complex approach to take because the M12 rate not only 63 UNION GAS PANEL 1, ex (Lea) 1 pays for fuel, this is the fuel that we are talking 2 about here which is the fuel that was at the fuel site. 3 We never did include fuel at Dawn's that may be used as 4 a result of the new service. It would have required 5 coming up with some kind of an estimate of unaccounted 6 for and we were to match all the costs that are 7 recovered in M12 rates. I do know that the dollar value 8 of M12 is over $300,000 annually. 9 MS LEA: I'm not sure I understand what you 10 just told me. 11 MS CALLINGHAM: That the charges to the 12 customer is under the long term contract. 13 MS LEA: Okay. 14 MS CALLINGHAM: You know, if you apply the M12 15 commodity charges, it would be over $300,000 a year. 16 MS LEA: Yes. 17 MS CALLINGHAM: I didn't try to stay with the 18 estimate of the cost to equal that, but I would assume 19 that they would. 20 MS LEA: Yes. Okay. I gather then from your 21 answer that it would be a complicated matter to now 22 perform that exercise, that is to insert the cost and 23 revenues from this type of cost. 24 MS CALLINGHAM: Well, generally speaking, we 25 have never taken that approach in economic analysis and 26 on the advice of -- you know, from time to time I have 27 spoken to our rate design group about it. You have to 28 obtain this, what's the cost of gas going to be over 64 UNION GAS PANEL 1, ex (Lea) 1 time. There's a lot more variables in it. Conceptually 2 the rate should track all those costs so that your 3 margin is not impacted. 4 We in past applications, not only storage but 5 transmission, did not forecast the commodity costs or 6 the commodity revenues. 7 MS LEA: Yes. One moment, please. 8 --- Pause 9 MS LEA: Mr. Mackie has very kindly done a 10 calculation for me. The O&M costs I believe as a result 11 of the deductions on this item were reduced by $287,000. 12 Is that right? 13 MS CALLINGHAM: No. 14 MS LEA: From 445 to 2,287. Thank you very 15 much. 16 MS CALLINGHAM: That's right. It was a 17 reduction in O&M costs of $158,000 annually. 18 MS LEA: I'm sorry? 19 MS CALLINGHAM: $158,000 annually. 20 MS LEA: Yes, and that amount is all 21 attributable to the issue we have just been discussing. 22 MS CALLINGHAM: Yes, it is. 23 MS LEA: Okay. Thank you very much. 24 Now, I have some questions about the costs 25 associated with the acquisition of gas storage rights 26 for each of the pools. Now, at the technical conference 27 it was Mr. Lowe that answered these questions. Is this 28 the right panel, though, to ask those questions of? I 65 UNION GAS PANEL 1, ex (Lea) 1 expect that it is. Can someone assist me with that on 2 the panel? 3 MR. MARUSIC: I think you can ask the question 4 and if we can answer it, we will. If not -- 5 MS LEA: And if not, you will bounce it over 6 to someone else. Okay. Thank you very much. 7 Now, just going back to the technical 8 conference then, as I understood it, Mr. Lowe explained 9 that the total acquisition costs for all the assets in 10 the Oil City Pools was $988,000 and the payment was made 11 over several years. 12 After the technical conference you provided us 13 with undertaking 27. In that undertaking you showed us 14 the original cost of the gas storage rights for each 15 pool. Now, do you have that undertaking, sir? 16 MR. MARUSIC: I think so. 17 MS LEA: I'm just going to be referring to 18 some figures on it. I don't know that I have a problem 19 with it. I am just going to be referring to figures. 20 That's undertaking 27. 21 For the Oil City Pools, the original purchase 22 cost is listed as $765.5 thousand and then you have 23 added under the CWIP IDC column $154.5 thousand to 24 arrive at the capitalized asset value of $920,000. 25 Now, I'm trying to tie together Mr. Lowe's 26 evidence from the technical conference, that is that the 27 cost of all the assets associated with the Oil City 28 Pools was $988,00. It's true then -- my understanding 66 UNION GAS PANEL 1, ex (Lea) 1 is that $920,000 of this the cost of the gas storage 2 leases. Have I got my understanding right there? 3 I'm sorry, you don't have the undertaking yet, 4 sir. I'm sorry. 5 MR. MARUSIC: I've got it. Sorry. 6 MS LEA: Have a look at the figures. 7 MR. MARUSIC: Okay. 8 MS LEA: Then I will repeat my question. 9 MR. MARUSIC: I'm ready. 10 MS LEA: Okay. Thanks. Mr. Lowe's statement 11 that the purchase of all the assets from the old city 12 pool was $988,000. I assume then from undertaking 27 13 that $920,000 of that was for the gas storage leases. 14 Am I correct? And that includes the CWIP and IDC 15 because we have got a total storage rights costs in 16 right of that. 17 MR. MARUSIC: I don't believe those were for 18 gas lease payments. 19 MS LEA: Okay. 20 MR. MARUSIC: They were for storage rights. 21 MS LEA: Okay. 22 MR. MARUSIC: Which is a different thing. 23 MS LEA: Yes. Can you explain what the 24 difference is, sir? 25 MR. MARUSIC: It's my understanding, and Mr. 26 Lowe can help me here later, that storage rights 27 payments are made to acquire an interest in a storage 28 pool, normally from the group or party that owns the 67 UNION GAS PANEL 1, ex (Lea) 1 rights to the pool and did the actual production. 2 MS LEA: All right. Let's come at it from 3 this way. Did Union have any working interest in the 4 Oil City Pools before purchasing those assets that have 5 been valued at $988,000? 6 MR. MARUSIC: I don't know. 7 MS LEA: Who does? 8 MR. MARUSIC: Mr. Lowe. 9 MS LEA: Okay. Just let me write his name 10 beside this question. He also indicated in the 11 technical conference that the purchase of these assets 12 occurred over a number of those years since each of the 13 parties to the Michigan group sold out at different 14 times. 15 I guess it would be Mr. Lowe that would tell 16 me when these assets were purchased and how much was 17 paid. 18 MR. MARUSIC: Yes, that's correct. 19 MS LEA: Okay. Just one moment. Again I was 20 going to ask what was covered in each of those 21 purchases. That would be Mr. Lowe. 22 Here is something that you may be able to 23 assist us with. I don't know. Does Union have a policy 24 of purchasing the assets of the existing producing pools 25 if it appears from the geological data that's available 26 that the pools might be candidates for gas storage or 27 otherwise? 28 MR. MARUSIC: I would defer that to Mr. Lowe 68 UNION GAS PANEL 1, ex (Lea) 1 as well. 2 MS LEA: You are not giving me much hope if I 3 keep asking these questions of this panel. One moment 4 please. 5 Okay. Again, I have a couple more for 6 Mr. Lowe. Let me try this one for this panel. It is a 7 little more general. 8 If we look at Undertaking 27, it is plain that 9 Union paid more for the gas storage rights in the Oil 10 City Pools than either of the other two pools. Is that 11 correct? 12 MR. MARUSIC: That is correct. 13 MS LEA: We calculated, and you may want 14 someone to check this, but we understood that Union paid 15 about $18.97 per 10(3)m(3) of working storage space for 16 Oil City Pools, but only about $5.08 for Mandaumin and 17 $6.74 for Bluewater gas storage rights. That is the gas 18 storage rights, I gather, working storage space. 19 Can anybody assist me as to the reason for 20 that differential? 21 MR. MARUSIC: I think you would have to ask 22 Mr. Lowe that as well. 23 MS LEA: Okay. That is right. One moment, 24 please. Mr. Lowe is he here? You can hear what I am 25 going to be asking you. 26 MR. MARUSIC: He is taking notes vigorously. 27 MS LEA: So he can tell me. One moment 28 please. 69 UNION GAS PANEL 1, ex (Lea) 1 Okay. Right. Just one moment. A change in 2 drilling costs. I gather there was an increase of 3 $618,000 in drilling costs. Am I correct? 4 MR. MARUSIC: Yes, that is correct. 5 MS LEA: And the reason for that? 6 MR. MARUSIC: We made -- I refer you to the 7 addendum to paragraph 7. 8 MS LEA: Yes. 9 MR. MARUSIC: Page 3. There we outline in 10 a -- in a rough fashion the nature of the changes to the 11 well drilling program in the Mandaumin Pool. Primarily 12 the cost increases are due to a change in drilling 13 method. We were originally proposing to drill those 14 using cable-tool and we have switched now to rotary 15 drilling methodology and that is the more expensive 16 drilling method. 17 The other major factor in the drilling cost is 18 the two wells that we are proposing to now directionally 19 drill. That adds to the cost as well. 20 MS LEA: Okay. Sir, are you the gentleman to 21 ask why you changed from cable-tool to rotary drilling 22 methodology? 23 MR. MARUSIC: I believe Mr. Pardy on the next 24 panel can help you with that. 25 MS LEA: Thank you. All right. I think then 26 my last question for this panel is the following. 27 One of the reasons why we are scrutinizing 28 these costs today is to assist, of course, this panel of 70 UNION GAS PANEL 1, ex (Lea) 1 the Board to determine whether they are appropriate 2 costs. Can I ask you this also. 3 Previously -- before in the old style of 4 regulation that existed up until about three years ago, 5 in rates cases Union would file a rate base filing and 6 in that rate base would be included the cost of projects 7 such as this. Is that correct? 8 MS CALLINGHAM: Yes. 9 MS LEA: Do you understand what filings would 10 be made regarding rate base under the new PBR 11 methodology which we are adopting? Would these costs 12 be -- the costs of projects such as this, would they be 13 set out in filings any more? 14 MS GALBRAITH: Where we have filed the PBR 15 unbundling proposal which would presumably -- we are 16 basing rates for the Year 2000 but off 1999. So 1999 17 will reflect adjustments. So you won't see this set out 18 in the same old way as it always was. Our accounting 19 systems internally will still basically go the same way, 20 but it will be a subtle difference because we are asking 21 more for a review of the whole instead of every single 22 component of the parts. 23 MS LEA: I guess what I am asking is if -- if 24 we are talking about a public review of rate base items, 25 this particular project will not be broken out in the 26 public filings as I understand it under the new PBR 27 regime. Am I right? I mean I am not sure. I am asking 28 partly because I'm not sure. 71 UNION GAS PANEL 1, ex (Lea) 1 MS GALBRAITH: And quite frankly I'm not sure 2 of the detail that will happen or the reviews that will 3 be put in place subject to the entire PBR unbundling 4 package. 5 MS LEA: Okay. It is my understanding they 6 won't be, but time will tell. 7 In that circumstance then that I am correct 8 and you will not be filing these projects broken out, it 9 is this panel of the Board then that is really the only 10 regulatory scrutiny of these costs at the time that they 11 approve the project? 12 MS GALBRAITH: It is this Board who is 13 approving the facilities for this project and it would 14 be the Board that would approve the contracts and the 15 revenues, at least the long-term revenues that would 16 accrue to Union as a result of this project. It is 17 Union's shareholder who is going to bear the risk of any 18 cost differential that may come about because of the PBR 19 analysis, because it is not a specific approval of the 20 dollars put into rate base except for the adjustments. 21 MS LEA: Okay. Thank you. One moment, 22 please. 23 Thank you. Given that I have several 24 questions to defer to another panel then, those are my 25 questions for this one. Thank you very much for your 26 answers, ladies and gentlemen. Thank you, Madam Chair. 27 THE PRESIDING MEMBER: Thank you, Ms Lea. Ms 28 Drozd. 72 UNION GAS PANEL 1, ex (Lea) 1 MEMBER DROZD: I assume I am turned on here. 2 I note in the Exhibit 11.2 that was filed with 3 the Board this morning that there is an agreement that 4 Union will not drill UMD No. 6 on Harris' property. I 5 also note in the material on the blue sheets that you 6 have included a cost of about $600,000, $700,000 dollars 7 for directional drilling of UMD 6. Are you going to be 8 filing revised, updated cost schedules which eliminate 9 the cost of UMD 6? 10 MR. MARUSIC: UMD 6 in the addendum that was 11 filed is proposed in its new location, which is not on 12 the Harris property. It is being directional drilled 13 and the costs shown of $652,300 does reflect that it is 14 being directional drilled from a different location. 15 MEMBER DROZD: Thank you. Thank you, Madam 16 Chair. 17 THE PRESIDING MEMBER: Thank you, Ms Drozd. 18 Ms Simon. 19 MEMBER SIMON: Just a general question on the 20 19 year payback. I was wondering if that 19 year 21 payback is a typical payback that we could expect for 22 the development of these types of pools that you are 23 proposing? Typical from a historical sense or what we 24 would expect in future. 25 MS CALLINGHAM: Typical from a historical 26 perspective. 27 The payback for Phase I pools was seven years 28 so -- and that is the most recent history on the pool 73 UNION GAS PANEL 1, ex (Lea) 1 development. Bentpath/Rosedale was completed -- hook-up 2 was I think in '97 and I'm not sure of the payback for 3 that. But it was -- the MPV was something like $20 4 million over 30 years. I'm sure it was a very early 5 payback on that particular project as well. I don't 6 have any more history than that. I don't know -- 7 typically we run the analysis over 30 years and prior to 8 that whether -- I'm not sure what the payback was in 9 terms of -- 10 MS GALBRAITH: Perhaps I can give you a little 11 information from before that and it will be general 12 information, not specific information. 13 Since Bentpath/Rosedale in the Century Phase I 14 and Century Phase II, these pools have been taken to the 15 market because it is competitive and it is market 16 projects. Before '97 the storage development that was 17 done at Union since, oh, '88 to '97 because I remember 18 in '97 a big to-do when we went with the open season was 19 the first time in 10 years that Union has taken 20 long-term storage to markets outside of its own 21 infranchise base. 22 So prior to the Bentpath development, the 23 storage that we had been developing on Union was 24 cost-of-service storage. 25 You know, Ms Lea asked earlier if there was a 26 benefit to these projects. Storage prices through the 27 eighties rose continually. As we started developing 28 these new projects, we are noting there is a decline in 74 UNION GAS PANEL 1, ex (Lea) 1 the cost-of-service rate even when these are rolled in, 2 generally speaking. But the rate has dropped from over 3 $50 a 10(3) -- is that right? Fifty cents. About 4 50 cents an MCF -- I'm not very good with 10(3s) -- to 5 about 34 cents an MCF. 6 So outside of the, you know, paybacks there 7 are significant infranchise benefits to the rate 8 reductions and to the existing M12 contract holders, GMI 9 and Consumers, who have existing long-term contracts. 10 MEMBER SIMON: Ms Callingham, you mentioned 11 that there might be some implications for this type of 12 payback that we could expect in the future, this type of 13 payback that we could expect in the future on this order 14 for future pool development of this type. 15 MS CALLINGHAM: It depends on the cost of the 16 project. The location, the storage, the cost of the 17 project. 18 Generally speaking, I guess in a broad sense, 19 we would always do the most economical ones first. And, 20 as time goes on, and those go, probably the cost to 21 develop would increase over time. 22 Perhaps Mr. Marusic can add to that. 23 MR. MARUSIC: All I can say is that depending 24 on the location of the new storage pools, you know, if 25 they are closer to Dawn or farther from Dawn, that is 26 going to impact the cost of the facilities, which has a 27 bearing on the breakeven. 28 And the other thing is the revenues, and they 75 UNION GAS PANEL 1, ex (Lea) 1 are uncertain as well. We don't know going forward what 2 the revenues might be, and Ms Galbraith can add to that, 3 but we are dealing with uncertainty there too. So those 4 factors will have a bearing on the profitability of 5 future storage projects. 6 MEMBER SIMON: Thank you. That is very 7 helpful. 8 I just had a question related to rate impact. 9 I was wondering if you could point me to where in the 10 evidence I could find -- I assume it is there -- where I 11 could find what the rate impacts are to Union's 12 infranchise customers. Do we have that? 13 MS CALLINGHAM: That information isn't 14 provided in the evidence. 15 I can say that, in both the short and the long 16 term, the total revenues coming in exceed the cost, and 17 overall there is no increase in revenue requirement as a 18 result of this project going forward. 19 As to how the benefits, if you will, the 20 excess of revenue over cost, is disposed of, whether it 21 is -- how it is shared amongst customers would be a 22 matter that would have to be dealt with by the Board in 23 a future rate proceeding. 24 Typically, we don't deal with the rate side of 25 it at the facilities applications. 26 MEMBER SIMON: And this will be tracked in the 27 deferral account? 28 MS CALLINGHAM: At the present time, it would 76 UNION GAS PANEL 1, ex (Lea) 1 be tracked in the deferral account, based on the last 2 Board order, until it is changed at the direction of the 3 Board, if it is. 4 MEMBER SIMON: Thank you very much. 5 Those are my questions, Madam Chair. 6 THE PRESIDING MEMBER: Thank you, Ms Simon. 7 I just have a couple of questions. 8 To follow up with what Ms Drozd asked, are we 9 going to be getting an update to reflect the settlement 10 agreement reached this morning, Mr. Leslie? 11 MR. LESLIE: The settlement agreement won't 12 respect anything that this panel is dealing with, and I 13 will have to think about whether -- we will certainly be 14 filing copies of the documents that are referred to in 15 the settlement agreement. There is a revised letter of 16 understanding, the easement agreements have been revised 17 slightly, and there is something called a construction 18 commitment letter, all of which we will file. But I 19 will have to take under advisement whether any further 20 updates are required as a result of this. 21 Most of it relates to construction practices 22 and things of that kind, so I don't think it is going to 23 impact, at least not in a forecast way, on the costs. 24 THE PRESIDING MEMBER: Okay. I would 25 appreciate if you would review the material just to make 26 sure -- 27 MR. LESLIE: Yes, of course. 28 THE PRESIDING MEMBER: Okay. Thank you. 77 UNION GAS PANEL 1, ex (Lea) 1 Perhaps you can explain to me -- I'm a bit 2 confused. I think it was Ms Callingham who said that 3 the Century Pool I that was just approved last year, the 4 payback was seven years, and the payback for this 5 project, Century Pools II, is 19 years. I'm confused as 6 to why there is such a large discrepancy in the payback 7 period between two projects that are relatively close in 8 time. 9 MS CALLINGHAM: We did the most economic one 10 first, as Lynn is saying. 11 The total capital cost to develop the Phase I 12 series of pools, there were two pools involved in that, 13 was $15 million. On a cost-per-unit of capacity in 14 terms of the development costs per unit of capacity was 15 much lower for the Phase I pools than it is for the 16 Phase II pools. 17 MR. MARUSIC: The two pools developed under 18 Phase I, those being Bentpath east and Booth Creek, were 19 significantly closer to the Dawn compressor station than 20 Mandaumin and Bluewater especially. We are having to 21 install more pipeline, for example, to reach Mandaumin 22 and Bluewater Pools, and that has added to the capital 23 costs and affected the breakeven. 24 THE PRESIDING MEMBER: Thank you. 25 With respect to the update for section 6, 26 Schedule 3, and the update with respect to Board Staff 27 Interrogatory 89, is the updated Board Staff 28 Interrogatory 89 the breakdown of the project economics 78 UNION GAS PANEL 1, ex (Lea) 1 and costs? Are the changes in the blue sheets for Board 2 Staff Interrogatory 89 only reflective of the update in 3 Schedule 3, section 6, or are there other changes that 4 had an impact on the economic feasibility? 5 MS CALLINGHAM: All of the changes that are 6 outlined in the addendum that are reflected in the blue 7 page are reflected in the update to IR-89. So it 8 wouldn't be just Schedule 3; it would be all of the 9 changes that we have spoken about today. 10 THE PRESIDING MEMBER: So, just to follow me, 11 because sometimes it is hard to follow all the blue 12 sheets, et cetera -- 13 MS CALLINGHAM: Yes. 14 THE PRESIDING MEMBER: -- you are saying that 15 it does reflect the changes to the updated Schedule 3, 16 section 6, and it does reflect the addendum? 17 Are there any other changes that 18 Interrogatory 89 reflects, the changes reflect? 19 MS CALLINGHAM: Nothing beyond what is in the 20 addendum. 21 THE PRESIDING MEMBER: Okay. Thank you. 22 Mrs. Galbraith, and this is just to follow 23 up -- I think that it has been answered -- will the 24 Board have before it the actual contracts that you want 25 the Board to approve for this project at some time? 26 MS GALBRAITH: You bet you will. 27 THE PRESIDING MEMBER: Prior to when you want 28 us to approve it? 79 UNION GAS PANEL 1, ex (Lea) 1 MS GALBRAITH: Oh, boy. My staff is dancing 2 back at the office right now. 3 --- Laughter 4 THE PRESIDING MEMBER: I appreciate that. I 5 just -- 6 MS GALBRAITH: Yes. Yes. That was said 7 very -- 8 THE PRESIDING MEMBER: I think that was one of 9 your undertakings -- 10 MS GALBRAITH: I am most embarrassed. 11 THE PRESIDING MEMBER: -- the actual 12 contracts. 13 Thank you. 14 Also, Mrs. Galbraith, you talked before -- I 15 guess Board staff asked you the question about whether 16 all of the pools were not approved and dealing with how 17 you were going to deal with the contracts. 18 Are the volumes that are required in the pools 19 also dependent upon the Board's determination for your 20 delta pressuring proposal? 21 MR. MARUSIC: Yes, they are. The Board's 22 determination of delta pressuring has an impact on how 23 much space would be available in the first year of 24 development. 25 THE PRESIDING MEMBER: So in fact there are 26 two basic scenarios, that if the Board doesn't approve 27 all of the designated storage areas or the Board for 28 some reason does not approve your delta pressuring 80 UNION GAS PANEL 1, ex (Lea) 1 proposal, then they would both have impacts on the 2 capacity, storage capacity available to meet the 3 contracts? 4 MR. MARUSIC: That's correct. 5 THE PRESIDING MEMBER: Okay. Thank you. 6 I have one more question, and I'm not sure if 7 this is the right panel. It just deals with Union's 8 unbundling proposal, especially the upstream unbundling 9 proposal. 10 I would like people's comments on if Union is 11 proposing to unbundle upstream storage from gas 12 distribution, as I understand is the case, why should 13 the Board approve this storage proposal now if the 14 proposal for Union is to send it off into a competitive 15 upstream unbundled business -- in other words, why 16 should the ratepayers pay for it, presumably, and it is 17 going to be a 19-year payback? 18 Ms Callingham talked about the overall 19 increase in revenue over the project will more than pay 20 for it, but in the initial cost of service -- and I know 21 that we are all going from cost of service to PBR, and 22 we are going from bundling to unbundling, and it is all 23 complicated for all of us. But could you comment on 24 that in general? 25 MS GALBRAITH: Yes. Firstly I would just like 26 to talk a little bit about the 19-year payback, because 27 the payback is a reflection of capital. 28 THE PRESIDING MEMBER: Right. 81 UNION GAS PANEL 1, ex (Lea) 1 MS GALBRAITH: So year-to-year, you know, when 2 you are looking at -- you are looking at excess revenue 3 over costs year-to-year. That's why we have the market 4 premium account, at least at the present time -- 5 THE PRESIDING MEMBER: Right. 6 MS GALBRAITH: -- which does provide benefit 7 to the customers. 8 We have also discussed this morning how since 9 the Bentpath, Rosedale -- which was the first of these 10 hearings that were supported with franchise volumes -- 11 have directionally reduced the rates to the infranchise 12 customers, people infranchise customers. They pay much 13 less for storage today than what they paid five years 14 ago. So there has been -- over time this is a very good 15 thing for customers in Ontario. 16 Now I will stop and collect my thoughts. 17 As far as the unbundling for the upstream 18 customers goes, we have taken -- and I believe made the 19 point with this Board that storage is a competitive 20 product but is an asset that remains in regulation. We 21 have asked for the flexibility to be able to price 22 storage so that can capture the market value and 23 sometimes that is going to be less than the costs. We 24 haven't seen that yet, but presumably that could happen 25 in a competitive market world. 26 But we have not proposed to take storage 27 outside of regulation. We have proposed in the 28 unbundling proposal that parties have access to the 82 UNION GAS PANEL 1, ex (Lea) 1 storage in similar fashion that they had access to 2 upstream transportation, but the storage that we are 3 proposing to allocate is storage on our system and we 4 are not proposing to take it out of the realm of 5 regulation. We are just proposing that the people that 6 get it infranchise for the time being get it at cost. 7 THE PRESIDING MEMBER: Thank you, 8 Mrs. Galbraith. That has been very helpful. 9 You mentioned one of the advantages -- and I 10 don't think that anything necessarily hinges on this, 11 but one of the advantages to the ratepayers of this 12 proposal is a price discovery. I haven't heard that 13 term before. Could you just explain it to me? 14 MS GALBRAITH: Yes, I would be very happy to 15 explain it to you. 16 I deal with a lot of people who trade natural 17 gas day-to-day and there are a lot of different types of 18 players out in the market who buy and sell gas 19 continually. 20 You are probably familiar with the NYMEX and 21 how gas is traded on the stock market essentially, just 22 like corn or wheat or traded as a commodity. That 23 commodity that is traded, the NYMEX value, is very high 24 level of price discovery. You can go to any broker in 25 the country, financial broker, and buy units of natural 26 gas on the stock market essentially. That's very -- 27 that is price discovery. You can look and see how much 28 is traded and you know that everybody is basically 83 UNION GAS PANEL 1, ex (Lea) 1 paying the same price today for the same product next 2 month. 3 Now, the very perfect price discovery is the 4 NYMEX right now and it is really based on supply basin 5 because you have a very -- you have a lot of gas in the 6 supply basin and in the supply basin the gas has one 7 goal and that goal is to get out of the supply basin, 8 move down the transport chain, move down the 9 distribution chain and ultimately find a home and get 10 burned. 11 But down there, you know, it's very liquid, 12 very transparent because there is so much gas. 13 What is a real complement to Dawn is that 14 parties trade 5 BCF of gas a day, which is more gas on 15 any day than what flows into the Province of Ontario on 16 a financial basis. 17 You could call any of 80 different companies 18 who buy and sell gas at Dawn and ask them what their 19 price is for tomorrow, what their price is for next 20 week, what their price is for next month, for the next 21 five month strip, and you will find that all of them are 22 within a penny or two for the same service. 23 So what you are getting with price discovery 24 is a lot of people who are selling the commodity for the 25 same price and it's transparent. I can see it easily 26 because it is not like 10 years ago when it was just 27 Western Gas Marketing, the old TransCanada marketing 28 affiliate, who sold gas. 84 UNION GAS PANEL 1, ex (Lea) 1 The price discovery. I sold gas in the early 2 1980s and the price discovery was as simple as I looked 3 at what my one choice out of Alberta was, my one choice 4 for transportation was, and then I looked at my choice 5 out of the U.S. and said "Yes, I'm smarter than these 6 other people because they don't know how to buy gas out 7 of the U.S." So even though gas is $1.00 cheaper out of 8 the U.S., I can sell it for 99 cents more because it is 9 cheaper than their one Canadian alternative. 10 As soon as any of that information gets 11 published it becomes transparent and your competitive 12 advantage goes down substantially, right. It's good for 13 price. Six months after I started selling U.S. gas I 14 was making a penny. When I started selling U.S. gas I 15 was making 70 cents. 16 So that is the benefit of price transparency, 17 it's a lot of willing buyers, willing sellers that you 18 know you can land the product for at the same price. 19 THE PRESIDING MEMBER: Thank you. 20 I can see you are quite passionate about price 21 discovery, Mrs. Galbraith. 22 MS GALBRAITH: Well, I think it's really good 23 for the province. 24 THE PRESIDING MEMBER: I'm not disagreeing 25 with you. 26 MS GALBRAITH: I think we are very 27 fortunate -- and I mean this in my heart -- I think we 28 are very fortunate that Ontario has a centre that any 85 UNION GAS PANEL 1, ex (Lea) 1 marketer will tell you has excellent price discovery. 2 It's good. It's good for everyone. 3 THE PRESIDING MEMBER: Thank you. 4 --- Off record discussion 5 THE PRESIDING MEMBER: Mr. Leslie, do you have 6 anything on redirect? 7 MR. LESLIE: No, I do not. Thank you. 8 THE PRESIDING MEMBER: Thank you. 9 I think now would be an appropriate -- I thank 10 the panel very much. You are excused. 11 Now will be an appropriate time to break, so 12 we will break for lunch until two o'clock. 13 Thank you. 14 --- Upon recessing at 1220 15 --- Upon resuming at 1402 16 THE PRESIDING MEMBER: Please be seated. 17 MR. CARD: My name is Barry Card. I appear 18 for the Corporation of the Township of Dawn-Euphemia. 19 We are an intervenor in the proceedings. I apologize 20 for not having been here this morning. 21 The reason for my absence is that we had hoped 22 by this morning to have concluded a settlement with 23 Union that would have resulted in the withdrawal of our 24 intervention. We are still very close. I am optimistic 25 that we will be able to do that by tomorrow morning. 26 That would obviate the need for our participation in 27 these proceedings. 28 Because the settlement will have to be 86 1 ratified by all the members of council in accordance 2 with a council resolution that was passed last week, it 3 hasn't been possible logistically to get everyone to 4 look at the settlement and to agree to it by this 5 moment, but I'm hoping that by this time tomorrow it 6 will be done. 7 What I propose to do is to simply send a 8 letter, as I had done yesterday, confirming that the 9 interest of the township has been resolved and that 10 there is no need for it to continue participation. 11 On the other hand, if we are unsuccessful in 12 concluding the arrangement, I will beg your indulgence 13 to be able to participate, but at the moment that 14 appears unlikely. 15 THE PRESIDING MEMBER: Thank you, Mr. Card. 16 Mr. Leslie, do you have any comments? 17 MR. LESLIE: No. Thank you very much. 18 THE PRESIDING MEMBER: Okay. Thank you very 19 much. 20 MS LEA: I have one question of Mr. Card. I 21 gather then that you understand that Union's witness 22 panels are proceeding and that they may in fact be 23 completed by this time tomorrow, at least it's possible 24 that that may be the case. Are you waiving your right 25 to ask questions of these panels? 26 MR. CARD: Yes. Under the circumstances I am. 27 I know that according to the order the issues are being 28 addressed that we still haven't reached -- I suspect 87 1 that we haven't reached the matters that would be of 2 interest to the municipality, but certainly it seems if 3 evidence is going to be finished tomorrow afternoon, I 4 will either have to be here first thing in the morning 5 and try to participate or abandon the right to ask 6 questions. Yes. 7 MS LEA: Thank you, Mr. Card. You are 8 excused. 9 Before we continue with the next panel, I 10 understand that Mr. and Mrs. Vokes have taken advantage 11 of my offer to address the Board and if they want to 12 come forward now, we would be happy to hear what you 13 have to say. 14 Welcome, Mr. Vokes, Mrs. Vokes. 15 PRESENTATION 16 MR. VOKES: Hello. Yes, I am David Vokes. 17 This is my wife Laurie. 18 We felt that we were participating in this 19 hearing through the work of the Lambton County Gas 20 Storage Organization. This settlement took us a little 21 bit by surprise. At this point we don't really know 22 whether our concerns were addressed or not, being a 23 little bit different than most of the concerns of the 24 people in that organization. 25 I spoke to your staff at noon and I wanted to 26 leave with them the page of our concerns so it could go 27 on the public record. They suggested that they take a 28 copy of that and distribute and then if you had any 88 DAVID VOKES/LAURIE VOKES, Pres. 1 questions, you could ask them of us. 2 MS LEA: I wonder if we could make that an 3 exhibit now, please. That will be Exhibit 17.1. 4 EXHIBIT NO. 17.1: Memorandum submitted 5 by David Vokes 6 THE PRESIDING MEMBER: Thank you. 7 Mr. Leslie, do you have a copy of the letter? 8 MR. LESLIE: Yes, we do. It's a memorandum, I 9 guess. 10 THE PRESIDING MEMBER: Memorandum. 11 MR. LESLIE: Yes, I have it. 12 THE PRESIDING MEMBER: Thank you. 17.1. 13 MS LEA: Thank you. 14 MR. VOKES: There's basically three areas that 15 we have concerns and they are not necessarily in any 16 order or priority, but you can ask me whatever you like 17 about them. 18 THE PRESIDING MEMBER: Mr. Vokes, why don't 19 you just tell us in general terms what your concerns 20 are. 21 MR. VOKES: Well, probably the most important 22 one from our viewpoint is the health and safety impacts, 23 if any, of this project. This project seems to have 24 gone ahead regardless of being approved here. We have 25 already experienced some nuisance from the construction 26 and so forth, noise, dust. 27 We have a problem with where the access lane 28 to this project is in terms of being directly across the 89 DAVID VOKES/LAURIE VOKES, Pres. 1 road from our lane where our children board the school 2 bus. This layering that went on during the test wells 3 caused some problems with regard to swelling up of my 4 eye in particular and sinus irritation. This is when I 5 discussed with our family doctor. That probably deals 6 with most of that issue. 7 Another concern was that since we have owned 8 our property, we have kept it lease free. We don't have 9 an oil or gas lease on our property. We have been 10 approached numerous times to lease it. At that time we 11 didn't feel that the leases were good enough to sign, so 12 we made a conscious effort not to sign those leases 13 until somebody came around with a lease that was 14 acceptable to us. In doing so, we forego any 15 possibility of lease income from that. 16 Now, with the designation of this pool, it's 17 my understanding that whereas right now we aren't 18 affected by any legislation that would cause someone who 19 is doing any oil or gas exploration on our property to 20 have any problems with regard to what they could 21 possibly do with a potential well on our property. 22 After this pool is designated, apparently there is 23 regulations as to how that would affect how we would be 24 able to conduct our business. 25 We feel that that's in effect an expropriation 26 of our rights without any compensation. I understand 27 the compensation issues are being put off to another 28 hearing, but really it's not a compensation issue until 90 DAVID VOKES/LAURIE VOKES, Pres. 1 this designation takes place. 2 THE PRESIDING MEMBER: Mr. Vokes, you are 3 saying that you are a member of the Lambton County 4 Storage Association. 5 MR. VOKES: Yes. 6 THE PRESIDING MEMBER: But you are concerned 7 that the settlement of the compensation issues, or at 8 least the issues -- 9 MR. VOKES: The issues. 10 THE PRESIDING MEMBER: The issues, not the 11 compensation issue, because that's the subject of a 12 separate hearing. You are not satisfied with those. 13 MR. VOKES: Well, at this point I can't tell 14 you whether I am or not because it just happened. 15 THE PRESIDING MEMBER: Right. 16 MR. VOKES: So that's why I just wanted to 17 leave this information with you, make sure it's on 18 record. If you have any questions, you are welcome to 19 ask me. 20 THE PRESIDING MEMBER: We appreciate that, Mr. 21 Vokes. 22 Mr. Leslie, do you have any comments? 23 MR. LESLIE: The only thing I thought might be 24 helpful would be to locate the Vokes property by 25 reference to one of the maps that shows the DSAs and the 26 wells. 27 MS LEA: Section 4, schedule 5, I think will 28 do that. 91 DAVID VOKES/LAURIE VOKES, Pres. 1 MR. LESLIE: And, with your leave, I will just 2 ask Mr. and Mrs. -- they don't have that map, so I will 3 walk over and show it to them and ask them to identify 4 their property. 5 THE PRESIDING MEMBER: Okay. Thank you. 6 --- Off microphone 7 MR. LESLIE: If you get out the map Ms Lea has 8 referred to, it's schedule 5 in section 4. It's a map 9 of the Century Pools Phase II, the Mandaumin and 10 Bluewater Pools. It's towards the left hand side of the 11 map. You will see properties just above the centre. 12 There are two properties there under the words 13 "Concession three" that have the name Vokes beside them 14 or in them. 15 Mr. Vokes' property is the one to the left. 16 It's got a little box with the name "Hicks" in the lower 17 corner. The well that Mr. Vokes is discussing is to the 18 south of that. It's designated UVW No. 1. 19 THE PRESIDING MEMBER: So, Mr. Vokes, is 20 County Road 14 the same as Churchill Road? 21 MR. VOKES: Yes. 22 THE PRESIDING MEMBER: Okay. Thank you. 23 MS LEA: I have a couple of questions for 24 Mr. Vokes if it please the Board also. 25 THE PRESIDING MEMBER: Yes, Ms Lea, why don't 26 you continue. 27 MS LEA: Thank you. 28 Mr. Vokes, you have indicated that you had a 92 DAVID VOKES/LAURIE VOKES, Pres. 1 problem, you already have had a problem with noise and 2 dust. I just want to understand from this map then, 3 directly south of your property there is, what we see on 4 this map is a pink-marked access road down to well 5 sites. Is that the access road that you are referring 6 to in the second paragraph of your -- in number 2 in 7 your memorandum? 8 MR. VOKES: Yes. 9 MS LEA: Okay. So that you are saying that 10 traffic then that has used that road has already caused 11 you difficulties with noise and dust? 12 MR. VOKES: Yes. 13 MS LEA: Okay. So some construction has 14 obviously already gone on in that area? 15 MR. VOKES: Yes. 16 MS LEA: Do you remember when that access road 17 was built? Was it a long time ago or was it just for 18 this project? 19 MR. VOKES: Well, it was a farm lane which was 20 upgraded this summer to this gravelled road. 21 MS LEA: Was upgraded this summer. Okay. 22 Thank you. 23 Now, tell me, you were concerned also about 24 safety. You have small children boarding the bus. I 25 guess that is on the road that the -- that Madam Chair 26 just referred to. Is that right? The bus comes along 27 that road? 28 MR. VOKES: Yes, County Road 14. 93 DAVID VOKES/LAURIE VOKES, Pres. 1 MS LEA: Okay. And picks up your children at 2 the south end of your property? 3 MR. VOKES: Yes. Right. 4 MS LEA: Okay. Thanks. Which -- where was 5 the flaring occurring that gave you the problem? 6 MR. VOKES: Apparently it was that well that 7 was referred to there. 8 MS LEA: UM -- UBW 1. Okay. Thank you. 9 That flaring, did it go on -- how long did it 10 go on? Was it an hour, days, weeks, what sort of -- 11 MR. VOKES: My understanding was about four 12 days. 13 MS LEA: About four days. 14 MR. VOKES: I noticed it towards the end of 15 the -- 16 MS LEA: Okay. Now, about the noise, have you 17 had any experience with noise from drilling? 18 MR. VOKES: Yes. 19 MS LEA: And that is in relation to these same 20 wells I guess? 21 MR. VOKES: Right. 22 MS LEA: Okay. 23 MR. VOKES: Yes, it goes -- like they are 24 working around the clock there. 25 MS LEA: Working around the clock. And about 26 for how many days did that go on? 27 MR. VOKES: A number of weeks. 28 MS LEA: A number of weeks. And it was run in 94 DAVID VOKES/LAURIE VOKES, Pres. 1 the night as well as in the day? 2 MR. VOKES: Yes. 3 MS LEA: I'm sorry. 4 MRS. VOKES: All night long. 5 MS LEA: All night long. Okay. 6 Whereabouts is your residence, the actual 7 place where you live in your property here? Is it the 8 north, south end, whereabouts? 9 MR. VOKES: If you take a look at the map 10 there and find the access road that is on the property 11 to the south of us -- 12 MS LEA: Yes. 13 MR. VOKES: -- directly across the road from 14 that on our property is where our lane is and we are 15 back -- back that lane about 200 feet. 16 MS LEA: Okay. Now, in the first part of your 17 memo here you have talked about the fringe area of the 18 DSA. I gather that your property is right -- not right 19 next to the boundary but it is still within 1.6 20 kilometres of the boundary of the DSA as it is proposed. 21 Do I understand that correctly? 22 MR. VOKES: Yes. As I understand the 23 boundary, the DSA is on the south side of County Road 24 14. So -- so we are well within the 1.6 kilometres. 25 MS LEA: Is there anything that -- any 26 particular suggestion, if the Board decides that for the 27 general public interest that the project should go 28 ahead, the project at large should go ahead, is there 95 DAVID VOKES/LAURIE VOKES, Pres. 1 anything that you would suggest Union do to reduce this 2 aggravation that you are suffering? 3 MR. VOKES: Well, when there was the first 4 hearing or the first information meeting over in 5 Brigden, I believe from that information over there we 6 understood that the access lane was going to be off of 7 Waterworks Side Road. 8 MS LEA: Off of Waterworks Side Road. 9 MR. VOKES: Yes. 10 MS LEA: Okay. Looking at the map, I see that 11 that runs north/south and it is to the west of your 12 property and it is not on the western boundary of your 13 property but another concession over, another property 14 over. Is that right? I haven't been very clear. 15 It is to the left of your property. 16 MR. VOKES: Right. 17 MS LEA: It runs north/south. 18 MR. VOKES: That is right. 19 MS LEA: So that would assist you if the 20 access road was in a different place? 21 MR. VOKES: Oh, yes. 22 MS LEA: Okay. In order to do that, would it 23 have to cross someone else's property? 24 MR. VOKES: I believe it would. 25 MS LEA: Any other suggestions? 26 MRS. VOKES: We are just not sure how much of 27 this flaring is going on and we would like to see no 28 more flaring. I don't know how realistic that is or we 96 DAVID VOKES/LAURIE VOKES, Pres. 1 are not even sure whether it is going to be something 2 that is going to be happening all the time there or just 3 when they are getting these wells going. So -- 4 MS LEA: Okay. When did you find out that the 5 access road was going to be running south from where 6 your property is rather than from the west from 7 Waterworks Road? 8 MR. VOKES: Well, I don't have an exact date 9 for that. 10 MS LEA: Around. 11 MR. VOKES: When -- when the work commenced. 12 So you would probably have to check with Union on that. 13 MS LEA: Okay. Thanks. Thank you very much. 14 Thank you, Madam Chair. 15 THE PRESIDING MEMBER: Thank you, Ms Lea. 16 Mr. Leslie. 17 MR. LESLIE: No, I have nothing more. Thank 18 you. 19 THE PRESIDING MEMBER: Okay. Thank you. 20 Mr. Vokes, are you aware that the gathering 21 lines for this project will be to the south of the 22 existing well? In other words, the further construction 23 of the lines and the pipelines are going in the opposite 24 direction from the well from where your property is. 25 MR. VOKES: Are we aware of that? No, we are 26 not aware of that. 27 THE PRESIDING MEMBER: Perhaps Mr. Mackie can 28 show you on the map. 97 DAVID VOKES/LAURIE VOKES, Pres. 1 MS LEA: Also the access road may still be 2 used. 3 THE PRESIDING MEMBER: No, I appreciate that. 4 I was going to ask -- 5 MR. VOKES: Yes, we are aware of the way this 6 is. Now, in the future, which I know you probably 7 aren't dealing with here today, and I understand 8 CanEnerCo is bringing a pipeline down Waterworks. I 9 don't know just where they are thinking of connecting up 10 to this. When we went to the meeting, it was going down 11 Waterworks and across through that -- quite aways away 12 from our residence, which was fine with us. 13 Since then there has been a lot of surveying 14 going on in front of our property. 15 THE PRESIDING MEMBER: I appreciate you have 16 every right to be concerned. 17 MR. VOKES: That would be the subject of 18 another hearing. I'm not sure where it is at right now. 19 THE PRESIDING MEMBER: Right. 20 MR. VOKES: Maybe -- can we get a response to 21 Union as to the flaring? Whether that is common 22 practice or -- 23 MR. LESLIE: Why don't I deal with this now. 24 I was going to ask one of the witnesses some questions 25 about this and I can do that now if you like and get the 26 whole -- 27 THE PRESIDING MEMBER: That is fine, Mr. 28 Leslie. I was going to ask you to deal with these 98 DAVID VOKES/LAURIE VOKES, Pres. 1 issues at the next -- with the appropriate -- 2 MR. LESLIE: Yes. You will appreciate that we 3 got this about an hour ago so we -- 4 THE PRESIDING MEMBER: The same time as we 5 did. Yes. Thank you. 6 MR. LESLIE: Mr. Pardy, Mr. Steve Pardy who is 7 the central member of the next panel is familiar with 8 some of this at least and I am going to ask Mr. Pardy 9 some questions. 10 Mr. Pardy, I understand that you were present 11 when -- 12 THE PRESIDING MEMBER: Excuse me, Mr. Leslie. 13 Shouldn't Mr. Pardy be sworn? 14 MR. LESLIE: Oh, yes, of course. Why don't we 15 do that. 16 SWORN: STEVEN PARDY 17 PREVIOUSLY SWORN: JOSEPH MARUSIC 18 EXAMINATION-IN-CHIEF 19 MR. LESLIE: Mr. Pardy, perhaps I should ask 20 you to confirm that you are Union Gas' -- let me get 21 this out and get your title right -- you are a Senior 22 Reservoir and Drilling Engineer for Union Gas? 23 MR. PARDY: That is correct. 24 MR. LESLIE: And I will refer you to your 25 evidence later, but for now with respect to the Vokes' 26 concerns, you, I understand, were present during the 27 testing of the well designated UBW 1? 28 MR. PARDY: Yes. I was on site for that 99 UNION GAS PANEL 2, in-ch (Leslie) 1 entire work. 2 MR. LESLIE: And I also understand that the 3 flaring that is being referred to is part of the testing 4 procedure? 5 MR. PARDY: Yes. That well -- we did a well 6 test on the stratigraphic test well that was drilled 7 there and in order to test the well we had to flow gas 8 and instead of venting it to atmosphere, we flared the 9 gas. 10 MR. LESLIE: And for what period of time was 11 that ongoing? 12 MR. PARDY: Over a four-day period. The first 13 24-hour period gas was flared and then there was about 14 another approximately 24-hour period where there would 15 have been no flaring and then another eight-hour period 16 at the end where there would have been flaring on and 17 off. 18 MR. LESLIE: All right. Is that process now 19 complete? 20 MR. PARDY: Yes, it is. 21 MR. LESLIE: Is the drilling of that well now 22 complete? 23 MR. PARDY: Yes, it is. 24 MR. LESLIE: Do you anticipate any further 25 flaring on that well? 26 MR. PARDY: No. 27 MR. LESLIE: When you were there, did you make 28 any attempt to contact the authorities or local 100 UNION GAS PANEL 2, in-ch (Leslie) 1 landowners to make them aware of what was going to 2 happen? 3 MR. PARDY: Before our work commenced, we did 4 contact the Joshes, the Hardys and the local police 5 department to let them know that we would be flaring gas 6 over several days. 7 MR. LESLIE: Were you on site the whole time? 8 MR. PARDY: Yes. 9 MR. LESLIE: Did you receive or did you become 10 aware of any complaints about your activity while you 11 were there? 12 MR. PARDY: No. There was no complaints 13 brought to my attention, and I would have been the 14 supervisor on site. 15 MR. LESLIE: With respect to the access road, 16 I understand that it was Union's desire as well as the 17 Vokes to have the access come off Waterworks Road, but 18 that that wasn't possible. Are you aware of that? 19 MR. PARDY: Yes. The Joshes were approached 20 to have the access road come off Waterworks, and it was 21 not to their desire to have the road come in that 22 direction. Mr. Hardy was approached and he was in 23 agreement with letting us build the access road on his 24 property, basically converting the existing lane way 25 that would have accessed the existing well and 26 converting that to the standard we would use for our 27 roadways. 28 MR. LESLIE: Those are all the questions I 101 UNION GAS PANEL 2, in-ch (Leslie) 1 have. 2 THE PRESIDING MEMBER: Thank you, Mr. Leslie. 3 MS LEA: I have a couple of questions. 4 MR. LESLIE: Perhaps I should ask you one 5 further question, just definitional. 6 You referred to a stratigraphic well. This 7 was a stratigraphic well. What is the purpose of the 8 stratigraphic well? 9 MR. PARDY: The purpose of the stratigraphic 10 test well is basically to gain information with respect 11 to the reservoir that will be used in preparing our 12 evidence and testifying, I guess, before the Board on 13 this matter of the storage pool. 14 MR. LESLIE: Are there any other wells in that 15 area that will be subject to the same kind of testing 16 that UBW 1 was undergoing? 17 MR. PARDY: No. We would not do any -- there 18 is another well, UBW 2, that will be drilled close by 19 there, but we would not do a flare test on that well. 20 MR. LESLIE: Thank you. 21 THE PRESIDING MEMBER: Thank you, Mr. Leslie. 22 Mr. Vokes, do you have any questions for 23 Mr. Pardy? Feel free to ask them. 24 EXAMINATION 25 MR. VOKES: As part of the ongoing operation 26 of this site back there, we should not expect flaring to 27 be part of it? 28 MR. PARDY: No. Once this pool is in 102 UNION GAS PANEL 2, ex (Vokes) 1 production, obviously all of the gas that is produced 2 from the reservoir will go through the pipelines and 3 gathering systems and there will be no need to do 4 flaring. 5 THE PRESIDING MEMBER: Ms Lea, you had some 6 questions? 7 MS LEA: Yes. Thank you. 8 EXAMINATION 9 MS LEA: Mr. Pardy, there looked to be more 10 than -- I don't have a map in front of me, but there 11 looked to be more than one well there that was going to 12 be dealt with. There looked to be a total of three. Am 13 I wrong about that? 14 MR. PARDY: There is a stratigraphic test well 15 that was drilled. That was UBW 1. 16 MS LEA: Yes. 17 MR. PARDY: UBW 2 will be drilled as a part of 18 this project. 19 And there is an existing well in the field 20 that we will do a workover on. 21 MS LEA: All right. 22 So for the one that you are about to drill, or 23 the one that you are going to do the workover on, will 24 any flaring be necessary of either of those wells? 25 MR. PARDY: No. 26 MS LEA: You seem to hesitate, sir. Is it 27 possible it might be if you have problems? 28 MR. PARDY: No. I don't anticipate that there 103 UNION GAS PANEL 2, ex (Lea) 1 will be any flaring there. Our assumption is that we 2 will be using cable-tool drilling there, and when you 3 cable-tool drill a well there is no need to flare the 4 gas. 5 MS LEA: I'm sorry, I don't understand, then. 6 Some of the wells in this project are going to be 7 cable-tool drilled? 8 MR. PARDY: Yes, that's correct. 9 MS LEA: Okay. So you have one more well, 10 then, to drill. 11 How did you drill UBW 1? Rotary or cable? 12 MR. PARDY: Rotary. 13 MS LEA: Why are you using cable tool for 14 number 2? 15 MR. PARDY: UBW 1 was drilled with a rotary 16 rig because we cored the reef and you can only do that, 17 well, with a rotary rig. 18 UBW 2, we had chosen to use a cable-tool rig 19 basically because it costs less money and it meets the 20 needs that we have on this project. 21 MS LEA: I understand from what the Vokes said 22 that the rotary drill rig ran all night -- all day and 23 all night. Is that correct? 24 MR. PARDY: Yes, that is correct. 25 MS LEA: Does the cable-tool rig run all day 26 and all not? 27 MR. PARDY: Yes, it does. 28 MS LEA: What is the comparison in terms of 104 UNION GAS PANEL 2, ex (Lea) 1 noise from each of those rigs? 2 MR. PARDY: Cable-tool drilling would be a lot 3 quieter than rotary drilling. 4 MS LEA: How much closer or farther away from 5 the Vokes' residence is this Well No. 2? 6 MR. LESLIE: The scale is 1 to 10,000. It's 7 about 2 inches. 8 MS LEA: I'm sorry. I don't have the map in 9 front of me. 10 MR. PARDY: I don't have the exact distance, 11 but it is south of UBW 1. 12 MS LEA: So it's farther away? 13 MR. PARDY: Yes. 14 MS LEA: Okay. 15 Is there anything you can do to reduce the 16 noise from the rig that is running at night? 17 MR. PARDY: Not that I'm aware of right now. 18 MS LEA: Okay. 19 Now, the other concern was dust, I guess, from 20 traffic going in and out of that access road. Would it 21 be you that I would ask about that or the environmental 22 panel? 23 MR. PARDY: You can try me. 24 MS LEA: All right. 25 --- Laughter 26 MS LEA: What can you say to reassure us about 27 the question of dust? Obviously, this has been a 28 problem so far on this access road. Are you going to do 105 UNION GAS PANEL 2, ex (Lea) 1 anything differently next time? 2 MR. PARDY: I guess it is anticipated that as 3 vehicles go back and forth that road there will be dust. 4 I guess the options that we would have is some kind of 5 dust suppressant that would be applied to the road from 6 time to time. I guess that is where we would go. 7 MS LEA: Okay. 8 For how many days will you be doing that 9 cable-tool drilling there? 10 MR. PARDY: The cable-tool drilling will take 11 approximately six to seven weeks. 12 MS LEA: Six to seven weeks. And it is going 13 to be running all day and all night for six to seven 14 weeks? 15 MR. PARDY: Except on weekends. 16 MS LEA: I see. 17 What will be the level of traffic going in and 18 out of that site every day? 19 MR. PARDY: Basically, it will be shift 20 changes. Usually they run two or three shifts, and it 21 would be one or probably two vehicles going in and out 22 of that site on each shift change. Basically, there are 23 two or three crew members on each shift. 24 MS LEA: Thank you. One moment. 25 --- Pause 26 MS LEA: The other thing that I wanted to ask 27 you about is heavy machinery or equipment using that 28 road. I gathered from what you were saying that on 106 UNION GAS PANEL 2, ex (Lea) 1 shift changes it would be passenger vehicles going in 2 and out. What about heavy vehicles going in and out? 3 MR. PARDY: Yes. During the drilling there 4 will also be heavy vehicles moving in and out. That 5 would be basically for cementing operations when we are 6 running casings, so at the different casing set points 7 that we would cement the well, and so that day there 8 would be cementing equipment and so forth. 9 MS LEA: Would this be like once a week or 10 once every two weeks or twice a week? Can you give me 11 any idea? 12 MR. PARDY: There are four casing strings, so 13 for each of those there will be a cement job. 14 MS LEA: Okay. So four times over the six or 15 seven week period. 16 MR. PARDY: That's correct. 17 MS LEA: Is there any particular hour of the 18 day when these heavy vehicles will be going in and out? 19 MR. PARDY: No. It would depend on when we 20 got to the point where we needed the equipment and then 21 it would come. 22 MS LEA: Would it be during daylight hours or 23 at night? 24 MR. PARDY: It could be either. 25 MS LEA: Thank you. 26 MR. PARDY: I don't think the equipment that 27 is going in and out of that site would be anything 28 vastly different from what is traversing on the roads in 107 UNION GAS PANEL 2, ex (Lea) 1 that area either. 2 MS LEA: Do you mean, you know, farm 3 machinery? When you say "traversing on the roads", do 4 you mean other than your operation? 5 MR. PARDY: Yes, exactly. 6 MS LEA: Okay. Thank you. 7 THE PRESIDING MEMBER: So what you are saying, 8 then, is Churchill Road or County Concession 14 is a 9 major thoroughfare? 10 MR. PARDY: I wouldn't say that. 11 THE PRESIDING MEMBER: You wouldn't say that. 12 Okay. 13 MR. PARDY: It's a paved road. I think the 14 Mandaumin Road is -- there is a fair amount of traffic 15 on there and I would expect some of it would spill over 16 onto Churchill Road. 17 THE PRESIDING MEMBER: Right. 18 Can you help me in the other direction with 19 UMD 5, UMD 4, UMD 3? They seem to be in the same order 20 of magnitude away from Vokes' property as the other 21 wells. Can you enlighten me as to whether those same 22 concerns will arise with respect to those additional 23 wells? 24 MR. PARDY: Are you talking with respect to 25 the flaring? 26 THE PRESIDING MEMBER: I guess all of their 27 issues with respect to the flaring, with respect to the 28 dust, with respect to the noise from the drilling. 108 UNION GAS PANEL 1 1 MR. PARDY: Obviously the drilling on those 2 sites will also take place 24 hours a day. We will be 3 using rotary drilling in the Mandaumin Pool, so that the 4 amount of time required to drill each well will be 5 shorter, approximately two weeks, however, the rotary 6 rigs do have a -- are a little noisier and they will be 7 going 24-hours a day. There is a possibility, because 8 of the nature of operations there, that there may be 9 some flaring on the horizontal wells. 10 THE PRESIDING MEMBER: So can you help me? 11 Which of those wells are the horizontal wells that there 12 may be flaring on? 13 MR. PARDY: The flaring, there is the 14 possibility that it may take on Union Mandaumin No. 4 15 and Union Mandaumin No. 6. Union Mandaumin 6 is on the 16 north side of Churchill Road -- 17 THE PRESIDING MEMBER: Right. I see it now, 18 thank you. 19 MR. PARDY: -- Union Mandaumin No. 4 is on the 20 south side of Churchill Road. 21 THE PRESIDING MEMBER: So the Vokes are going 22 to have this problem coming at them from two directions, 23 then, once the project commences? 24 MR. PARDY: There is -- yes. There is 25 potential, yes. 26 THE PRESIDING MEMBER: Do you have any 27 suggestion of any further mitigation factors that Union 28 can engage in to alleviate some of the Vokes' concern? 109 UNION GAS PANEL 1 1 MR. PARDY: Not off the top of my head right 2 now, no. 3 THE PRESIDING MEMBER: Thank you. 4 MR. PARDY: It's important to note that over 5 our construction period there is obviously going to be a 6 lot more activity than would be in the future. So in 7 the future there would be very little traffic on these 8 roads, there would be very little visits to the well, so 9 ordinarily we would take pressures at each of our 10 reservoirs once a week, so that would involve somebody 11 in a pickup truck driving up to the observation well, 12 taking a pressure, leaving again, and in a normal week 13 that is basically all the activity that would be going 14 on at these pool sites. 15 So there is some short-term inconvenience, we 16 recognize that, but in the long-term there will not be 17 these situations. 18 THE PRESIDING MEMBER: How long is the 19 construction period again? I know it's not your panel, 20 but can you help me with that? 21 MR. PARDY: Approximately two or three months. 22 THE PRESIDING MEMBER: Okay. 23 Any other comments? No? 24 Thank you for sharing your concerns with us, 25 Mr. and Mrs. Vokes. 26 We will ask additional questions, I think of 27 the construction panel that will appear later tomorrow. 28 I would strongly encourage you to speak with people from 110 UNION GAS PANEL 1 1 Union Gas, see if you can discuss your concern with 2 them, and hopefully they will be able to do whatever is 3 necessary to alleviate any of your concerns. 4 Is there anything else you would like to say? 5 --- Pause 6 MR. VOKES: I guess I just want to hear a 7 reiteration that once this site is up and running that 8 there will not be the same sort of level of activity 9 that we are seeing now. 10 THE PRESIDING MEMBER: Mr. Pardy, would you 11 like to give that assurance under oath? 12 MR. PARDY: We can give that assurance that 13 there will not be the same level of activity once the 14 site is up and running. 15 MR. LESLIE: Madam Chair, one other thing. 16 Perhaps I could -- 17 THE PRESIDING MEMBER: Thank you, Mr. Leslie. 18 MR. LESLIE: I am advised that if there are 19 concerns, people can call the Dawn Operations Centre and 20 they are instructed to deal with complaints. As 21 Mr. Pardy has indicated, there is some attempt to 22 contact landowners at the time. 23 But I will ask one of Union's people to give 24 the Vokes the telephone number and the name of whoever 25 they should speak to at the Dawn, and the title, so that 26 if they do have concerns of this kind and there is 27 anything that can be done now, they will have somebody 28 they can talk to. 111 UNION GAS PANEL 1 1 THE PRESIDING MEMBER: I appreciate that. 2 Thank you, Mr. Leslie. 3 Is there a possibility that the Vokes can be 4 included within the landowner -- affected landowners and 5 the relationship I know that -- 6 MR. LESLIE: They are a part of the Lambton 7 County Storage and that relationship committee is 8 representing all the Lambton County Storage landowners, 9 so they will be included in that process in that 10 way, yes. 11 THE PRESIDING MEMBER: Okay. Thank you for 12 clarify that. 13 MR. LESLIE: They were, by the way, served 14 with notice of these proceedings as well. 15 THE PRESIDING MEMBER: Right, I appreciate 16 that. 17 So you understand that the Lambton County 18 Storage Association organization has a liaison committee 19 with Union Gas to deal with landowner concerns 20 throughout the project? 21 MR. VOKES: (No audible response). 22 THE PRESIDING MEMBER: Well, they do. So I 23 guess what we are saying is, if you do have concerns you 24 can either go through the Lambton County Storage 25 Association Co-ordinating Committee or, as Mr. Leslie 26 says, phone Dawn office of Union Gas directly to voice 27 your complaints. 28 MR. VOKES: With regard to that access lane 112 UNION GAS PANEL 1 1 again, I guess we would want to state that we still 2 aren't happy with that decision. Certainly there was no 3 consultation with us on that and my understanding wasn't 4 that the Josh's did want it across that property but 5 that it was going to be cheaper to do it this way. 6 Now, that may or may not be right, you can 7 maybe ask them, but that was our understanding from what 8 we have heard. 9 THE PRESIDING MEMBER: I thank you for sharing 10 that with us. 11 There is an issue you should be aware that I 12 know that Board Staff will be raising with another 13 committee and that deals with pre-approval 14 construction -- at least I think that they may be 15 dealing with it. If they don't then I will -- and we 16 will ask for more specific details as far as exactly 17 what construction and what activities have gone on prior 18 to this hearing and prior to the approval. So we will 19 try to find out some more information for you at that 20 time. 21 Thank you very much for coming forward. 22 Before we start the next panel, is there 23 anyone else who would like to make any comments at this 24 time? 25 --- Pause 26 THE PRESIDING MEMBER: All right, then. 27 Mr. Leslie. 28 MR. LESLIE: Yes, thank you, Madam Chair. 113 UNION GAS PANEL 1 1 Madam Chair, the remaining member of this 2 panel who has not been introduced is Mr. Jim Egden, who 3 is sitting closest to me. Mr. Egden is Chief Geologist 4 for Union Gas. 5 Is that correct, sir? 6 MR. EGDEN: That is correct. 7 MR. LESLIE: Could Mr. Egden be sworn. 8 SWORN: JIM EGDEN 9 FURTHER EXAMINATION-IN-CHIEF 10 MR. LESLIE: Mr. Egden, your pre-filed 11 evidence for purposes of your appearance today is in 12 section 3 dealing with geology and reservoir engineering 13 and section 6 dealing with geology costs. Is that 14 correct, sir? 15 MR. EGDEN: That is correct. 16 MR. LESLIE: Do you adopt that evidence? 17 MR. EGDEN: Yes, I do. 18 MR. LESLIE: Mr. Pardy, your evidence for 19 purposes of your appearance here today is sections 3 20 and 4 as they deal with proposed circuit facilities and 21 section 6 dealing with drilling costs? 22 MR. PARDY: That's correct. 23 MR. LESLIE: Do you adopt that evidence? 24 I'm sorry, yes, you have one correction and I 25 should ask you about that. 26 I believe you wanted to make the correction at 27 section 4, Schedule 3? 28 MR. PARDY: Yes, section 4, Schedule 3 with 114 UNION GAS PANEL 2, in-ch (Leslie) 1 respect to the Union Mandaumin No. 3 well. 2 The size and specifications of the conductor 3 and surface casing were incorrectly stated on that table 4 and basically they should be the same as the other wells 5 in the reservoir. 6 So the conductor surface casing on that well 7 should be the same as, for instance, the conductor and 8 surface casing on Union Mandaumin No. 2. 9 THE PRESIDING MEMBER: So that would be 10 406.4 millimetres? 11 MR. PARDY: That's correct. 12 THE PRESIDING MEMBER: The surface would be 13 339.7 millimetres? 14 MR. PARDY: That's correct. 15 THE PRESIDING MEMBER: Thank you. 16 MR. PARTY: Yes. The remaining properties 17 would follow across. 18 MR. LESLIE: With that corrected, Mr. Pardy, 19 can you adopt your evidence? 20 MR. PARDY: Yes, I can. 21 MR. LESLIE: Thank you. 22 Mr. Marusic, for purposes of your appearance 23 on this panel, your pre-filed evidence is sections 4 24 and 5, proposed storage operation? 25 MR. MARUSIC: Yes, that's correct. 26 MR. LESLIE: Do you adopt that evidence? 27 MR. MARUSIC: Yes, I do. 28 MR. LESLIE: Madam Chair, I have some 115 UNION GAS PANEL 2, in-ch (Leslie) 1 questions that I want to put, principally to Mr. Egden, 2 and in connection with the first series of questions I 3 will ask Ms Hockin to pass out some correspondence 4 relating the 3D seismic for the Oil City Pool. 5 MS LEA: I think that would be Exhibit 9.3, 6 please. 7 EXHIBIT NO. 9.3: Correspondence relating 8 the 3D seismic for the Oil City Pool 9 --- Pause 10 MR. LESLIE: Mr. Egden, we have just 11 identified as Exhibit 9.3 a letter that you received 12 from Mr. Boyd at Boyd Petrosearch. I take it you sent a 13 copy of that letter to Mr. Mackie on February 4. Could 14 you explain to the Board your reasons for obtaining that 15 letter and how it's significant to the designated 16 storage area for the Oil City Pool? 17 MR. EGDEN: Yes, I can. The work that had 18 been done put together the prefiled evidence on the Oil 19 City Pool had been through the IR process and at the 20 technical conference. There was substantial questioning 21 that came up on the seismic evidence that Union had been 22 using in presenting where the DSA boundary should be and 23 the extent of associated rocks with the storage 24 operation, reservoir rock. 25 As a result of what I thought to be some 26 clarity that could be helpful for all concerned, I took 27 the first page of Board staff's evidence that dealt with 28 some of these questions and I faxed them out to Calgary 116 UNION GAS PANEL 2, in-ch (Leslie) 1 to John Boyd, who is the Interpretations Geophysicist on 2 this project. 3 I asked him if he could provide some comments 4 back to me with regard to the degree of confidence that 5 he would have in the work that had been done. In 6 response to that, this letter came back to myself. We 7 sent copies to Board staff and to Board staff 8 consultants. 9 I think the important thing for us to consider 10 here is that Mr. Boyd had substantially more information 11 in front of him in doing his analysis and then 12 consequently that being incorporated into our evidence 13 than Board staff or Board staff's consultant had. 14 I think it's reasonable to say that should 15 another individual have this same wealth of evidence or 16 information in front of them, they may not have required 17 the same clarity. This is important to look at Board 18 staff's comments with regard to the extent of the porous 19 A1 carbonate as we had mapped it. 20 Through this letter I think John Boyd has been 21 clear in saying that he looked not just at this 3D 22 dataset, but all of our other 3D datasets in Lambton 23 County, of which there are 19 of them. 24 There was a fairly comprehensive 2D dataset of 25 seismic numbering, in effect 3,000 kilometres, with a 26 library of sonic data in Lambton County, over 30 wells, 27 so the fact that we did not have a sonic log in a well 28 in the Oil City Pools did not mean that sonic data had 117 UNION GAS PANEL 2, in-ch (Leslie) 1 not been used. 2 Indeed, sonic logs are used to generate a 3 fairly comprehensive seismic model that would be tied to 4 the N3D seismic, and that has been done, especially with 5 wells that are local to the area and other wells in 6 other geological settings around other storage pools. 7 In all fairness to Board staff and its 8 consultant, if they had the same information in front of 9 them, they might have come to the same conclusions, but 10 in the absence of all of the information that John Boyd 11 had available to them, I can see where their comments 12 would come from. 13 Our point was just to try and provide some 14 clarity to this situation. 15 MR. LESLIE: Mr. Egden, do you have Mr. 16 Trevail's evidence available to you? This is the 17 witness for Board staff on this issue. 18 MR. EGDEN: Yes, I do. 19 MR. LESLIE: Madam Chair, I believe that's 20 been designated Exhibit 15.1 in these proceedings. 21 THE PRESIDING MEMBER: Thank you. 22 MR. LESLIE: Mr. Egden, I understand that the 23 letter you have been discussing was secured, partially 24 at least, with a view to dealing with one of the 25 observations that Mr. Trevail makes. Could you explain 26 that? 27 MR. EGDEN: Yes, I can. On page 1 of the 28 evidence marked "Comments with respect to the proposed 118 UNION GAS PANEL 2, in-ch (Leslie) 1 designated storage area boundary by Robert Trevail, 2 Orion Resources, Consultants", in paragraphs 4 and 5, 3 that begin "In the prefiled evidence, Union Gas and the 4 concern I have with this approach", those two 5 paragraphs, the seismic data is somewhat discounted. 6 In light of the comments that we have provided 7 from John Boyd, I think we should make some comments on 8 the proposal to reduce the DSA in Board staff evidence, 9 specifically tract five, lot 17, concession five. That 10 is referred to in the first paragraph of page 2. 11 There's some discussion about the M&R 12 personnel agreeing to have that tract excluded from the 13 designated storage area. In actual fact, the 14 discussions that we have had with M&R staff, there was 15 also agreement that that tract could be included into 16 the designated storage area without any negative impact. 17 There is also comments about the same tract 18 being in a position that is similar to tract six, lot 19 16, concession five. That comment is incorrect as well, 20 I believe, since the village of Oil City itself provides 21 some protection due to surface drilling restrictions in 22 an urban environment to tract six that tract five was 23 not afforded. 24 In addition to that, Highway 21 on the west 25 side of tract six provides additional restrictions to 26 drilling both on the highway itself and the associated 27 road allowance and the setback from highways that are 28 required by government regulations. 119 UNION GAS PANEL 2, in-ch (Leslie) 1 In addition -- 2 MR. LESLIE: I'm sorry, Mr. Egden. Go ahead. 3 MR. EGDEN: Regional migrations of fluids 4 which were used to support the recommendation that tract 5 five, lot 17, concession five, and tract three, lot 15, 6 concession four, be excluded from the DSA, I appreciate 7 the comments that my colleagues made on the migration of 8 fluids. However, on the designation or the boundary of 9 the designated storage area, the integrity of 10 underground inventory of gas and protection of the 11 reservoir are the real issues, not migration of regional 12 fluids. 13 MR. LESLIE: When you say integrity of the 14 reservoir, what specifically is your concern? Why do 15 you want a buffer in relation to the reservoir? 16 MR. EGDEN: In tract three, lot 16, concession 17 four, my evidence shows that there is associated A1 18 carbonated reservoir rock that's in communication with 19 the storage reservoir property and is well free. That 20 would be underneath that tract. The extent of the 21 porous A1 carbonate that has been mapped into that tract 22 is supported by a detailed, comprehensive reservoir 23 seismic study. 24 In addition to that, schedule 3 and schedule 25 11 of section 3 of my evidence shows well drilling 26 records in the 116 of four and the T17 of four well, 27 both of which had porous A1 carbonate in them and in 28 both of those wells the A1 carbonate was gas bearing, so 120 UNION GAS PANEL 2, in-ch (Leslie) 1 there is no question that there is porous A1 carbonate 2 that has gas in it inside of the lands that are outlined 3 in that boundary. 4 Furthermore, coming back to tract five, lot 5 17, concession five, that tract falls within the OHE's 6 previous guidelines for a minimum of a 40 to 60 meter 7 buffer area beyond the edge of the A1 porous rock in 8 communication with the storage reef and the mandate by 9 the Ministry of Natural Resources to include a hole 10 drilling tract within the DSA not to bisect drilling 11 tracts with a DSA boundary. 12 One last point is that I see no impairment to 13 exploration resulting from the inclusion of these lands 14 into the DSA that is referred to in Mr. Trevail's 15 evidence. 16 MR. LESLIE: Why is that, Mr. Egden? 17 MR. EGDEN: Simply put, seismic can still take 18 place on this land. That's an exploration activity, 19 regardless of whether it's in a designated storage area 20 or not. Drilling can take place. The process by which 21 to have a well approved is somewhat more lengthy or 22 detailed, requiring an applicant to drill a well to come 23 in front of the Board, but it's not impossible to drill 24 a well. In fact, this is taking place in other storage 25 pools. 26 I have a problem with comments that say that 27 designating lands for storage impairs exploration 28 activity. 121 UNION GAS PANEL 2, in-ch (Leslie) 1 MR. LESLIE: Mr. Egden, you referred to the 2 fact that with respect to tract three, and I think, 3 Madam Chair, both Mr. Egden and I are looking at the map 4 that's at the back of Mr. Trevail's evidence which shows 5 the tracts that are being referred to. 6 Tract five is in the upper right hand corner 7 and tract three is in the lower left hand corner of that 8 map. 9 With respect to tract three, Mr. Egden, you 10 referred to porous A1 carbonate being within tract 11 three. Just for clarity, is porous A1 carbonate part of 12 your storage reservoir? 13 MR. EGDEN: Yes, the porous A1 carbonate is a 14 halo of rock that is in pressure communication with 15 the -- with the Guelph reef. In previous hearings we 16 have described the Guelph reef as a primary warehouse 17 for the gas underground and the associated porous A1 as 18 being like a secondary warehouse that is in 19 communication. And although the gas is injected and 20 withdrawn in wells that are drilled into the Guelph 21 reef. Gas in effect is actually moving back and forth 22 between the primary and secondary pore spaces that makes 23 up this storage warehouse if we will. 24 MR. LESLIE: Is that a more complete way of 25 saying yes? 26 MR. EGDEN: Yes, it is. And just as a further 27 point of clarification, the area that we are talking 28 about is the area enclosed by the gas line on that map. 122 UNION GAS PANEL 2, in-ch (Leslie) 1 MR. LESLIE: And with respect to tract 5, you 2 refer to that as a buffer area. Why do you require a 3 buffer area? 4 MR. EGDEN: The storage operations do require 5 a certain amount of protection from activities by third 6 parties, primarily exploration and production companies 7 that would want to drill wells and perhaps do mechanical 8 stimulation or fracturing of the rocks in the immediate 9 area of their well bore. And we need to provide a 10 certain amount of buffer that would make those 11 operations reasonably compatible with the operations 12 that are taking place inside of the designated storage 13 area. And that is accomplished by ensuring that there 14 is an adequate buffer between the storage reservoir 15 itself and the boundary of the storage pool. 16 MR. LESLIE: All right. If you took tract 5 17 out of the designated storage area so that it was 18 reduced to that extent, what would be the minimum 19 distance between the reef, the porous A1 carbonate 20 boundary, and the boundary of the designated storage 21 area? 22 MR. EGDEN: I believe that that measurement is 23 26 metres, subject to check. It could be 25. It might 24 be 28 metres but it certainly is less than 30 metres. 25 MR. LESLIE: All right. You refer to 26 paragraphs 4 and 5 of Mr. Trevail's letter. In 27 paragraph 5 he says: 28 "The concern I have with this approach is 123 UNION GAS PANEL 2, in-ch (Leslie) 1 that normally the seismic data with 2 calibrated with sonic density geophysical 3 logs from local wells to ensure the 4 accuracy of the correlation between the 5 seismic data and the actual geology. No 6 sonic (acoustic) logs are available from 7 the Oil City Pool ..." 8 I take it that is correct that there are no 9 sonic logs that are specific to the Oil City Pool? 10 MR. EGDEN: There are no sonic logs that are 11 within the Oil City Pool proper, but there are more than 12 enough sonic logs in the general area to achieve those 13 kind of calibrations with a fairly high degree of 14 confidence. 15 MR. LESLIE: And is the letter that you -- 16 that we have been discussing from Boyd PetroSearch 17 responsive to that concern? 18 MR. EGDEN: Yes, it is. 19 MR. LESLIE: How so? 20 MR. EGDEN: Well, John Boyd outlines a fairly 21 detailed process by which he did all of that calibration 22 using other seismic data sets and sonic logs from wells 23 in the area although they weren't specifically from the 24 wells that were drilled into the Oil City Pool. 25 MR. LESLIE: All right. Just one further 26 question on this. With respect to tract number 5, I 27 believe it is, on Mr. Trevail's map, there is a letter 28 in evidence that you wrote, I believe, to the Ministry 124 UNION GAS PANEL 2, in-ch (Leslie) 1 of Natural Resources on the DSA boundary. 2 MR. EGDEN: Yes. 3 MR. LESLIE: It is the addendum to section -- 4 section 3. Excuse me. 5 MR. EGDEN: Yes, addendum 1, section 3. 6 MR. LESLIE: And that letter recorded a 7 meeting you had with representatives of the Ministry on 8 April the 3rd and June 30th? 9 MR. EGDEN: That is correct. 10 MR. LESLIE: And at page 3 of that letter 11 right at the top appears the sentence: 12 "It was agreed that Tract 6, Lot 16, 13 Conc. 5 ..." 14 and I take it that is the same tract 6 that is shown on 15 Mr. Trevail's map? 16 MR. EGDEN: That is correct. The northwest 17 corner of the -- 18 MR. LESLIE: "... and Tract 5, Lot 17, 19 Con. 5, in the North East corner could be 20 excluded from the DSA." 21 That suggests at that time you were in agreement with 22 the Ministry officials that you could take tract 6 out 23 of the DSA. Is that correct? 24 MR. EGDEN: That is correct. 25 MR. LESLIE: Why are you now proposing to 26 leave it in? 27 MR. EGDEN: Perhaps I misheard you. 28 MR. LESLIE: I think you may well have. 125 UNION GAS PANEL 2, in-ch (Leslie) 1 I asked you whether or not you had agreed with 2 the Ministry at the time of these meetings that tract 6, 3 which is on Mr. Trevail's map, whether you had agreed 4 with him that that tract could come out of the DSA? 5 MR. EGDEN: Yes, tract 6, both ourselves and 6 the Ministry were in agreement that it could come out 7 because of the surface occupation of those -- of that 8 drilling tract by the Village of Oil City. However, 9 tract 5 -- 10 MR. LESLIE: I'm sorry. It is tract 5 I 11 should have been referring you to. 12 MR. EGDEN: Tract 5 we were in agreement with 13 the MNR that the -- let me rephrase that. 14 The Ministry of Natural Resources was benign 15 to tract 5 being in the DSA or being outside the DSA. 16 Their exact words, "That they wouldn't fight to have it 17 put in and they wouldn't fight to have it taken out." 18 We were in general agreement that under very 19 specific cases that it could be taken out, but it was 20 Union's preference to have that DSA put in. And my 21 words in this sentence are probably incomplete on the 22 full intent and discussion that was taking place. 23 I have been in discussion with the MNR 24 regarding this addendum as recently as yesterday and the 25 MNR's comments are that this addendum is taking a life 26 on of its own once the lawyers got their hands on it. 27 In the spirit of the meetings that we had with 28 MNR were for our technical people to get together, have 126 UNION GAS PANEL 2, in-ch (Leslie) 1 some off line discussion about the technical merits of 2 certain lands being used, included in a DSA, being 3 excluded from a DSA and trying to make the hearing 4 process run a bit smoother. In the future I think we 5 would probably pay more attention to recording exact 6 words and having precise sign-off on intents and 7 different things that go with this. 8 But the exact words of the Ministry 9 representative yesterday that I was talking to by 10 telephone was that, "Is everybody forgetting that we had 11 a meeting where we were in agreement?" And I said, 12 "Well, I can't put words in people's mouths. I just 13 want to confirm with you that you are on board with 14 where the way that we will portray this addendum on what 15 is going on." 16 So my -- my summary statement would be I'm 17 somewhat incomplete in this addendum with describing the 18 words that were said. But I have been in constant 19 communication with the Ministry and they are fully aware 20 of what I'm saying and are in agreement with, as they 21 were then, with what we have proposed for a DSA 22 boundary. 23 MR. LESLIE: Do I understand from what you 24 have just told me, leaving aside the significance that 25 may or may not be attributed to this letter, that you 26 and the Ministry officials agreed that tract 6 could 27 come out because the residential area that exists there 28 in effect provided the kind of buffer you needed. Is 127 UNION GAS PANEL 2, in-ch (Leslie) 1 that correct? 2 MR. EGDEN: That is correct. 3 MR. LESLIE: And that tract 5 could be within 4 the DSA and you and the Ministry officials didn't 5 disagree about that? 6 MR. EGDEN: That is correct. 7 MR. LESLIE: And did they know at the time 8 that it was your intention to include tract 5 in the 9 DSA? 10 MR. EGDEN: Yes, they did. 11 MS LEA: I'm sorry. I didn't hear that 12 answer. 13 MR. EGDEN: Yes, they were aware that tract 5 14 was going to be in the proposal that Union Gas would put 15 forward. 16 MS LEA: And I'm sorry, Mr. Leslie, your 17 question was "when"? 18 MR. LESLIE: No, my question was were they 19 when you had this meeting in June -- 20 MS LEA: When you had the meeting. Thank you. 21 MR. LESLIE: -- aware that you were going to 22 propose a DSA that included tract 5? 23 MR. EGDEN: Yes, they were aware and the 24 inclusion of tract 5 in the proposed DSA has been the 25 subject of at least three telephone conversations since 26 this addendum was written up and put into evidence. 27 MR. LESLIE: And in those three telephone 28 conversations, had the Ministry officials taken 128 UNION GAS PANEL 2, in-ch (Leslie) 1 exception to the proposal that you are now making for 2 the DSA as it relates to tract 5 or otherwise? 3 MR. EGDEN: No, they have not. 4 MR. LESLIE: I think we have probably beaten 5 that one to death, Mr. Egden. 6 Madam Chair, with your permission I now 7 propose to ask Mr. Egden some questions about changes in 8 well locations and for that purpose we have put on the 9 white board at the front of the room or the clipboard at 10 the front of the room a map of the Bluewater, Mandaumin 11 Pools. 12 There is in the material that was filed with 13 the Board on January 1st -- 31st, I should say, a 14 transparency which was meant to assist in dealing with 15 these changes. It is identified as Schedule B, addendum 16 and it has got Schedule B on it and relates to the 17 Mandaumin Pool. Are you able to find that? 18 THE PRESIDING MEMBER: Is there more than one 19 transparency? 20 MR. LESLIE: I don't think so. 21 THE PRESIDING MEMBER: Thank you. 22 MR. LESLIE: Now, the next thing I am going to 23 ask you to do is turn up section 3, Schedule 20, which 24 is a map of the same area, the same Mandaumin storage 25 pool. 26 --- Pause 27 MR. LESLIE: If you have both of those 28 documents, if you could put the transparency over 129 UNION GAS PANEL 2, in-ch (Leslie) 1 Schedule B, that will allow us to explain the changes 2 that are being made and why they are being made. 3 The way to line these up I have found, do you 4 see UMD No. 4, if you line up those two dots, that well 5 doesn't change. 6 THE PRESIDING MEMBER: Right. 7 MR. LESLIE: And if you also line up the one 8 with the little star at the top, it's IU 36.1, I think, 9 that location doesn't change. If those two are held 10 constant, you can see the changes to the other wells. 11 Mr. Johnston is at the map with a pointer so 12 that he can point you to where these things are as well. 13 But with those visual aids I hope, and with 14 Mr. Egden's assistance, to be able to take you through 15 the changes and what they are and why they have been 16 made. 17 --- Pause 18 MR. EGDEN: I think it is easiest to start in 19 numerical order on these wells with the first location 20 being UMD No. 1, which Mr. Johnston is pointing out on 21 the easel right now. 22 UMD No. 1, the surface location of that well 23 does not change. It has already been drilled, so it 24 stays static. 25 UMD No. 2, which is just south of that -- 26 again it is being pointed out on the easel -- shifts 27 slightly by several metres, the exact coordinates of 28 which we can talk about later, but a short distance 130 UNION GAS PANEL 2, in-ch (Leslie) 1 south. 2 UMD No. 3 shifts more substantially from its 3 present location -- its originally proposed location to 4 the current proposed location, and that is kind of in 5 the middle of the south part of Lot 1, Concession 3. 6 UMD 4 is further south and it was a test well, 7 a stratigraphic test well also, so it remains static. 8 However, we are proposing to re-enter and deepen the 9 length of the well bore on that particular well. So 10 there is new activity that will be associated with that 11 well. 12 UMD 5 is in the same neighbourhood as UMD 4 13 and it has a relatively minor shift in its coordinates. 14 UMD No. 6, there is a substantial shift in the 15 surface location of that well bore. The actual target 16 that is being -- that will be intersected by the well 17 bore will be accessed from a point south and west of it. 18 The actual pathway is represented by the dashed line 19 moving from the triangle with "UMD 6" beside it, moving 20 in a northeasterly direction underneath the road and 21 terminating in the open circle that is on the east side 22 of the Mandaumin line. 23 These wells have been shifted primarily as a 24 result of taking the information that is gained through 25 the stratigraphic test wells and, in particular, the 26 core information that was taken at UMD No. 4, in that 27 core there was a substantial amount of salt plugging of 28 the porous base and that well is not suitable for use as 131 UNION GAS PANEL 2, in-ch (Leslie) 1 an I/W well as it stands right now. However, by taking 2 the information from that core and the information from 3 the UMD 1 well where we had open porosity filled with 4 gas, feeding that back into our seismic model we were 5 able to differentiate or gain a higher resolution on 6 which target we should be trying to intercept with the 7 remaining well bores. 8 In a nutshell, what we have done is that we 9 are shifting our well locations to get better 10 positioning on them relative to the targets that are 11 inside of the storage reef itself. 12 The total number of wells that are to be 13 drilled has not changed. The surface location of the 14 wells on the ground is moving somewhat. 15 MR. LESLIE: Well No. 6, I take it, is the 16 well that is to be directionally drilled? 17 MR. EGDEN: UMD 6 will be directionally 18 drilled and our current plan is for that to be in a 19 relatively severe manner, and by that I mean it could be 20 as much as horizontal or near horizontal. 21 MR. LESLIE: You mentioned an I/W well. That 22 is an injection/withdrawal well, is it? 23 MR. EGDEN: Yes. I apologize on that. I/W 24 wells are the term we use for injection/withdrawal well. 25 MR. LESLIE: No. That's fine. 26 All right. Thank you, Mr. Egden. 27 One last series of questions, Madam Chair. 28 Mr. Marusic, delta pressuring. My 132 UNION GAS PANEL 2, in-ch (Leslie) 1 understanding is that Union proposes to delta pressure 2 these pools in the first injection cycle. Is that 3 correct? 4 MR. MARUSIC: Yes, that's correct. 5 MR. LESLIE: Has Union had any previous 6 experience with delta pressuring? 7 MR. MARUSIC: Union operates 17 storage pools 8 presently. All 17 of those storage pools are delta 9 pressured. 10 MR. LESLIE: Has Union ever delta pressured a 11 storage pool in the first injection cycle before? 12 MR. MARUSIC: Yes, we have. We have delta 13 pressured three pools in the first injection cycle, 14 those being Oil Springs east, Bentpath east, and Booth 15 Creek. 16 MR. LESLIE: And there is some question in 17 this case, it is an issue that has been mentioned, as to 18 whether or not it is prudent to delta pressure a pool in 19 the first injection cycle as opposed to, I suppose, the 20 second or third cycle. 21 Do you believe that this is a prudent course 22 of action, and, assuming you say yes, what are your 23 reasons? 24 MR. MARUSIC: As I said, we have delta 25 pressured 17 storage pools and we have substantial 26 history in terms of operating those pools. An analogy 27 would be one learns to walk before they learn to run, 28 and it is not necessary to relearn to walk if you want 133 UNION GAS PANEL 2, in-ch (Leslie) 1 to run a second time or a third time. So we are 2 applying the knowledge that we have gained to date to 3 allow us to come to the conclusion that it is safe and 4 it is prudent to delta pressure those pools in the first 5 year of operation. 6 MR. LESLIE: Thank you, Mr. Marusic. 7 Those are my questions, Madam Chair. 8 THE PRESIDING MEMBER: Thank you, Mr. Leslie. 9 Ms Lea. 10 MS LEA: Thank you, Madam Chair. 11 EXAMINATION 12 MS LEA: Mr. Egden, I would like to start with 13 you and the only issue I have for you. 14 As you know, we agree with the geological 15 interpretation of the Mandaumin and Bluewater Pools and 16 the extent of the porosity and the DSA boundaries. We 17 have no quarrel with that at all. The only bone of 18 contention seems to be, then, the boundaries of the Oil 19 City Pool. So why don't we talk about that. 20 First of all, I agree with you that I think 21 this memorandum or whatever from MNR is being given a 22 lot of prominence here, and I think that that perhaps is 23 not necessary. You would agree with me that MNR is not 24 here to say themselves what their understanding was of 25 whatever evidence you were filing and that kind of 26 thing. 27 MR. EGDEN: Well, I respect the sensitivity of 28 the situation, that is why I paid particular care in 134 UNION GAS PANEL 2, ex (Lea) 1 maintaining communications with the ministry and the 2 staff who were in that meeting and making sure that they 3 know what I'm intending to say and that I am 4 understanding their position fully. 5 MS LEA: Mr. Egden, I wonder if you could 6 listen to my question again, please. 7 The Ministry of Natural Resources staff are 8 not here to tell us what they knew or didn't know about 9 what evidence you were filing. 10 You have told us you have told them. I'm not 11 questioning that. They are not here. Is that right? 12 MR. EGDEN: They are not here. 13 MS LEA: They are not here. Union hasn't 14 called them, I haven't called them. So that if Board 15 Staff has different information as to what the Ministry 16 knew or didn't know, they are not here to tell us who is 17 right. So if we have different information about what 18 they knew, our evidence is no more valuable than you 19 telling us? 20 MR. EGDEN: Well, actually I disagree with you 21 on that, because if Board Staff have that type of 22 information I think that they would be obligated to put 23 it forward so that we could discuss that. 24 My colleague, Dave Lowe, compromised -- or was 25 another person at that meeting and between the two of us 26 we would represent 50 per cent of the people who were 27 actually in room and talking about that and I would 28 think that if there is serious or substantial 135 UNION GAS PANEL 2, ex (Lea) 1 disagreement, and that Board Staff were in possession of 2 that type of information, that it would have come 3 forward by this point. 4 I think the date on that addendum is fall of 5 1999. It's old information and I would be shocked, 6 absolutely shocked, at this point if that type of 7 information came out on the basis of (a) I was in the 8 room so I heard what was said and I know what I was 9 saying -- 10 MS LEA: I don't think we have any different 11 information about what happened at the meeting, sir. I 12 think -- 13 MR. EGDEN: Well, I'm having problems 14 understanding how there can be a difference between what 15 I have written down, what I'm saying and what 16 information Board Staff could be keeping close to their 17 vest right now. 18 MS LEA: My only point is, sir, that it is not 19 necessary for this panel to understand whatever happened 20 at that meeting and, as you have said, the addendum is 21 taking on a life of its own. We don't need to pursue it 22 further. 23 I was attempting to point out that since MNR 24 isn't here we only have your secondhand evidence or our 25 secondhand evidence about what they thought. 26 MR. LESLIE: Ms Lea, his evidence isn't 27 secondhand, he was at the meeting and the rest of his 28 evidence pertains to conversations that he had with MNR 136 UNION GAS PANEL 2, ex (Lea) 1 officials. That's not secondhand either. He has given 2 evidence as to what went on in those conversations. He 3 is under oath. 4 MS LEA: Yes, he is under oath, Mr. Leslie. 5 I think that I can leave this point because I 6 don't think it is that relevant to what this actual 7 panel has to decide on this application. 8 MR. LESLIE: I don't disagree with you. I 9 simply asked about the letter because it, I think, had 10 created an impression that wasn't correct and that is 11 because, as Mr. Egden explained, the letter wasn't as 12 complete as it should have been. 13 MS LEA: Certainly we can go into Mr. Egden's 14 opinion about the geology, and I think that is what I 15 propose to do now. 16 Let's have a look, Mr. Egden, at section 3, 17 Schedule 14 together, please, which is your diagram of 18 the proposed designated storage area and the extent, 19 probable maximum extent, I think you called it, of the 20 A1 porosity there. 21 You have explained to us that the reason for 22 your agreeing to exclude tract -- I'm sorry, I'm just 23 getting the numbers here -- Tract 6 of Lot 16, the 24 reason for that was because there was some urban or 25 semi-urban development there. Is that right? 26 MR. EGDEN: The Village of Oil City more or 27 less occupies 100 per cent of Tract 6 in Lot 16, 28 Concession 5. 137 UNION GAS PANEL 2, ex (Lea) 1 MS LEA: Is part of the reason also because 2 the extent of the A1 porosity that you have mapped here 3 doesn't extend into that tract? 4 MR. EGDEN: No. 5 MS LEA: So if the A1 porosity extended into 6 that tract you would still be happy to have it excluded 7 from the DSA? 8 MR. EGDEN: Well, it actually was our intent 9 to try to include it and we went out and were trying to 10 get storage and P&NG leases in the Village of Oil City 11 under the expectation that it would be being included in 12 the DSA. 13 MS LEA: Yes. 14 MR. EGDEN: As a result of the conversations, 15 meetings that we had with the Ministry of Natural 16 Resources staff, we determined that probably it was a 17 lot of action on that part that would be unnecessary. 18 But we were willing and actively acquiring the leases on 19 house-sized lots in the Village of Oil City in 20 anticipation that that drilling tract may be required 21 for the DSA. 22 MS LEA: So if you had your own preference, 23 Mr. Egden, would you also have included Tract 6 in 24 Lot 16 in the DSA? If you had just your choice with no 25 difficulties? 26 MR. EGDEN: If the Village of Oil City wasn't 27 there I would include it. 28 MS LEA: The reason for that has to do with 138 UNION GAS PANEL 2, ex (Lea) 1 this buffer area that you have explained to us? 2 MR. EGDEN: That's correct. 3 MS LEA: So the decision, then, that you were 4 drawing -- just one moment, please. Just one moment. 5 How far into Tract 5 does the Village of Oil 6 City extend? Tract 5 of Lot 16 I mean, obviously, not 7 Tract 5 of Lot 17. 8 MR. EGDEN: I can't answer that, but there is 9 part of Tract 5, Lot 16, Concession 5 is within the 10 municipal boundary of the Village of Oil City. 11 MS LEA: Okay. 12 Let's look for a moment together at Lot 16, 13 Tract 3, which is in the southwest corner. You will 14 recall that Mr. Trevail's evidence suggests that this is 15 a possible tract to be excluded. 16 Can I ask you, in the Technical Conference you 17 describe the boundary that you have drawn with a dotted 18 line or dashed line here as "maximum" and "probable 19 extent" of the A1 porosity. In other words, you are not 20 sure exactly where that boundary is. Is that correct? 21 MR. EGDEN: That would be my definition of 22 "probable". 23 MS LEA: What are the bands of error, if I can 24 put it that way, on either side of this dotted line? 25 How far can we push that boundary and still be within 26 what you believe it to be within the margin of error 27 that could exist there? 28 MR. EGDEN: There are a number of ways that 139 UNION GAS PANEL 2, ex (Lea) 1 that can be achieved which are standard tools in a 2 geologist's toolbox. One of those would be to look at 3 the thickness of the A1 interval itself and if we are in 4 a position where the full thickness of the A1 carbonate 5 formation has been achieved moving away from the reef, 6 that would be an indication that we are probably -- we 7 should be expecting a much lesser chance of there being 8 a porous A1 that is in association with the reef present 9 under that type of circumstance. 10 Another thing that we could do -- 11 MS LEA: If I can interrupt you, I'm 12 sorry, sir. 13 I wasn't asking you what further investigation 14 you could do, my question more related to given the 15 information that you presently have, and the Boyd 16 PetroSearch presently has, what is the physical 17 distance, the physical extent of the bands of error that 18 you would put around this dotted line? If it's maximum 19 and probable it could be inside the dotted line, I 20 gather, a bit? 21 MR. EGDEN: Well, if it was inside the dotted 22 line I would have used the term "probable extent" but I 23 have used "maximum probable" so I think that is as far 24 out as it would go. 25 MS LEA: So the dotted line is the -- it's not 26 going to go any further out than the dotted line. The 27 extent of the porosity may in fact be farther in, that 28 is closer to the crest of the reef, than this dotted 140 UNION GAS PANEL 2, ex (Lea) 1 line shows? It may? 2 --- Pause 3 MR. EGDEN: I can't answer definitively 4 how many -- 5 MS LEA: No. I asked you if it may. 6 MR. EGDEN: -- how many meters -- 7 MS LEA: Okay. 8 MR. EGDEN: -- inside of that line that the 9 maximum probable extent would be simply because the 10 maximum probable extent that I have outlined on here was 11 done on the basis of some changing seismic signature 12 that we were seeing in the A1 carbonate interval and the 13 standard tools that I was describing to you with respect 14 to thickness of the A1 carbonate unit. 15 Another key thing -- this is a very key 16 point -- would be if we take the elevation that the base 17 of the gas is at in the Guelph reef itself, and we 18 recognize that the A1 carbonate is draping down, the 19 point where those two claims intercept, any porosity 20 that is located above that and is gas-bearing could 21 potentially be in communication with the storage reef. 22 If there is porosity that is found that is 23 below that elevation and there is gas in it, it should 24 not be in communication with the reef simply because it 25 is below the base of the gas in the reef. 26 In doing that type of fairly standard and 27 quick analysis, one would be able to draw the line that 28 runs through, starting on the east side, in tract eight 141 UNION GAS PANEL 2, ex (Lea) 1 of lot 17, concession five, moving in a northwest 2 direction. It would go up and go through tract five of 3 lot 17 and tract six of lot 17, tract five of lot 16, 4 would go right through the intersection of tract five, 5 six, seven and eight in lot 16, which is the corner 6 that's cut out of this DSA, come back southwest through 7 tract seven of lot 16, concession five, and into tract 8 two of lot 16, concession four before moving off the 9 map. 10 That type of real quick analysis but fairly 11 effective way of outlining what are the potential rocks 12 that could be holding gas in a situation where the 13 resolution of the tools that were being used were beyond 14 the -- were not fine enough to see minute amounts of 15 porosity were in communication. 16 If we did this type of analysis, we would see 17 that all of the drilling tracts that we have included in 18 the proposed DSA fall within that criteria. On one of 19 the basic tools, broad brushed but a pretty darn 20 accurate way of doing it, we find out that this DSA is 21 pretty much bang on. 22 The question is should tract six in lot 16, 23 concession five, be included or not. The discussion 24 with the tracts on the south boundary and on the east 25 boundary of this pool become a moot point. 26 MS LEA: The line that you were describing, 27 sir, is that some kind of contour line that lines up 28 with the base of gas? Is that what you were saying? 142 UNION GAS PANEL 2, ex (Lea) 1 MR. EGDEN: No. It would be the contour line 2 on the top of the A1 carbonate that would be coincident 3 with the same elevation as the base of the gas in the 4 Guelph reef. 5 MS LEA: Okay. 6 MR. EGDEN: In fact, if it helps the Board 7 here, we have taken this schedule and put that line on 8 it and made photocopies. I believe they are available. 9 MS LEA: Yes. Okay. I think I did understand 10 that correctly that it lines up with the base of gas. 11 Now, -- 12 THE PRESIDING MEMBER: Excuse me, Ms Lea. Is 13 there something being produced? 14 MS LEA: I think there is. 15 MR. EGDEN: I think the map I just described, 16 it is helpful. 17 MS LEA: Sure. Bring it out. 18 MR. EGDEN: To put that out. It's not our 19 intent to hide anything on this. 20 MS LEA: Mr. Trevail is just on me, his best 21 guess and the description you gave here too, but we 22 would like to see it. Sure. 23 MR. EGDEN: It's a simple supposition of the 24 A1 carbonate structure map with the base of gas on it. 25 On this map the line that I am talking about shows up 26 as -- 27 MS LEA: We haven't got it yet. 28 THE PRESIDING MEMBER: Just housekeeping Ms 143 UNION GAS PANEL 2, ex (Lea) 1 Lea. Are we going to give this an exhibit number? 2 MS LEA: Yes, please. That I think is in the 3 9 series, 9.4, 9.4 Sorry, Mr. Egden, it's unusual when 4 I ask you to slow down. I'm going to have to this time. 5 EXHIBIT NO. 9.4: A1 Carbonate Structure 6 Map with Base of Gas 7 MS LEA: Now, sir, what are you talking about? 8 MR. EGDEN: On this map -- 9 MS LEA: The 386 one? 10 MR. EGDEN: Yes. The minus 386 line is an 11 elevation that's equal to the elevation of the base of 12 the gas in the Guelph reef. That shows up as a fine 13 dashed line. 14 MS LEA: Yes. 15 MR. EGDEN: The heavier dashed line is the 16 maximum probable extent of A1 porosity. In a most 17 extreme case of gas -- you know, you asked me how far 18 out could this be. I think the laws of physics would 19 provide us with some impossibilities of saying that 20 there would be gas associated porosity north of this 21 fine dashed line or west of this fine dashed line on the 22 west side of the pool. 23 MS LEA: Why on the west side, sir? I can see 24 the north side it gets -- 25 MR. EGDEN: The fine dashed line takes it just 26 to the south on the west side of the pool. 27 MS LEA: I understand what you are telling me. 28 Yes. 144 UNION GAS PANEL 2, ex (Lea) 1 MR. EGDEN: Yes. Now, on this map as well we 2 have scaled off the distance between the maximum 3 probable extent of A1 porosity on the northeast side of 4 that heavy dashed line and the distance between the 5 maximum probable extent of A1 porosity and tract five, 6 lot 17, concession five, is in fact 26 metres and that 7 is well below the minimum of 40 to 50 metres that have 8 been used as a guideline by the OEB in the past. I 9 think that came from the Edys Mills designation hearing. 10 I don't know what the E.B.O. number was. 11 MS LEA: I would like to talk about the buffer 12 again for a moment, but help me a bit with the minus 386 13 line. What happens to this line south of the designated 14 storage area? I gather that the contour continues. Does 15 it ever make a circle back to join up again, or what? 16 MR. EGDEN: No, it does not. The general 17 trend of these contour lines should be in a northeast, 18 southwest direction, so this line, all things being 19 considered equal, will restore itself to a northeast, 20 southwest direction. It has this bump off to the north, 21 northwest. That is there as a result of the actual reef 22 being present in the Oil City Pool. 23 MS LEA: Okay. I think I understand you, sir. 24 Although the designated storage area of course does not 25 cover all the area which is above the minus 386 line, 26 the boundary you propose is sufficient to deal with that 27 porosity that runs along that contour line. 28 MR. EGDEN: Yes, it is. The one area that if 145 UNION GAS PANEL 2, ex (Lea) 1 we were going to make a change would be to include tract 2 six in lot 16, concession five, which would make this 3 boundary back being a square. I think that that one 4 bite that is taken out of the northwest corner is really 5 the only land that's up for discussion in a reasonable 6 manner, which would be to put that back in. 7 The fact that there are homes there and that 8 would prohibit surface drilling activities there, we 9 have gone out -- we have acquired some of the leases 10 that would have been necessary if that was to be 11 included. Other ones we haven't been able to get. Our 12 discussion with the M&R staff was why don't we just go 13 with taking that corner out. 14 Now, the other side of that is that it is in a 15 down dip direction and if gas was escaping, it would 16 be -- well gas bubble in water moves up, not down, so 17 that would be the least likely area for escape of 18 inventory. 19 MS LEA: Okay. Can I just ask you, sir, what 20 evidence you used to set this 386 contour line? What 21 evidence is there that that's where it is? 22 MR. EGDEN: Well, that's the base of gas in 23 the reef as we have determined from our combined 24 geological and engineering work on that. 25 MS LEA: Yes. 26 MR. EGDEN: We have taken the seismically 27 defined container and we have tried to match rock 28 characteristics to that that would be reasonable and 146 UNION GAS PANEL 2, ex (Lea) 1 supported by the data from the wells that are drilled 2 into this pool. 3 To answer to you whether or not this shape can 4 hold the gas under reasonable conditions, be they 5 pressure, water, saturation, temperature, porous state. 6 MS LEA: Sir, I'm not asking how you know that 7 the base of gas is at 386. Perhaps I'm not asking the 8 question properly. How do you know that that's where 9 the 386 contour runs in this area of Lambton County? Do 10 you have maps of that kind of thing? 11 MR. EGDEN: Yes. We have maps of all of 12 Lambton County with the A1 carbonate structure on it, so 13 this is in effect a postage stamp piece that is taken 14 out of a much larger map sheet. 15 MS LEA: Okay. The contour line that 16 immediately -- how far apart are these contour lines 17 that we see? We have minus 386. What's the next one 18 below that as we look at the map? 19 MR. EGDEN: The label on that contour is 20 somewhat obscured by the heavy dashed line, but it is 21 minus 380. 22 MS LEA: Minus 380. 23 MR. EGDEN: Down in the "remarks" section, we 24 have the contour interval marked there. They say a ten 25 metre interval. Aside from the dashed lines, all the 26 other contour lines are at 10 metre contour interval. 27 MS LEA: So the contour line above that is the 28 minus 390 line. 147 UNION GAS PANEL 2, ex (Lea) 1 MR. EGDEN: That is correct. 2 MR. EGDEN: Yes. That minus 390 label is 3 obscured by these words tract five in lot 16, concession 4 five. 5 MS LEA: Okay. I think I understand that now. 6 Madam Chair, I am going to be a little while 7 longer on this topic. I didn't know whether you wanted 8 to take a break this afternoon and at what time. I 9 didn't want to just keep going ad infinitum. 10 THE PRESIDING MEMBER: I appreciate that, Ms 11 Lea. We were just waiting for you to take a breath. 12 Since you have, now will be an appropriate time to take 13 a break and we will be back in 15 minutes. 14 Thank you. 15 MS LEA: Thank you. 16 --- Upon recessing at 1528 17 --- Upon resuming at 1555 18 THE PRESIDING MEMBER: Ms Lea. 19 MS LEA: Thank you, Madam Chair. 20 Mr. Egden, your counsel asked you to consider 21 Mr. Trevail's evidence. I wonder if we could just look 22 at the attachment to that evidence together, please, 23 which is the diagram. His evidence is Exhibit 15.1. 24 Attached to that evidence is a reworking of section 3, 25 schedule 14, which you and I have been looking at 26 together. 27 And there Mr. Trevail has provided migration 28 directions and flow directions on that diagram. Can you 148 UNION GAS PANEL 2, ex (Lea) 1 tell me whether you disagree with the flow directions or 2 migration directions in that diagram? 3 MR. EGDEN: I think in general that the arrows 4 that Mr. Trevail has put on there are using some 5 geological principles. 6 MS LEA: Okay. So you don't have any 7 particular quarrel with the arrows. 8 Tell me what is the level of risk that you 9 assess in your judgement that would be opposed to 10 Union's project if lot 16, tract 3 were excluded from 11 the DSA? 12 MR. EGDEN: Could you repeat that question, 13 please. 14 MS LEA: Yes. In your opinion what would be 15 the level of risk to Union's storage operation in the 16 Oil City Pool if lot 16, tract 3, that is the lower 17 left-hand corner, were excluded from the DSA? 18 MR. EGDEN: My evidence shows that there is 19 associated reservoir rocks probable underneath the 20 northeast corner of tract 3, and on the basis of that 21 evidence I would have to say that the risk is extremely 22 high to Union Gas if that was excluded. 23 MS LEA: You rate that as an extremely high 24 risk of migration into lot 16, tract 3? 25 MR. EGDEN: Well, a well drilled into the 26 northeast corner of tract 3 would have a high 27 probability of encountering the same pressure system 28 that we are storing gas in and with rocks that are 149 UNION GAS PANEL 2, ex (Lea) 1 capable of holding gas that is in association with the 2 storage reservoir. On that basis, I would have to 3 classify that as a very high risk to the storage 4 operation. 5 MS LEA: And that is despite the direction of 6 the flow as has been diagrammatically represented? 7 MR. EGDEN: Well, the direction of the flow, I 8 believe is for fluids that are migrating under -- in the 9 subsurface on their own. But once we drill a well bore 10 down into the rocks there, the flow changes and it is 11 into the well bore and up to the surface simply because 12 the pressure at surface is much lower than what is at -- 13 at depth. And that is -- I mean that is just a fact of 14 physics. 15 MS LEA: And, Mr. Egden, if someone was going 16 to drill in any one of these tracts, is it not the case 17 that the actual place where they can drill within the 18 tract is in the centre of the tract and not in the 19 corners? 20 MR. EGDEN: That is untrue. 21 MS LEA: Explain that to me. Is it throughout 22 the tracts you can drill? 23 MR. EGDEN: The regulations -- the drilling 24 regulations allow for interested parties to apply to the 25 Ministry of Natural Resources for permission to drill 26 anywhere in the tract. 27 Now, there are certain criteria that must be 28 met but if the reservoir is not present in the so-called 150 UNION GAS PANEL 2, ex (Lea) 1 target area of the centre of the tract, the mechanism is 2 in place for allowing a company to drill off target. 3 And for this type of reservoir where typically it is 4 defined seismically, not just by drilling in the centre 5 of the tract, off target applications are a very common 6 approach to drilling. 7 In fact, our own drilling locations inside of 8 the designated storage area are rarely in the official 9 drilling -- official target area of a drilling tract. 10 And we -- we rarely drill on target. So I wouldn't 11 expect that anyone else drilling for the same thing 12 would be wanting to impair their ability to put a drill 13 bit into the so-called goodies by drilling in the least 14 desirable places. 15 MS LEA: Let's turn our attention then to 16 tract 5 in lot 17, please. As I understand your reasons 17 that you have given, despite the fact that the maximum 18 probable extent of the A1 porosity does not actually 19 intersect this tract, you believe that it is necessary 20 to have a buffer outside of the maximum probably extent 21 of the porosity and that the 26 metre distance between 22 the edge of that porosity as mapped in your evidence and 23 the corner, the southwest corner of tract 5 is too 24 short, too small. Have I correctly summarized your 25 reasons for the inclusion of tract 5? 26 MR. EGDEN: Well, not -- not quite. You are 27 putting the OEB words into my mouth and giving me credit 28 for them. I don't think that is proper. It is the 151 UNION GAS PANEL 2, ex (Lea) 1 Ontario Energy Board that was ruling that a 40 to 60 2 metre buffer beyond the maximum probable extent was the 3 minimum, not the maximum, not the recommended, but the 4 minimum required. And in fact the map that shows that 5 from the Edys Mills designation hearing is in the 6 interrogatory responses that Union had to Lambton County 7 Storage Association. 8 So under those guidelines tract 5 must be 9 included with the Board's own guidelines. And those 10 aren't my words, those are words that have been in 11 past -- past hearings. 12 MS LEA: When was the Edys Mills decision, 13 sir, do you remember? About five years ago or something 14 like that? I don't know, but that is my best guess. I 15 don't think I acted on it but I could be wrong. 16 MR. EGDEN: It is on my -- it is on my CV 17 because I was the geological witness for Union at that. 18 But I believe it was in about 1992 or '93, something -- 19 MS LEA: Okay. I probably would have acted on 20 it then. 21 And are you saying, sir, that ever since that 22 time this Board has not approved a DSA boundary for 23 Union that has not included a 40 to 60 metre buffer from 24 the maximum probable extent of A1 porosity? 25 MR. EGDEN: No, what I said was that the 26 Board's words were that they recommend a minimum of 40 27 to 60 metres and that 40 to 60 metres would put it into 28 tract 5. 152 UNION GAS PANEL 2, ex (Lea) 1 MS LEA: Yes. Leaving aside tract 5 for the 2 moment, you were referring to the Edys Mills decision. 3 MR. EGDEN: Yes. 4 MS LEA: I don't know and I am asking for your 5 assistance, is that the only decision where that buffer 6 has been -- 7 MR. EGDEN: To the best of my knowledge and I 8 have been on all of the hearings but haven't taken a 9 fine-toothed comb to that. We have in an interrogatory 10 to Board staff with regards to their evidence asked for 11 minimum distances from the edge of gas to the DSA 12 boundary. I believe that is IR response -- or 13 Interrogatory No. 4 of Union to Board staff evidence and 14 in that the -- the number of metres between the edge of 15 the gas and the -- or associated rock, and there is two 16 different scenarios there, to the DSA boundaries on DSAs 17 that have been approved since 1990. I think our 18 terminology in there was in the last 10 years. 19 Anyways, it is in the order of hundreds of 20 metres. I think the maximum distance was 0.8 of a 21 kilometre or something in that order anyways. 22 MS LEA: Are you referring to Interrogatory 23 No. 4 to Board staff -- which page is that 24 interrogatory? 25 MR. EGDEN: Interrogatory No. 4 from Union Gas 26 to Board staff and that would be on page 2. One would 27 surmise by looking at the numbers here that are all in 28 the hundreds of metres that something that was in a 153 UNION GAS PANEL 2, ex (Lea) 1 few -- we are talking about a few tens of metres that 2 that would be a -- pretty much a piece of cake to 3 include that in the DSA. 4 MS LEA: I don't understand, sir, what the 5 zeros represent. I know it is our interrogatory and I 6 should know. 7 MR. EGDEN: Well, I think the -- and I let 8 Mr. Trevail speak to it for you if he wishes, but my -- 9 being reasonably familiar with these pools and what the 10 distances were, the zeros correspond to DSAs that are 11 immediately abutting up against another DSA. One of the 12 examples would be the Ladysmith Pool up against the 13 Kimball-Colinville Pool. 14 And in our own application here on the 15 Mandaumin and Bluewater Pool they share a boundary such 16 that the zeros, although they are factually correct 17 here, and I am sure that Mr. Trevail would quickly agree 18 with me here, that the DSA sharing a boundary causes a 19 certain amount of ambiguity with those zeros. 20 MS LEA: Leaving aside for the moment what the 21 Board may have ruled about this, what is your own 22 opinion as to how much of a buffer we need now going 23 back to this particular pool? 24 MR. EGDEN: Well, I think it is -- it is 25 probably a point that is being overlooked right now in 26 that the proposed DSA for the Oil City Pool as it stands 27 with Union's proposal, not the reduced lands that are 28 being proposed by Board staff, but the Union Gas 154 UNION GAS PANEL 2, ex (Lea) 1 proposal that I have put together in my evidence would 2 represent the smallest DSA or storage -- designated 3 storage area in the Province of Ontario. And I'm really 4 uncomfortable with us trying to take what will be the 5 smallest area to protect the storage pool and chiselling 6 out an extra few acres on the basis of a few sentences 7 or paragraphs in the evidence. 8 I personally would like to see something of 9 substantially more significance to that and I don't 10 think that we are seeing that in front of us. I think 11 we are overlooking the fact that the proposal we put 12 forward is for the smallest DSA that would be in 13 operation in the Province of Ontario, and the question 14 might be, what makes it the smallest one? Why wouldn't 15 we have a few more drilling tracts attached to this? 16 MS LEA: Mr. Egden, can I ask you to clarify 17 something for me. The Interrogatory 4 response, in your 18 question you asked for the distances from the map edge 19 of reservoir development including associated A1 20 carbonate porosity, is that equivalent to saying the 21 maximum probable extent of the A1 carbonate porosity? 22 The words are not the same. I just want to know what 23 you were asking for sure so that we understand what you 24 were asking there. 25 MR. EGDEN: The intent of the interrogatory 26 was to ask for comparable distances on designated 27 storage areas that had come in front of the Board in the 28 last ten years that would be comparable between the 155 UNION GAS PANEL 2, ex (Lea) 1 heavy dashed line that we have outlined on schedule 14 2 and similar maps that have come from the Board in the 3 past. 4 Now, some of the confusion comes from 5 terminology. I have chosen to use maximum probably 6 extent of the A1 porosity here because as my colleague 7 across the room has pointed out, there is a lack of 8 definitive well control out in the areas some distance 9 away from the reef. 10 In the Mandaumin-Bluewater case, we have used 11 slightly different terminology there because we actually 12 have wells that penetrated sections that with our 13 microscopic examination of the drill cuttings we were 14 able to determine that there was porosity and that it 15 was reef debris. In other cases, it may be labelled 16 associated A1 carbonate. In other situations, other 17 authors may have used the termed A1 sucrosic porosity. 18 But for the most part, this is all the same rock and it 19 is just a tomatoe/tomato on how it is described in terms 20 of the actual words attached to it. 21 MS LEA: All right. 22 Well, we may have to ask Mr. Trevail how he 23 interpreted the question as well as what you meant by 24 your question. Thank you. 25 If we look again at Mr. Travail's flow 26 diagram, he indicates that the flow in tract 5 of lot 17 27 would be towards the reservoir. In other words, there 28 would not be migration into tract 5, lot 17, because of 156 UNION GAS PANEL 2, ex (Lea) 1 the direction of flow or migration. 2 Can you give us your view as to that? 3 MR. EGDEN: In what context? With -- well, in 4 what context? 5 MS LEA: If you look at Mr. Trevail's flow 6 diagram -- 7 MR. EGDEN: Yes. 8 MS LEA: -- it appears from that diagram that 9 any migration of fluids would be -- I'm not going to use 10 up and down because I always get them mixed up, but 11 towards the reservoir and not away from the reservoir in 12 lot 17, tract 5. Do you disagree with that 13 interpretation? 14 MR. EGDEN: No, I don't disagree with that. 15 MS LEA: So you would agree, then, that there 16 was very little risk of migration of fluids into lot 17, 17 tract 5? 18 MR. EGDEN: Yes. I would agree that the 19 migration model that is presented on Mr. Travail's 20 evidence is reasonably correct. However, I think that 21 for a point of clarification, we should remind ourselves 22 that the establishment of the DSA boundary is not based 23 on migration of fluid, it is based on protection of the 24 reservoir from third party activities, which is why we 25 need the buffer area, which is why the boundary is where 26 it is. 27 MS LEA: Okay. Let me just stop you there. 28 What is it all about? I want to make sure I 157 UNION GAS PANEL 2, ex (Lea) 1 understand. 2 MR. EGDEN: I do need to finish this point. 3 We have this protection from other activities 4 as a component of where the boundary should be, and then 5 there is another component which is where are the fluids 6 and how do they move, and that comes under our inventory 7 containment part of how we determine where a boundary 8 should be. 9 So it is extremely important to make sure we 10 consider both of these issues at the same time, and not 11 cherry-pick one or the other because we may end up 12 convincing ourselves of the things that are not whole in 13 their analysis. 14 MS LEA: Yes. What I was going to ask you 15 was, you wish to include lot 17, tract 5, for protection 16 of the reservoir purposes, not for migration. 17 MR. EGDEN: That is correct. 18 MS LEA: Okay. 19 Why then at some time, when you discussed 20 these things with MNR, was your opinion that this tract 21 could be excluded? And I put it no higher than could 22 be. Why did you believe at one time that this tract 23 could be excluded? 24 MR. EGDEN: Well, I hope I'm being clear on 25 this, that in that sentence there is some omission 26 there, that there was an agreement that if we use my -- 27 the map that we had handed out before, if we use that 28 particular tool in trying to -- 158 UNION GAS PANEL 2, ex (Lea) 1 MS LEA: I'm sorry. Is this the base of gas, 2 the contour map, 9.3? 3 MR. EGDEN: 9.3? I didn't write down what -- 4 MS LEA: I think that is what it is, sir. 5 MR. EGDEN: Yes. On 9.3, if we use that 6 method for taking a look at which tract should be 7 included -- 8 MS LEA: It is 9.4, actually, sir. I beg your 9 pardon. But in any event, go ahead. 10 MR. EGDEN: Under that method of valuation, we 11 would see that the tract should be included because if 12 the minus 386.8 contour goes through the tract, if we 13 look at the maximum probable extent, we could see that 14 it could be excluded on an inventory containment basis 15 only. So in our discussions with the MNR we were 16 saying, "Well, it could be included or it could be 17 excluded", and the MNR said, "Well, look it. We are not 18 going to fight for it, we are not going to fight against 19 it, but for issues of protection of the reservoir from 20 outside activities, that becomes more of a storage 21 operator issue specifically, so that, as the operator of 22 this pool, we are recommending that it be included in." 23 MS LEA: At the time that you believed that it 24 would be possible that this tract could be excluded, did 25 you have the information about the contour of the base 26 of gas? 27 MR. EGDEN: Yes. And at the time that I was 28 saying it could be excluded, I was also saying it could 159 UNION GAS PANEL 2, ex (Lea) 1 be included. That is an important omission on my part 2 from that addendum, and it has been a point 3 of confusion. 4 MS LEA: Why were you uncertain at that time, 5 sir, if you had all this information that we have before 6 us today? Frankly, this new information is important to 7 us and we didn't have it until today. We think it is 8 important information. Why were you still uncertain? 9 MR. EGDEN: We weren't uncertain. As I was -- 10 as I'm trying to point out, it was if we looked at it 11 one way it could be like this, if we looked at it 12 another way it could be like that, and both of them were 13 valid tools. 14 In doing the analysis, one of the ways that we 15 reduce the uncertainty is to go through our analysis a 16 number of different ways and find out which things in 17 the analysis come together and which fall apart, which 18 are the loose ends and which are the things that are 19 coming together. This is where we have combined our 20 geology, the seismic, the reservoir engineering, the 21 migration pathways of fluids. All of these things 22 together taken as a whole give us a more complete answer 23 than picking just one item at a time. 24 Sometimes going with just one item at a time 25 we can end up with an analysis that is flawed. 26 MS LEA: So there was no one particular piece 27 of evidence to convince you that tract should be 28 included, it was a combination of all these things? 160 UNION GAS PANEL 2, ex (Lea) 1 MR. EGDEN: I think that is a reasonable 2 summation. 3 MS LEA: Can we look at the same section of 4 the evidence, at section 3 but Schedule 15, please. 5 I would like to suggest to you that one factor 6 in your decision may have been what is diagrammatically 7 illustrated on section 3, Schedule 15, that is, that all 8 the tracts that you want to include were part of your 9 original unit boundary, and the tract that you have 10 consented to have removed for what may be geological 11 reasons is also not part of the original unit area 12 boundary. 13 Was that part of the consideration for Union's 14 position as to which tracts should be included and 15 excluded? 16 MR. EGDEN: Well, one of the positions that 17 Union has taken in the past, and most recently in 18 Phase I of the Century Pools application, was that the 19 designated storage area at a minimum should try to 20 contain the original production unit. On that basis all 21 of the drilling tracts that we are applying for in the 22 Oil City Pools would be included. 23 Again, coming back to my previous statement 24 about looking at a portfolio of tools, under that 25 particular tool, yes, all of these drilling tracts would 26 be included. 27 If I was asked to speculate, I would speculate 28 that Tract 6 in Lot 16 was excluded from the production 161 UNION GAS PANEL 2, ex (Lea) 1 unit simply on the basis that it would have been easier 2 to administer with it being left out rather than having 3 it left in. 4 Now, I wasn't part of the unitization process 5 so I can't speak to that in a factual sense. 6 MS LEA: Why is it that the original unit 7 boundary should be a factor in setting the designated 8 storage area. Why should the original boundaries be 9 included within the DSA? 10 MR. EGDEN: Well, the leases have been 11 gathered and are held under a unit agreement and when 12 the unit agreement is put into place all of the leases 13 are treated as if they are one. So to combine all of 14 these, treat them as one in both a financial and 15 administrative sense and then to go back and separate 16 them back out becomes a bit of an administrative 17 headache. I would think that if the landowners were 18 asked, they would probably want to know why they were 19 included on one hand and being financially excluded on 20 another. 21 MS LEA: So it was, then, a factor in terms of 22 where the boundaries should be set? 23 MR. EGDEN: I think that's a fair statement. 24 MS LEA: Thank you. 25 One moment, please. 26 --- Pause 27 MS LEA: There is one other thing I wanted to 28 ask you, sir, and I thought it was just me that didn't 162 UNION GAS PANEL 2, ex (Lea) 1 understand it but I guess Mr. Mackie wants an 2 explanation too. 3 On your diagram that shows us the minus 386 4 contour line, why are we concerned about that contour 5 line to the west of the formation but you don't seem to 6 wait for it to dip down again to the south on the east 7 side? In other words, you are not including more tracts 8 to the east in order to accommodate that contour line? 9 Can you assist us with that? 10 MR. EGDEN: I'm not sure I understand the 11 question. 12 MS LEA: I'm not sure I understand me either. 13 I gather that this contour line goes along at 14 a certain level under the ground and it takes a bump, if 15 I can put it that way -- I think those were your 16 words -- to the northwest where this reef is, because 17 there is an increase there. 18 If we follow that contour line to the west, it 19 dips down to the south and proceeds out of the DSA 20 farther south on the west side than it proceeds out of 21 the DSA on the east side. It's farther north on the 22 east side. 23 My question is: Is that a problem? Do we 24 have a problem with protection on the east side? 25 MR. EGDEN: No. No, we don't. 26 MS LEA: The reasons? 27 MR. EGDEN: The line is where it is because of 28 the -- this was a seismic reflection that we were able 163 UNION GAS PANEL 2, ex (Lea) 1 to map across the area, so the contour line goes where 2 mother nature wanted it to go and mother nature is in 3 control on that, not myself. 4 If we look at the distance between the thick 5 dashed line and the thin dashed line, you will see that 6 those two lines are separating so that the risk on the 7 east side is dropping significantly as we move to the 8 east. 9 MS LEA: Thank you. 10 Madam Chair, I have asked my friend Mr. Leslie 11 for an indulgence to allow me to call Mr. Trevail today. 12 I have finished my cross-examination of Mr. Egden on 13 this point and it is only upon this point that 14 Mr. Trevail was going to testify. 15 Mr. Leslie, would it be acceptable to you to 16 interrupt your panel to hear Mr. Trevail's evidence now? 17 Madam Chair, would that be acceptable to you? 18 MR. LESLIE: It's fine with me. 19 THE PRESIDING MEMBER: Fine with me. 20 MS LEA: We will keep all the geology 21 together. 22 THE PRESIDING MEMBER: Thank you, Ms Lea. 23 Where would you propose that Mr. Trevail sit 24 to give his evidence? 25 MS LEA: Well, he can certainly sit here, if 26 that is agreeable, to my right, rather than disturb the 27 panel members there. Is that acceptable? 28 THE PRESIDING MEMBER: That's fine with me. 164 UNION GAS PANEL 2, ex (Lea) 1 Is it fine with you, Mr. Leslie? 2 MR. LESLIE: Yes, indeed. 3 THE PRESIDING MEMBER: Mr. Trevail needs to be 4 sworn in. 5 SWORN: ROBERT TREVAIL 6 EXAMINATION 7 MS LEA: Thank you. 8 Mr. Trevail, you produced evidence for this 9 hearing which has become Exhibit 15.1. Is that correct? 10 MR. TREVAIL: That's correct. 11 MS LEA: Your resum‚ is filed in this 12 proceeding and has become Exhibit 15.2. Is that 13 correct? 14 MR. TREVAIL: That's correct. 15 MS LEA: That resum‚ indicates that you have 16 been a working geologist since 1978 and have held many 17 positions in that regard. Yes? 18 MR. TREVAIL: That's correct. 19 MS LEA: Testified at seven or eight Board 20 hearings? 21 MR. TREVAIL: Seven appearances with regard to 22 eight Board hearings. 23 MS LEA: All right. You were for a while 24 Chief Geologist with the Ministry of Natural Resources? 25 MR. TREVAIL: That's correct. 26 MS LEA: Mr. Leslie, is there any issue with 27 this witness's qualifications to give expert evidence? 28 MR. LESLIE: No. 165 TREVAIL, ex (Lea) 1 MS LEA: Thank you. 2 Madam Chair, could I ask, then, that 3 Mr. Trevail be accepted as an expert qualified to give 4 expert evidence on geology, please? 5 THE PRESIDING MEMBER: Certainly. 6 MS LEA: Thank you. 7 Now, Mr. Trevail, you also answered 8 interrogatories in this proceeding. Are you now 9 prepared to adopt your evidence and your interrogatories 10 as filed? 11 MR. TREVAIL: Yes, I am. 12 MS LEA: Thank you. 13 Could you take us to your evidence, please, 14 and explain to us the significance of the diagram that 15 is an attachment to it, which I gather is a reworking of 16 section 3, Schedule 14. 17 MR. TREVAIL: This diagram was prepared to 18 show the directions of migration of fluids within the 19 subsurface, specifically within the Guelph and A1 20 carbonate formations. It was prepared in response -- or 21 as part of my pre-filed testimony to deal with some of 22 the questions that arose during the Technical 23 Conference. 24 MS LEA: What do these arrows mean in terms of 25 what this Board has to decide, that is where the 26 designated storage area and boundaries should go? 27 MR. TREVAIL: On this particular diagram, 28 these arrows indicate the direction of flow of fluids 166 TREVAIL, ex (Lea) 1 within the subsurface. That is generally in an updip 2 direction. 3 MS LEA: What do you mean by "updip", sir? 4 MR. TREVAIL: The formations in Lambton County 5 dip at an angle down into the Mission Basin, which is 6 located in a northwest direction. That is the downdip 7 direction. Updip is the opposite to that, so we are 8 looking at a southeast direction for the dip. 9 MS LEA: That is for the regional migration? 10 MR. TREVAIL: That's correct. 11 MS LEA: Local migration, where we have what 12 has been described as a bump, that is a formation like 13 this reef. 14 MR. TREVAIL: Whenever you have an anomaly 15 such as a reef or a small anticline in the subsurface, 16 those particular types of structures affect the 17 directions of the flow in that the gradient that the 18 fluids wish to flow in is related to the updip 19 direction, which are changed due to the presence of the 20 structures. 21 MS LEA: You have indicated in your evidence 22 that the migration direction of fluids in the subsurface 23 in local migration is generally oriented perpendicular 24 to the structure contours. Does that mean it flows up 25 into the reef? 26 MR. TREVAIL: It flows towards the reef. 27 MS LEA: Towards the reef, okay. Thank you. 28 Now, how did you arrive at your opinion about 167 TREVAIL, ex (Lea) 1 the direction of migration in the area of this 2 reservoir? 3 MR. TREVAIL: Migrations are the study of the 4 migration directions and what I presented here is based 5 on generally accepted geological principles. 6 MS LEA: Now, in the attachment to your 7 evidence, then, let's have a look first at Tract 5 in 8 Lot 17. 9 In that tract there is an arrow which points 10 basically in a southwesterly direction. What does that 11 arrow indicate about the probable migration direction of 12 fluids in Tract 5 in Lot 17? 13 MR. TREVAIL: In the subsurface direction of 14 flow would be from the Tract 5 towards the reservoir 15 itself, in the southwesterly direction. 16 MS LEA: Okay. I would like to discuss with 17 you your reasons for the recommendation in your prefiled 18 evidence that two tracts could possibly be excluded from 19 this designated storage area. 20 I would like to deal first with lot 16, tract 21 three, which is the southwest corner. Perhaps I should 22 ask you this. Having heard the evidence today and 23 received the information that we have received in the 24 last few days, what is your view as to the advisability 25 of the inclusion or exclusion of tract three in lot 16? 26 MR. TREVAIL: Based on the letter from Boyd 27 PetroSearch, it appears that quite a bit of background 28 work has been done in attempting to correlate the 168 TREVAIL, ex (Lea) 1 various properties and characteristics of the A1 2 carbonate from other known pools in attempting to 3 characterize what the A1 carbonate looks like within the 4 bounds of the proposed designated storage for the Oil 5 Springs pool -- sorry, Oil City Pool. 6 MS LEA: What value then do you place on the 7 information that we have received from this letter from 8 Boyd PetroSearch? Does this assist your interpretation 9 of this area? 10 MR. TREVAIL: It's providing clarification as 11 to the interpretation and the background work that was 12 done into placing the maximum probable extent of the A1 13 process. 14 MS LEA: Can you assist us as to the 15 reliability or validity of the gas line which appears in 16 Mr. Egden's evidence of section 3, schedule 4? 17 MR. TREVAIL: Without having actually seen and 18 gone over it, the actual seismic data itself, I'm 19 somewhat reluctant to give my own opinion on the 20 validity of that particular boundary. 21 MS LEA: Having now received then the letter 22 from Boyd PetroSearch and the diagram which has become 23 Exhibit 9.4, what recommendation do you make to the 24 Board with respect to lot 16, tract three, or what 25 comment do you have about the advisability of including 26 or excluding that tract? 27 MR. TREVAIL: Based on the information that 28 was provided today, it would probably be prudent to 169 TREVAIL, ex (Lea) 1 include. 2 MS LEA: To include it. 3 MR. TREVAIL: To include tract three. 4 MS LEA: Thank you. And what about lot 17, 5 tract five? Mr. Egden has explained that he is not 6 worried about -- I don't want to paraphrase him, but I 7 think I understood him to say he's not so worried about 8 migration here as he is about protection of the 9 reservoir. Can you indicate your views on that 10 evidence? 11 MR. TREVAIL: When trying to determine 12 proposed designated storage area boundaries, it's 13 important to consider a couple of factors. One is to 14 preserve and ensure the integrity of the reservoir and 15 any of the connected secondary reservoir which would be 16 present within the A1 carbonate. That is the primary 17 concern. Secondary to that would also be to preserve 18 areas for future exploration and development and 19 opportunities. 20 In this particular case, evidence complemented 21 with the map we saw today based on the base of gas in 22 the Oil City reservoir itself would indicate that 23 inclusion of tract five, concession 17, would also be 24 useful in protection of the reservoir. 25 MS LEA: Mr. Trevail, your original evidence 26 recommended exclusion of both these tracts. 27 MR. TREVAIL: That's correct. 28 MS LEA: Today in examination-in-chief you 170 TREVAIL, ex (Lea) 1 have said that it would be prudent to include both these 2 tracts. If you had received the evidence from Boyd 3 PetroSearch and the map that has become Exhibit 9.4 4 prior to today and when you were drafting your original 5 evidence, would you have drafted your original evidence 6 the way it was drafted? 7 MR. TREVAIL: No. 8 MS LEA: Thank you. 9 If Mr. Leslie has any cross-examination, Mr. 10 Trevail is available. 11 THE PRESIDING MEMBER: I think you just got 12 agreement on the designated boundaries, Mr. Leslie, 13 but -- 14 MR. LESLIE: This is going to be my only 15 cross-examination. 16 THE PRESIDING MEMBER: I'm sorry. You were 17 saving it. 18 MR. LESLIE: No. I have no questions. Thank 19 you. 20 THE PRESIDING MEMBER: Thank you, Mr. Leslie. 21 MS LEA: Does the Board have any questions? 22 THE PRESIDING MEMBER: No, I don't think the 23 Board has any questions. 24 Thank you, Mr. Trevail. 25 MS LEA: No re-examination. 26 THE PRESIDING MEMBER: Thank you, Ms Lea, Mr. 27 Trevail. 28 Ms Lea, would you like to continue on with 171 TREVAIL, ex (Lea) 1 your examination? 2 MS LEA: I'm happy to do so. Thank you. If I 3 could just have a moment while Mr. Trevail steps down. 4 --- Pause 5 PREVIOUSLY SWORN: JOSEPH MARUSIC 6 PREVIOUSLY SWORN: STEVEN PARDY 7 PREVIOUSLY SWORN: JIM EGDEN 8 EXAMINATION (Continued) 9 MS LEA: Thank you. Let me just find where I 10 am. Okay. The second issue that I wanted to deal with 11 with this panel, we will see how this one goes, is for 12 Mr. Pardy, I think. That has to do with the delta 13 pressuring program that you are contemplating. 14 You have indicated, sir, that you have 15 previously delta pressured pools in this area in one 16 cycle. Is that correct? Perhaps -- was it you, sir? 17 MR. MARUSIC: I believe it was my testimony in 18 answer. 19 MS LEA: I'm sorry, Mr. Marusic. I remember 20 Mr. Pardy testifying about something. 21 Mr. Marusic, please help me there. 22 MR. MARUSIC: Yes, that's correct. The Oil 23 City, rather Oil Springs East Pool, was delta pressured 24 in one cycle which was in the vicinity of the Oil City 25 Pool proposed. 26 MS LEA: And Board staff prepared a -- well, 27 Board staff with Union's assistance prepared a chart 28 which I would like to introduce now as an exhibit which 172 UNION GAS PANEL 2, ex (Lea) 1 will assist us in understanding the nature of the delta 2 pressuring programs you have undertaken previously. Do 3 you know what chart I am referring to, sir? 4 MR. MARUSIC: I believe so. 5 MS LEA: Do you have it before you? 6 MR. MARUSIC: Yes, I do. 7 MS LEA: I'm just trying to find it before me 8 actually. It's entitled Union's Designated Storage 9 Areas, Discovery Pressure and Delta Pressure History. 10 Is that correct? 11 MR. MARUSIC: I'm not sure if I have the same 12 copy that you are working from. 13 MS LEA: Okay. Chris is just coming around to 14 make sure that you do. 15 MR. MARUSIC: Great. Thank you. 16 THE PRESIDING MEMBER: Excuse me, Ms Lea. Is 17 this already in evidence? 18 MS LEA: It is not. I just wanted the witness 19 to identify it before I give it a number so we are all 20 working off the same page. Thank you. 21 THE PRESIDING MEMBER: Thank you. 22 MS LEA: That's great. I might have forgot 23 otherwise. 24 Now, do you recognize that chart now, sir? 25 MR. MARUSIC: Yes, I do. 26 MS LEA: Okay. You provided some of the -- 27 Union rather provided some of the information in this 28 chart. 173 UNION GAS PANEL 2, ex (Lea) 1 MR. MARUSIC: Yes, we did. 2 MS LEA: Are you satisfied that it is accurate 3 within the scope of normal human error? 4 MR. MARUSIC: What's a normal human error? 5 MS LEA: I know. I shouldn't have asked you 6 that one. Sorry, sir. Are you satisfied that it's 7 accurate? 8 MR. MARUSIC: Without checking every single 9 number, I will accept that it's accurate. 10 MS LEA: Okay. I wonder if we could now 11 assign that Exhibit No. 15.6, please. We will call it 12 delta pressure history. 13 EXHIBIT NO. 15.6: Delta Pressure History 14 MS LEA: So looking at Exhibit 15.6, if we 15 look at the Mandaumin Pool under maximum discovery 16 pressure ratio, which is the fourth column from the 17 left, we see that there's a pressure of 1.975. That 18 continued to be the ratio how many times greater than 19 the discovery pressure, the total delta pressure, is 20 going to be. Is that how you understand that number, 21 sir? 22 MR. MARUSIC: Yes, it is. 23 MS LEA: And the pool that you mentioned, 24 which was Oil Springs East which you have previously 25 delta pressured in one cycle, could you tell us what the 26 maximum discovery pressure ratio is here? 27 MR. MARUSIC: For Oil Springs East, the 28 pressure ratio is 1.217. 174 UNION GAS PANEL 2, ex (Lea) 1 MS LEA: Okay. And for the Bluewater Pool, 2 what's the ratio? 3 MR. MARUSIC: 1.885. 4 MS LEA: Okay. Now, looking at this chart, we 5 see that, as I understand it, only two pools have been 6 brought to full delta pressure in the first cycle. Am I 7 correct? 8 MR. MARUSIC: Yes, that's correct. 9 MS LEA: And those two pools are Oil Springs 10 East and Bentpath East. Bentpath East has a ratio of 11 1.207. Would it be true to say that you have never 12 taken a pool to pressures approaching 1.8 or 1.97 of 13 their discovery pressure in one cycle? 14 MR. MARUSIC: Yes, that's true. 15 MS LEA: Pardon me. And any pools that you 16 have pressured up to pressures approaching that have all 17 been done in more than one cycle. For example, if you 18 look at the Dow Block A Pool, that is about the closest 19 I can find, 1.802 is the ratio. It was done over two 20 cycles. Is that right? 21 MR. MARUSIC: Yes, that is right. I would 22 also like to add though that our opinion is that that 23 column really isn't meaningful as a decision criteria 24 about the time at which one should delta pressure a 25 storage pool. 26 MS LEA: Tell me about that, sir. 27 MR. MARUSIC: Well, we feel that there are two 28 main factors that need to be considered in making the 175 UNION GAS PANEL 2, ex (Lea) 1 decision to delta pressure, the first being the 2 structural integrity of the cap rock. In this pool the 3 cap rock is the A2 anhydride. It is excellent cap rock. 4 We don't feel that that is in question in any of the 5 three storage pools that we are proposing here at this 6 application. 7 MR. EGDEN: I would like to add -- 8 MS LEA: Yes, go ahead. 9 MR. EGDEN: -- something to that in that the 10 stratigraphic test wells that we drilled prior to 11 applying for designation on pools, and this has been a 12 matter of standard operating procedure for us since the 13 Edys Mills application, has been to cut a core and 14 recover back to the surface a sample of the cap rock in 15 a pool. 16 And we take that cap rock and send it off to 17 specialized laboratories to have analysis done on the 18 integrity of that cap rock such that our proposal to 19 delta pressure is based on some laboratory measurements 20 as well as our operating experience. And in the case of 21 the Mandaumin/Bluewater Pools as well as Oil City, we 22 have actually taken a further step which was to take 23 this cap rock analysis and not just see if the cap rock 24 could withstand the pressures that we were going to be 25 subjecting it to, but we have added a further step in 26 our testing now where we subject the rock to a 27 pressure -- keep going or keep increasing the pressure 28 until the rock actually fails. In other words, that it 176 UNION GAS PANEL 2, ex (Lea) 1 cracks and we record that. 2 Now, in the past we didn't do that. So what 3 we have been doing in-house is going beyond what we have 4 done in the past to try and increase the comfort level 5 for ourselves. But also that we are anticipating that 6 the time could come where someone may ask us, well, 7 other than just what can the rock -- can the rock hold 8 the pressures that you want to take this too. How much 9 more can it take before it would fail? And that is the 10 level of testing that we are doing and basing our 11 proposals for delta pressuring in the first cycle on. 12 MS LEA: Is this the first development at 13 which you have done tests on the failure pressure of the 14 cap rock? 15 MR. EGDEN: The Oil City, Mandaumin and 16 Bluewater are the first ones where we have added this 17 extra step in. 18 MS LEA: What was the failure pressure, sir? 19 MR. MARUSIC: The cap rock can sustain a 20 gradient of at least one pound per foot. So we have got 21 a safety factor of approximately 40 per cent over what 22 we are proposing, the level of delta -- the level of 23 delta pressuring that we are proposing to take these 24 pools to. 25 In fact, operators of storage pools in 26 Michigan in the same geological formation as we are 27 dealing with in Lambton County are operating at 28 gradients above 0.7, as high as 0.73 as reported by AGA 177 UNION GAS PANEL 2, ex (Lea) 1 in their summary of underground storage in the United 2 States and Canada. So we feel comfortable going to 0.7. 3 We feel that that is not risky. 4 MS LEA: Okay. Thank you. 5 MR. PARDY: In our analysis of the cap rock 6 too, we found that it is not only -- it is beyond one 7 that we can take it. It is in the range of 1.1, 1.2. 8 So we do have quite a margin there that we can work 9 with. 10 MS LEA: And your proposal is to delta 11 pressure it to the equivalent of 0.7 psi per foot of 12 depth. Am I right? 13 MR. PARDY: That is correct. 14 MS LEA: Now, I understand what you have told 15 me about the cap rock, but that isn't our only concern I 16 believe about this -- about this delta pressuring. We 17 were also wondering about horizontal migration into the 18 surrounding formation. 19 One reason that I would put to you for 20 possibly delta pressuring more slowly is to observe 21 whether gas migrates. That is to give yourself an 22 opportunity to find out if you have got horizontal 23 migration from the formation rather than pushing it all 24 through one cycle. I wonder if you could address that 25 question. 26 MR. PARDY: I think there is several points 27 that I can add with respect to that. 28 MS LEA: I am sorry, sir, I didn't hear the 178 UNION GAS PANEL 2, ex (Lea) 1 beginning. 2 MR. PARDY: Like there is several points that 3 we can add with respect to that is across our storage 4 pools as you can appreciate since we have been doing 5 this for a long time, we have delta pressured pools at a 6 lot of different rates and some pools have taken a long 7 time to get to 0.7. 8 Now, that is not necessarily because we 9 weren't comfortable with taking them to 0.7. It has 10 only been our practice since the late eighties to take 11 pools all the way to 0.7. So along the way there has 12 been different comfort levels of taking pools up to 13 different pressure. 14 Now, we haven't seen any significant impact to 15 variance in the pools from the pools that we have delta 16 pressured in several -- a couple of -- one or two cycles 17 as opposed to pools we have delta pressured in 23 18 cycles. 19 So from that information we would argue that 20 when you take a pool to 0.7, whether I do it this year 21 or next year, the inventory variance that is going to be 22 there will be there regardless. So we don't see the 23 benefit of taking the pool, for instance, to discovery 24 pressure in the first year because we know that pool 25 held at discovery pressure for millions and millions of 26 years. So we are not proving anything by taking it to 27 that pressure that we don't already know. 28 So based on the information that we have which 179 UNION GAS PANEL 2, ex (Lea) 1 is basically inventory containment. We know there is a 2 container there because it held gas, cap rock integrity. 3 We know there is good cap rock in the pool. 4 We have it across our other pools and we can observe 5 what happens there, plus we have cap rock tests on each 6 individual pool. Also, from an inventory variance 7 standpoint, we haven't seen any difference as we delta 8 pressure the pools, whether it is delta pressured in a 9 couple of cycles as opposed to a lot more cycles, with 10 upwards of 20 cycles. 11 So for those reasons we feel that it is 12 prudent to go to .7 in the first year. 13 MS LEA: Mr. Pardy, I wasn't suggesting that 14 any more migration might occur because you are delta 15 pressuring in one cycle. Please don't assume that. It 16 is going to be the blank pressure that determines that, 17 not how fast you get there. 18 My point is if you are going to have migration 19 and you delta pressure more slowly, you have time to 20 observe whatever migration there may be. You can better 21 assess over a series of cycles what level of migration, 22 if any, will occur in the pool. So the suggestion is 23 that in moving there in one cycle you will not have the 24 opportunity to assess the level of migration the way you 25 would if you moved more slowly. 26 MR. PARDY: I understand your point, but I 27 don't think we would be proposing this if we weren't 28 comfortable with what we are doing, and I think that we 180 UNION GAS PANEL 2, ex (Lea) 1 can, by delta pressuring within the first season, we 2 will see -- if there is an inventory advantage it will 3 be trackable within the first couple of years, whether 4 it goes all the way in the first year or not. 5 Now, if there is a serious continuous problem, 6 we will see it as we delta pressure the pool in our 7 pressure inventory response. 8 MS LEA: I guess the other factor that we 9 noticed is that these pools are at some of the highest 10 ratios of any -- in fact they are higher than any pool 11 you have done before, that is the Mandaumin and 12 Bluewater are higher than any pool you have delta 13 pressured before on this list that I could see, and it 14 was that that also added to the question of assessment 15 of migration. 16 MR. EGDEN: If I can comment on that, though. 17 The reason that those pools are at the high 18 end on that -- and I share the comments previously that 19 this maximum-to-discovery-pressure ratio, I mean they 20 are numbers on a piece of paper, but I don't see what 21 use that they have, with all due respect. 22 But the reason that apparently there is a 23 trend here that Mandaumin-Bluewater fit on, it is 24 because of where those pools are located geographically 25 in the basin. As we move further north, and closer to 26 Lake Huron, we see pools that have a lower discovery 27 gradient, and it is just that those two pools are 28 located where they are and they have that. 181 UNION GAS PANEL 2, ex (Lea) 1 Now, the pool that is closest to this, to 2 those two pools, that's operating for storage, is the 3 Dow Block A Pool. On that one the discovery gradient 4 was in the same order. Now, it could be off by .01 of a 5 PSI per foot, but I think that we are talking it was .30 6 for one, .31 for another, and .32 for another, but 7 definitely in that range as opposed to pools that are 8 down in Dawn Township and some of those are upwards of 9 .55, .56. 10 So we see a trend as we go into the basin, and 11 if one doesn't recognize some of the geological factors, 12 we can convince ourselves that the numbers are telling 13 us something that really I don't believe they are 14 telling us. 15 MS LEA: Okay. Thanks, Mr. Egden. That's 16 helpful. 17 Do I understand also the fact which I think 18 was implied in your evidence, implied in the evidence 19 you just gave, that the discovery pressure of the pool 20 is not necessarily an indicator of how far it can be 21 delta pressured safely? 22 MR. EGDEN: Oh, absolutely. The key indicator 23 is how much pressure would a rock hold before it cracks, 24 and that is the type of testing that we are doing on our 25 cap rock analysis now. We have a significant financial 26 interest in ensuring that the rock can hold the gas at 27 the pressures we are putting at it and, on a personal 28 level, my continued employment with Union Gas hinges on 182 UNION GAS PANEL 2, ex (Lea) 1 a very accurate assessment of that margin of safety. 2 So, on a personal level, I am probably more interested 3 in this than anybody else in the room. 4 MS LEA: I have two follow-up questions to 5 this. First, Mr. Mackie reminded me that I never did 6 get the answer to my question: What was the failure 7 pressure of the cap rock for this pool? 8 MR. EGDEN: Subject to check, as my colleague 9 was pointing out, it is something in the order of 1.2. 10 The rule of thumb on the rocks would be something in the 11 order of 1.0. So what we are seeing is that these rocks 12 are stronger than the generally accepted norm, and that 13 is not unusual either because in the general sense the 14 older the rocks get, the stronger they are. Younger 15 rocks, ones that are maybe only a couple of million 16 years old as opposed to 400 million years old, would not 17 have the same strength. Again, that would be a general 18 trend that we see. 19 So we are doing more measurements in the lab, 20 we are doing more detailed analysis on it, and we are 21 finding that the rocks are behaving as we would expect. 22 So we are quite comfortable with how this is going, both 23 in a corporate sense and myself in a personal sense. 24 MS LEA: Can you tell me then, secondly -- and 25 maybe you have already told me this -- my understanding 26 is the cap rock and its ability to withstand pressure is 27 not indicative of horizontal migration problems. Am I 28 right, that they are unrelated or are they related? 183 UNION GAS PANEL 2, ex (Lea) 1 MR. EGDEN: Well, I'm not sure that I 2 understand your question, but bear with me while I walk 3 down this path and maybe it will help us. 4 The discovery gradient, if we take a look at 5 that and compare it to the normal hydrostatic gradient 6 which would be if there was a system across the region 7 that was at normal pressure, it would be a pressure that 8 is equivalent to a column of water at the same depth, 9 and that would be something in the order of about .45 10 PSI per foot. 11 When we see a couple of storage pools or a 12 couple of gas reservoirs similar to the 13 Mandaumin-Bluewater ones which are significantly off 14 that number, and here we are talking in the order of .3, 15 .31, compared to .45, what the rocks are telling us is 16 that the pressure system represented by that gas 17 reservoir is in excellent pressure isolation from the 18 regional subsurface fluids that are flowing. 19 As my colleague had pointed out with regional 20 migration patterns earlier, the Mandaumin and Bluewater 21 Pools, from the pressure data at discovery, are telling 22 us quite clearly that they are a separate and isolated 23 system. 24 Taking that one step further, for a delta 25 pressuring situation, we should have a very good level 26 of confidence that the gas is going to stay put. It's 27 not going to be migrating out to the side. 28 Now, that is not to say that if we had a 184 UNION GAS PANEL 2, ex (Lea) 1 discovery gradient of .45 that we would say that we 2 can't go to a delta pressuring in the first cycle. What 3 we would look at is, should we have a little bit more 4 land around the pool for a buffer. 5 But in this case, Mother Nature is telling us, 6 "People, you have a good set of rocks there, they are in 7 good pressure isolation and you can move forward and 8 keep Jim's job intact." 9 --- Laughter 10 MR. PARDY: I think that something to add here 11 too, in our Dow Block A Pool, which has a similar -- I 12 guess what we're determining as a maximum discovery 13 pressure ratio, I think the operating claim in there 14 with respect to the two cycles was to take it to 15 original discovery in the first year and then all the 16 way to .7 in the second. So, in essence, one of the 17 things that we were able to learn from there is we knew 18 how the pressure would react taken to original discovery 19 in the first year, and we proved that, yes, we didn't 20 learn anything any more, and then we could go all the 21 way to .7. 22 So, in essence, we are not doing anything 23 different in these pools in what we did there because we 24 went basically all the way to .7 in the second year and 25 we didn't add any benefits, I guess, to our analysis by 26 just taking discovery in the first year. 27 MS LEA: Can I ask you this? One of the 28 standard conditions of approval imposed by the Board 185 UNION GAS PANEL 2, ex (Lea) 1 with respect to storage reservoirs is that Union report 2 to the Board any material gas losses associated with the 3 operation of new storage pools within six months of such 4 losses being identified. I'm presuming that you are not 5 objecting to complying with that condition. 6 MR. MARUSIC: We do not take exception with 7 that condition of approval. 8 MS LEA: Can you tell me, then, given the 9 working volumes that you hope to achieve for each of 10 these pools, what volumes of gas did you consider 11 material such that you would have to make a report? 12 MR. PARDY: We don't have any specific volume 13 that I can give you right now, but I can tell you on our 14 other pools in the range of 1 to 2 per cent is something 15 that we would consider normal variance. 16 MS LEA: Normal variance is 1 to 2 per cent, 17 so when would you consider that it was sufficiently 18 material that you should tell the Board about it? Have 19 you thought about that? 20 MR. MARUSIC: I guess, depending on what we -- 21 variance is more than escaping gas. Variance can also 22 be measurement here. 23 MS LEA: Sure. 24 MR. MARUSIC: So depending on what we saw as 25 the reason for the variance, it is anything I guess 26 largely above that that we would report in that case. 27 MS LEA: Above 2 per cent unless you had a 28 clear explanation of metering. 186 UNION GAS PANEL 2, ex (Lea) 1 MR. PARDY: Yes. 2 MS LEA: Thank you. 3 If there were migration into the A1 carbonate 4 in the surrounding area, would that be a loss of gas or 5 would that be a temporary migration that could be 6 recovered if the pool was depressurized at the end of 7 the season? 8 MR. PARDY: I don't think it's lost because we 9 know where it is. 10 --- Laughter 11 MS LEA: But can you get it back is my 12 question. Can you get it back? 13 MR. PARDY: There is a possibility that when 14 you operate a storage pool that there is a required 15 amount of pressure support that is in the A1. So that 16 is why we would see a certain amount of variance from 17 year to year. So as you take the pool through its 18 cycle, there will be a certain amount of gas that 19 migrates into the A1. Some of it will be a part of the 20 normal cycle and you will recover every year. Some of 21 it will kind of sit in the A1 parts of the reef and as 22 long as you use a consistent storage cycle you wouldn't 23 see that gas come back. 24 Now, if you change your cycle it's possible 25 that you could get that gas back. It is possible to get 26 it back, I guess, if you needed it. 27 MS LEA: Sir, if you found that there was 28 migration, or if migration occurred into -- or if 187 UNION GAS PANEL 2, ex (Lea) 1 horizontal migration occurred -- I'm sorry, it's getting 2 late in the day -- the horizontal migration occurred, 3 would it mean that you had to inject additional cushion 4 gas in order to bring the pool up to a pressure where 5 deliverability was adequate? 6 MR. PARDY: No, that's not our practice. 7 MS LEA: Tell me what would you do, then, in 8 that circumstance? 9 --- Pause 10 MS LEA: I'm sorry, Mr. Pardy. The reason I 11 ask is we have had applications from Union to inject 12 more cushion gas into pools, so I was presuming that was 13 your practice. 14 MR. PARDY: I'm not sure which applications 15 you are referring to, but subject to check and with my 16 experience I don't think there has been any applications 17 with respect to gas we have lost into the A1 that we 18 want to inject more gas. 19 There have been instances where we have asked 20 to raise the cushion pressure, but I think it has been 21 for other reasons. 22 MS LEA: What, then, do you do to compensate 23 for migration? Have you had a circumstance where you 24 have had to compensate for it? What have you done? 25 MR. PARDY: I guess the normal variance that 26 we see on an annual basis, we go ahead and fill our 27 storage pools, we put the pools on stabilization, 28 observe the pressures, look at our inventory pressure 188 UNION GAS PANEL 2, ex (Lea) 1 relationships, and from there if we saw a variance we 2 wouldn't do anything basically. 3 We treat our pools as an integrated system, so 4 we look at it as a whole as opposed to looking 5 individually at that pool and we have to get that small 6 amount of gas back in there. Our system is such that it 7 can compensate for each other, so we would not look at 8 each pool on an individual basis every year to put a 9 small amount of gas back in or take some out if we 10 gained gas from the A1. 11 MS LEA: Thank you. 12 MR. EGDEN: I think the situation you have 13 been describing is one where the pool has sprung a leak 14 and to the best of our knowledge we don't have any pools 15 that leak. 16 MS LEA: I'm sorry, Mr. Egden. Say that 17 again. 18 MR. EGDEN: The situation you are describing 19 was gas getting away and what would we do and how do we 20 maintain cushion. What you have described is a 21 situation where the pool has sprung a leak, and to the 22 best of our knowledge we don't have any pools that leak. 23 You know, if we sound a little bit unsure 24 about what you are talking about it is because you are 25 asking about leaky pools and our pools don't leak. 26 MS LEA: Well, that's what I asked you: Have 27 you had the occasion to deal with this before? You are 28 telling me that you have not. 189 UNION GAS PANEL 2, ex (Lea) 1 One moment, please. 2 MR. EGDEN: No. 3 --- Pause 4 MS LEA: Madam Chair, I think I have reached 5 the end of that topic, and if -- I don't know if this is 6 a good time. I'm content to go on, but it is 5:05 also. 7 THE PRESIDING MEMBER: I think now would be a 8 good time for a break, subject to the fact that -- 9 Ms Drozd, do you have any questions? 10 MEMBER DROZD: No. 11 THE PRESIDING MEMBER: Ms Simon? 12 MEMBER SIMON: No questions. 13 THE PRESIDING MEMBER: I just have one 14 question. I think I'm following along. 15 My question is: I understand the concern 16 about the delta pressure and the lateral migration, and 17 I understand that you might not be able to get it but 18 it's not lost. I guess my concern is a failure and 19 there is a crack in the -- in other words, I assume that 20 if there is a failure in the delta pressuring, in the 21 lateral migration you can lose it, or you might not lose 22 it because you don't have leaky pools, but that doesn't 23 seem -- that may have adverse financial consequences and 24 you have lost some gas and we would have to worry about 25 that. 26 But if there is a failure and there is a 27 crack, how does that affect the integrity of the pool 28 itself, the overall integrity? 190 UNION GAS PANEL 2 1 MR. EGDEN: Well, first of all we don't 2 anticipate a crack -- 3 THE PRESIDING MEMBER: No, I understand. It's 4 sort of a doomsday scenario. 5 MR. EGDEN: -- and we have the laboratory 6 analysis to boost our confidence on that. 7 But as a secondary point, in general the type 8 of rock that makes up this cap rock, the A2 anhydride, 9 the anhydride is considered to be somewhat plastic under 10 temperature and pressure regime such that it is 11 self-healing. 12 Now, I don't think that we would like to 13 intentionally crack the cap rock and see how long it 14 takes for it to reseal itself, but since you are asking 15 that is an answer, that anhydride, like rock salt, is 16 considered to be plastic at depth and if it was cracked 17 it would heal. 18 The length of time it takes is another 19 question and, unfortunately, I can't answer that. I 20 would probably defer to mother nature and say in 21 geological time. 22 --- Laughter 23 MR. LESLIE: Madam Chair, could I just ask one 24 question to clarify, I think, the area that you were 25 exploring -- 26 THE PRESIDING MEMBER: Certainly, Mr. Leslie. 27 MR. LESLIE: -- because different units are 28 being used here. 191 UNION GAS PANEL 2 1 THE PRESIDING MEMBER: Okay. 2 MR. LESLIE: Mr. Egden, you indicated that the 3 break point of the cap rock according to your test was 4 1.2 and I think the units you are using are pounds per 5 square inch, per foot? 6 MR. EGDEN: That is correct. 7 MR. LESLIE: What is the maximum pressure in 8 the same unit that you propose to inject gas in these 9 pools? 10 MR. EGDEN: A little more than half that, or 11 .7 PSI per foot. 12 MR. LESLIE: Thank you. 13 MR. MARUSIC: I would add that there is a 14 40 per cent safety factor in terms of where we want to 15 go, to what break strength of the rock is. So we feel 16 there is a significant amount of safety there. 17 THE PRESIDING MEMBER: Is there another 40 per 18 cent safety factor? 19 MR. EGDEN: No, no. 20 THE PRESIDING MEMBER: You have got this 21 .701.2. 22 MR. EGDEN: Yes, correct. 23 THE PRESIDING MEMBER: I have got that 24 straight. 25 MR. EGDEN: One further point on that is that 26 there is a bit of a sandwich of different types of rock 27 on top of these pools. There is the A2 anhydride and 28 it's actually classified as a supercap rock by the 192 UNION GAS PANEL 2 1 people that make a living at classifying rocks. 2 Above that there is also the A2 carbonate and 3 the A2 carbonate where it is non-porous and 4 non-permeable, which is in most cases what we see, it 5 forms or acts as a cap rock as well and a pretty darn 6 good one. 7 In addition to that, there is a unit called -- 8 well, we call it the A2 shale, and I am sure my 9 colleague knows which rock I am talking about, but it's 10 a shale layer that's in the lower part of the A2 11 carbonate and it's a very good cap rock as well. 12 Now, we have seen in that A2 shale where there 13 has been evidence of cracking in the past, just with the 14 normal settling that happens with the rocks, and it has 15 been resealed. We have evidence of that in core and it 16 holds. We have seen that in the pools. We have this 40 17 per cent factor and then there is the double and triple 18 effect that we get with three different types of rock 19 stacked on top of each other, any one of which on their 20 own is an adequate cap rock. 21 There is a substantial amount of protection 22 from a vertical standpoint on that risk, if that helps. 23 THE PRESIDING MEMBER: So with the different 24 layers and different types of rock, they each have, what 25 will I call it, cracking characteristics. 26 MR. EGDEN: That's correct. 27 THE PRESIDING MEMBER: And just because one 28 layer would crack under certain pressure doesn't 193 UNION GAS PANEL 2 1 necessarily that the layer above it would crack and that 2 we would be able to monitor it in the next layer and 3 then become an adequate cap rock for the reservoir. 4 MR. EGDEN: That's correct, and in fact if 5 these cracks were induced, what we see a lot of times is 6 that the crack would -- there would be a vertical in 7 their orientation, not horizontal. 8 THE PRESIDING MEMBER: Right. 9 MR. EGDEN: That crack would go up and when it 10 hit a rock boundary, kind of the next layer in the 11 scene, which -- the theoretical models tell us that that 12 would stop the cracking and the crack would then 13 propagate out in a horizontal sense. 14 Your point I think is in a conceptual sense 15 quite good and the answer is that the protection is kind 16 of triple layered, if we will. It's not something that 17 we would consider to be a risk approaching any kind of 18 red zone, if we will. 19 THE PRESIDING MEMBER: Thank you very much. 20 MR. PARDY: And, too, we can add to that and 21 keep adding. 22 THE PRESIDING MEMBER: Keep adding for our 23 comfort. 24 MR. PARDY: The cap rock that we see in all 25 our reservoirs is very similar and we do have the A2 26 anhydride there that we would have across our pools and 27 we have taken most of those pools to the .7. It behaves 28 the way we expect it to behave. That gives us a lot of 194 UNION GAS PANEL 2 1 comfort in taking this pool to .7, anticipating that it 2 will behave the same way along with a cap rock analysis 3 that has shown it is also prudent. 4 THE PRESIDING MEMBER: Thank you. Anything 5 else to say? 6 Mr. Leslie, other than members of the panel 7 asking me to ask you, and I agree, in light of the 8 settlement today with Mr. Vogel, we would appreciate 9 some sort of summary of the outstanding land matters 10 before the land panel meets, I think tomorrow. 11 MR. LESLIE: We are starting with that panel 12 tomorrow. Would it be acceptable for me to do that 13 summary with them first thing in the morning? 14 THE PRESIDING MEMBER: That's fine, as long as 15 we sort of know where we start from on the outstanding 16 issues. 17 MR. LESLIE: I think I can give you a rough 18 summary. There are no easement issues. 19 THE PRESIDING MEMBER: Okay. 20 MR. LESLIE: So the transmission facilities so 21 far as land is concerned, there are no issues. On the 22 storage side, I think there are some properties. I 23 can't tell you exactly how many, but it's in the two's 24 to three's where there are no storage leases. 25 THE PRESIDING MEMBER: Okay. 26 MR. LESLIE: But 95 per cent of it is covered 27 by storage leases. 28 THE PRESIDING MEMBER: Okay. And is that the 195 UNION GAS PANEL 2 1 same for the P&NG leases as well? 2 MR. LESLIE: Yes. Now, as you will know, 3 under your statute once the hearing is designated in the 4 storage area, the fact that there is no lease does not 5 prevent the project from going forward. It simply means 6 compensation may have to be determined. That's what Mr. 7 Vogel is doing in his application, both with respect to 8 existing leases and lands that don't have any. 9 THE PRESIDING MEMBER: I see. Thank you. 10 MS LEA: I should make clear I have more 11 questions for this panel. 12 THE PRESIDING MEMBER: I was just going to ask 13 you, Ms Lea. 14 MS LEA: Yes. 15 MR. LESLIE: Is there something more than that 16 you need? I mean I will do that in a more definitive 17 way. 18 THE PRESIDING MEMBER: No. That's fine. I 19 guess we are just trying to determine what the 20 outstanding issues are. 21 MR. LESLIE: I have been going through the 22 same exercise for about three weeks. 23 THE PRESIDING MEMBER: I'm sure you have, Mr. 24 Leslie. 25 Well, that having been said, I think now is an 26 appropriate time for us to adjourn for this afternoon. 27 I thank the panel for coming today and I know 28 you are coming back tomorrow morning for further 196 UNION GAS PANEL 2 1 questions by Ms Lea. 2 We stand adjourned until nine o'clock tomorrow 3 morning. I would also like to remind people who are 4 still here that nine o'clock tomorrow, the first thing 5 we will do is hear from any local concerns, interests, 6 comments, problems, before we continue with examining 7 this panel. 8 We are adjourned until tomorrow at nine 9 o'clock. 10 Thank you. 11 --- Whereupon the hearing adjourned at 1710, 12 to resume on Wednesday, February 9, 2000 13 at 0900 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 197 UNION GAS PANEL 2 1 INDEX OF PROCEEDINGS 2 PAGE 3 Hearing commenced at 0948 4 4 Preliminary matters 7 5 UNION GAS PANEL 1 6 SWORN: JOSEPH MARUSIC 15 7 SWORN: MS LYNN GALBRAITH 15 8 SWORN: MS LAURA CALLINGHAM 15 9 SWORN: GERARD MALLETTE 15 10 Examination-in-chief by Mr. Leslie 15 11 Questions by Board counsel 25 12 Recess at 1105 52 13 Resumed at 1125 52 14 Questions by the Board 72 15 Luncheon recess at 1220 85 16 Resumed at 1402 85 17 Presentation by David and Laurie Vokes 87 18 UNION GAS PANEL 2 19 SWORN: STEVEN PARDY 98 20 PREVIOUSLY SWORN: JOSEPH MARUSIC 98 21 Examination in-chief by Mr. Leslie 98 22 Questions by Mr. Vokes 101 23 Questions by Board counsel 102 24 Questions by the Board 107 25 SWORN: JIM EGDEN 113 26 Further examination-in-chief 113 27 Questions by Board counsel 133 28 Recessed at 1528 147 198 1 INDEX OF PROCEEDINGS 2 PAGE 3 Resumed at 1555 147 4 SWORN: ROBERT TREVAIL 164 5 Questions by Board counsel 164 6 UNION GAS PANEL 2 (Continued) 7 PREVIOUSLY SWORN: JOSEPH MARUSIC 171 8 PREVIOUSLY SWORN: STEVEN PARDY 171 9 PREVIOUSLY SWORN: JIM EGDEN 171 10 Continued questions by Board counsel 171 11 Questions by the Board 189 12 Hearing adjourned at 1710 196 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 199 1 EXHIBITS 2 NO. PAGE 3 11.2 Document entitled "Schedule of 10 4 Resolved Issues" 5 17.1 Memorandum submitted by David Vokes 88 6 9.3 Correspondence relating the 3D 115 7 seismic for the Oil City Pool 8 9.4 A1 Carbonate Structure Map with Base 143 9 of Gas 10 15.6 Delta Pressure History 173 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 200 1 UNDERTAKINGS 2 NO. PAGE 3 16.1 Ms Galbraith undertakes to provide 29 4 the anticipated accumulated deferral 5 account balance for 2000 if these 6 storage contracts are approved 7 16.2 Ms Galbraith undertakes to file 37 8 Phase II Proposed Contracts with Duke 9 and Carthage 10 16.3 Mr. Mallette to give an explanation 59 11 regarding increased cost of land 12 purchase in the Oil City Pool 13