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, Sched. B; and in particular, sections 7 38(1), 39(2), 40(1), 90(1), 127(1)(e), and 127(2) 8 thereof, 9 AND IN THE MATTER OF an Application by Union Gas Limited 10 for a regulation designating the area known as the 11 Mandaumin Pool, in the Townships of Enniskillen, 12 Plympton, and the City of Sarnia, in the County of 13 Lambton, as a gas storage area; 14 AND IN THE MATTER OF an Application by Union Gas Limited 15 for a regulation designating the area known as the 16 Bluewater Pool, in the Townships of Moore and the City 17 of Sarnia, in the County of Lambton, as a gas storage 18 area; 19 AND IN THE MATTER OF an Application by Union Gas Limited 20 for a regulation designating the area known as the Oil 21 City Pool, in the Township of Enniskillen, in the County 22 of Lambton, as a gas storage area; 23 AND IN THE MATTER OF an Application by Union Gas Limited 24 for authority to inject gas into, store gas in and 25 remove gas from the areas designated as the Mandaumin, 26 Bluewater and Oil City Pools, and to enter into and upon 27 the lands in the said areas and use the said lands for 28 such purposes; 2 1 AND IN THE MATTER of an Application by Union Gas Limited 2 to the Ministry of Natural Resources for licences to 3 drill wells in the said areas; 4 AND IN THE MATTER OF an Application by Union Gas Limited 5 granting leave to construct natural gas pipelines in the 6 Townships of Enniskillen, Plympton, Moore, 7 Dawn-Euphemia, and the City of Sarnia, all in the 8 Country of Lambton; 9 AND IN THE MATTER OF an Application by Union Gas Limited 10 for approval of the parties to, the period of, and the 11 storage that is the subject of proposed storage 12 contracts. 13 14 15 16 17 Hearing held at: 18 2300 Yonge Street, 25th Floor, Hearing Room No. 1, 19 Toronto, Ontario on Thursday, December 16, 1999, 20 commencing at 0900 21 22 23 24 25 26 TECHNICAL CONFERENCE 27 28 VOLUME 1 3 1 APPEARANCES 2 CHRIS MACKIE/ Case Manager 3 WILFRED TEPER/ Board Technical Staff 4 BOB TREVAIL Board Technical Staff 5 6 APPLICANT 7 GLENN LESLIE/ Union Gas Limited 8 JO-ANN PATTERSON/ 9 KAREN HOCKIN 10 11 INTERVENORS 12 PAUL VOGEL/ LAMBTON COUNTY 13 ROBERT LIDDLE/ STORAGE ASSOCIATION 14 DOUGLAS NAPIER/ 15 ROBYN MARTTELA 16 JOE GORMAN CANENERCO 17 BARBARA BODNER ENBRIDGE CONSUMERS GAS 18 19 20 21 22 23 24 25 26 27 28 4 1 Toronto, Ontario 2 3 --- Upon commencing on Thursday, December 16, 1999 4 at 0900 5 MR. MACKIE: Ladies and gentlemen, good 6 morning. Welcome to this technical conference. 7 It's been delayed a few moments because the 8 court reporter has not been able to establish a phone 9 line to the head office in Ottawa. We are going to 10 start. 11 A transcript will be prepared. It's being 12 made manually by this reporter, and he has requested to 13 we speak slowly and deliberately, and he will jump in if 14 our words are not carrying. 15 Welcome to some old friends and also a number 16 of new faces here this morning as well. My name is Chris 17 Mackie, and I am part of Board staff. 18 Working with me on this case, to my left, is 19 Wilfred Teper. And also sitting in the audience is Zora 20 Kenochecki(ph), and Zora tomorrow will be more evident 21 when we deal with the environmental assessments. Thank 22 you, Zora. 23 Also working with Board staff in attendance 24 later this morning will be our consultant geologist, 25 Robert Trevail. 26 Could we go around the room, please, and take 27 appearances of most people who will be participating and 28 speaking this morning. 5 1 MR. LESLIE: Good morning. My name is Glenn 2 Leslie, and I represent Union Gas. Union Gas's 3 representatives beside me are, to my left, Jo-ann 4 Patterson, and to my right, Karen Hockin. 5 MR. VOGEL: Good morning. My name is Paul 6 Vogel. I am the lawyer for the Lambton County Storage 7 Association, LCSA. With me is Robyn, with a Y, 8 Marttela. And seated immediately behind me is Dr. 9 Douglas Napier, and Robert Liddle, who are both 10 consultants engaged by LCSA with respect to this matter. 11 MR. MACKIE: Other appearances, please? 12 MR. GORMAN: Good morning. My name is Joseph 13 Gorman, Gorman. I represent CanEnerco Limited. 14 MR. MACKIE: Are there any other interveners 15 present who want to put in an appearance for the record? 16 BARBARA BODNER: Barbara Bodner for Enbridge. 17 MR. MACKIE: Are there any other parties? 18 There appear to be none. 19 I will say a few words about the purpose of 20 this technical conference and what we hope to achieve 21 within the next few days. 22 It's being transcribed, as you are now aware, 23 so that it will become part of the public record. And 24 witnesses will be asked to affirm at the hearing that 25 the information provided today is correct, subject to 26 any errors that might creep into the transcript. And I 27 would say that I appreciate Union Gas having most of its 28 witnesses available for this two-day technical 6 1 conference. 2 I am hopeful that we will be able to develop 3 and establish a fairly complete record over the next two 4 days, in which case the Board may decide to proceed by 5 way of a limited issues hearing. 6 Arrangements have been made to hold a hearing 7 at the Holiday Inn at Point Edward in Sarnia during the 8 first week of February, commencing on Tuesday, February 9 the 8th, 2000. However, these arrangements are tentative 10 at this point, and depend upon the parties meeting the 11 deadlines set out in Procedural Order No. 1. A Notice 12 of Hearing will be issued in due course. 13 The issues list: Board staff prepared and 14 mailed out a proposed issues list to all parties on 15 December the 2nd, with an invitation to interveners to 16 submit additional issues that they may wish to address. 17 It would be helpful if parties could identify 18 those additional issues as soon as possible, and we will 19 make time for Union to respond to those proposed issues. 20 If there are any issues that remain contested, 21 then the Board will sit next week to hear submissions 22 and decide whether the contested issues should be 23 included as part of the Board's approved issues list. 24 I can't at the moment tell you which day has 25 been scheduled for that next week, but I hope to be able 26 to provide that information before the end of the day. 27 In terms of today's schedule, the court 28 reporters are available until 5 p.m., and we have a 7 1 pretty full agenda to get through. We shall break for 2 lunch around 12:30, and we have also made arrangements 3 for coffee and muffins to be delivered around 10:30, so 4 we'll stop for a ten- or fifteen-minute break at that 5 point. 6 Are there any comments or responses before we 7 commence with Union's first panel? 8 MR. VOGEL: I could indicate, Mr. Mackie, that 9 Lambton County Storage Association has reviewed the 10 proposed issues list and finds that it is fairly 11 complete. 12 There are a number of, a few, I would say, 13 additional issues which may be encompassed in the listed 14 issues or may not. I should just, I am just indicating 15 for the purposes of this record that under Board issue 16 C9, operation of facilities, LCSA is also concerned with 17 provision of abandonment of facilities. 18 And so I just draw that to everyone's 19 attention at this point. I presume that that is 20 included under operation and facilities, but I am making 21 that express on the record. 22 Similarly, with respect to issue F(7) on the 23 Board list, landowner concerns, LCSA has a number of 24 concerns with respect to Union's relations with 25 landowners, and so I would propose that landowner 26 relations also form part of that F(7) issue. 27 With respect to issue F(1), that is, status of 28 gas storage leases, encompassed in that issue from 8 1 LCSA's perspective in the form of the lease being 2 proposed to landowners, and therefore my suggestion 3 would be that issue F(1) be "status/form of gas storage 4 leases." 5 I think at this point there may be other 6 issues which arise during the if he can the technical 7 conference as we hear the evidence of the panels, but at 8 this point I can indicate that the only additional issue 9 which I would propose to the list is issue H, which is 10 access to natural gas, also of concern to LCSA. 11 MR. MACKIE: Sorry, which issue was that you 12 were referring to, Mr. Vogel? 13 MR. VOGEL: I am proposing to add an issue H 14 to the Board's list. 15 MR. MACKIE: I see. 16 MR. VOGEL: And I would describe that issue as 17 access to natural gas. 18 MR. MACKIE: Thank you for those comments. 19 Are there any other interveners that wish to 20 identify further issues at this point? And I will ask 21 Union, then, later in the proceeding to respond to those 22 comments by Mr. Vogel. 23 MR. LESLIE: Thanks, Chris. 24 MR. MACKIE: If there are no other comments, 25 perhaps we could commence, then, with Union's first 26 witness panel, who are patiently sitting here opposite 27 me. 28 Greetings, Ms Galbraith and Ms Cunningham. 9 1 Thanks for being here and for all the interrogatory 2 responses you have provided. 3 I should say that Board staff are prepared to 4 lead the questioning. We have a fairly wide spectrum of 5 questions for all panels. But if there is any 6 intervener that wishes to precede Board staff, please 7 let under the circumstances know now. We'll step down. 8 We don't mind which order we present our questions. 9 So is there anybody who wishes to precede 10 Board staff? 11 Being none, I will -- 12 MR. LESLIE: Chris, perhaps I should indicate 13 for the benefit of people who nay not know what our 14 plans are, our intention is to call panels to deal with 15 subjects in the order that was set out in your letter, 16 or the Board's letter -- no, it's your letter, sorry -- 17 of December the 2nd, 1999; that is to say, project need 18 and the contracts underlying the project, geology and 19 reservoir engineering. 20 And then project -- I'm sorry -- the initial 21 panel will deal with project costs and economic 22 feasibility and need. And then we'll deal with geology 23 and reservoir engineering, proposed facilities 24 operation. And tomorrow environmental instruction and 25 land matters. 26 There is in the response to interrogatory 1, I 27 believe it's 1A, a matrix that sets out the names of the 28 witnesses and the issues that they are able to deal 10 1 with. That may be of assistance to people in directing 2 their questions. 3 Sorry to interrupt, Chris. Thanks. 4 MR. MACKIE: Thank you, Glenn. That's very 5 helpful. 6 Ms Galbraith, I am going to begin with a 7 review of the open season storage contracts and the need 8 for the project. 9 And I am going to suggest that Board staff and 10 all parties put our questions on the record in that area 11 first so that we have this area covered in the 12 transcript in one place. And then I suggest we move on 13 to deal with the project cost and economic feasibility, 14 if that's acceptable to you. 15 Ms Galbraith -- 16 MR. VOGEL: Mr. Mackie, excuse me for 17 interrupting, but I think Mr. Leslie just indicated that 18 there was a witness list provided in matrix form. I 19 don't seem to have that in my... 20 MR. LESLIE: Have that one for now. 21 MR. MACKIE: I think we're ready now, then. 22 MR. VOGEL: Yes, we are. Thank you. 23 MR. MACKIE: Yes, right. Thank you. 24 Ms Galbraith, I am going to ask you a few 25 questions, which go back to the open season contracts 26 which were presented to this Board as part of Union's 27 phase 1 application. 28 And I would ask you to bear in mind that this 11 1 is a new application by Union Gas with possibly a new 2 panel sitting on this case, so you shouldn't assume that 3 the knowledge or the questions that you are being asked 4 is assumed knowledge by the panel who will be hearing 5 this case. 6 Can you confirm my understanding that there 7 was in fact one open season bidding process that was 8 held for both the Phase I and Phase II development? 9 MS GALBRAITH: Yes. 10 MR. MACKIE: And are the contracts for which 11 Union now seeks Board approval the same contracts which 12 Union had previously presented to the Board and had 13 sought approval in principle during the phase one 14 proceeding? 15 The Board declined to provide that approval, 16 but I just want to make sure we are looking at the same 17 contracts that you presented at that time. 18 MS GALBRAITH: Well, yes, we are. 19 MR. MACKIE: Thank you. I recognize that a 20 few names have changed, and we'll be dealing with the 21 name changes in due course, but in terms of the term and 22 the volume in those contracts, they appear to me to be 23 the same. 24 MS GALBRAITH: They are the same. 25 MR. MACKIE: Thank you. Would you return to 26 your response to interrogatory no. 7, please, in which 27 you prepared a very helpful summary of both the Phase I 28 and Phase II contracts. 12 1 I recollect at the end of the day there was a 2 space shortfall after all the Phase I contracts had been 3 approved by the Board, and my understanding is that 4 Union has contracted additional storage volumes to cover 5 that short fall; is that correct? 6 MS GALBRAITH: Pertaining to the Phase I 7 volumes, yes. 8 MR. MACKIE: And those volumes are shown in 9 this table for Phase I. It's the penultimate line of 10 that table, and they are identified as contract 11 available. 12 MS GALBRAITH: Yes, sir. 13 MR. MACKIE: Thank you. 14 Now, looking at the summary for the Phase II 15 contracts, its apparent that there is excess capacity to 16 be made available as short-term C1 storage. 17 MS GALBRAITH: That's correct. 18 MR. MACKIE: Why does Union intend to make 19 that space available for short-term storage rather than 20 utilizing it to meet the Phase I shortfall? 21 MS GALBRAITH: We entered into contractual 22 arrangements on a term basis, when we have CanEnerco 23 contract come along, which wasn't part of the open 24 season but had storage commitment volumes that we ended 25 up obtaining. 26 So when we went to the market to cover the 27 contract, we took a longer-term contract. 28 MR. MACKIE: And it appears, then, from this 13 1 table that you have a five-year contract to cover this, 2 what identifies this, this initial shortfall. 3 MS GALBRAITH: Yes. 4 MR. MACKIE: Who is that contract with? 5 MS GALBRAITH: It's with MCN. 6 MR. MACKIE: Sorry, M -- 7 MS GALBRAITH: Capital M, capital C, capital 8 N. 9 MR. MACKIE: Is that an abbreviated version of 10 a full corporate name, and if so, can you spell it out? 11 MS GALBRAITH: I believe that is the 12 appropriate... 13 MR. MACKIE: -- legal identification? 14 MS GALBRAITH: Yes. 15 MR. MACKIE: It's just that I'm not familiar 16 with it. 17 MS GALBRAITH: It's Michigan, it's a Mich Con, 18 the old Mich Con Corp. 19 MR. MACKIE: Thanks. 20 Right. Thank you. And looking at this table, 21 also, it appears to me that the open season contracts 22 approved for the Phase I development appear to be longer 23 in term, generally speaking, than the Phase II 24 contracts. 25 I am referring to Kingston Public Utilities 26 Commission, which is a ten-year contract; the Connetco 27 contract is a third year contract; the contract with 28 Duke is for six years. Whereas the Phase II contracts 14 1 appear to be for terms of four, five or six years. 2 Is there any reason why the Phase II contracts 3 appear to be generally of a shorter term? 4 MS GALBRAITH: Well, taking CanEnerco out of 5 the mix in the first case, because it had its own set of 6 unique arrangements, which were also tied to land, and 7 land rights, the bulk of the Phase I contracts were also 8 of terms of four or five or six years. 9 We did not see a significant difference in the 10 bidding for contracts. The bulk of the responses came 11 back in the three to six years time frame, which was, 12 quite frankly, longer than we expected the average to 13 come back at. 14 MR. MACKIE: And I think you have explained in 15 the evidence that Union selected these contracts, or 16 these bidders on the basis of maximizing the net present 17 value to Union; is that correct? 18 MS GALBRAITH: Yes, the net present value of 19 the revenue streams. 20 MR. MACKIE: Right. Thank you. 21 Now I am going to move on and I am leaving 22 this table. Are there any unresolved interests, Ms 23 Galbraith, which related to the gas storage leases for 24 the three Phase II pools? 25 I don't believe there are, but you are 26 probably more familiar with your application. 27 MS GALBRAITH: With the gas storage leases or 28 these contracts? 15 1 MR. MACKIE: Now I am referring to the leases. 2 Now, I'll explain to you why I am asking this question. 3 I realize this comes out of the blue a little bit. 4 What I am seeking some confirmation on is that 5 none of the lands in question under lease to competing 6 interests or parties -- and it's what I call a CanEnerco 7 syndrome. 8 Because we began Phase I with a situation in 9 which there was a surplus volume available. When we got 10 to the hearing, that had changed by virtue of the 11 CanEnerco contract understandably to a shortfall. 12 I am just trying to establish that in all 13 probability we are not going to go down that route in 14 this application. 15 MR. LESLIE: Just give us a minute, Chris. 16 MR. MACKIE: Sure. 17 MR. LESLIE: We think it may not be a 18 syndrome. We don't know of any latent "CanEnercos." But 19 that doesn't preclude the possibility, but not so far as 20 we are aware, Chris. 21 MR. MACKIE: That's my understanding too, 22 Glenn. Thank you. So we'll wait and see. 23 Could we now turn, then, to the open season 24 long-term storage bid package that you provided in your 25 evidence at tab 2. So this is section 2, schedule 2 of 26 the prefiled evidence. 27 And, Ms Galbraith, for convenience I have 28 chosen to number the pages, but yours are not numbered. 16 1 And I began with page 1 being the inside page headed the 2 "Offer." And my questions relate to page 2 under the 3 heading, "Offering Summary." 4 Can you please clarify the in-service date of 5 April the 1st? My understanding is that the project 6 in-service date is scheduled for July 1st, 2000. 7 MS GALBRAITH: Yes, I can. And we did address 8 that in the prefiled, is we will use -- if we believe 9 the project in-service date will be in service for July 10 1, we will make available injection entitlements to 11 these contracts using Union's integrated system. So 12 that the customer could have the benefit of the entire 13 season. 14 MR. MACKIE: All right. Thank you. 15 I want to clarify some of the terms that 16 appear in this contract. I recollect that you explained 17 in Phase I that a 93-day storage allows the storage 18 customer to withdraw gas at the maximum daily rate of 19 1.1 percent of the contract volume. Have I stated that 20 correctly? 21 MS GALBRAITH: No, sir, you have not. 22 MR. MACKIE: Could you explain. 23 MS GALBRAITH: Yes. A 93-day service provides 24 a customer with 60 days of service, essentially, at a 25 1.2 percent deliverability rate, and that's against 26 maximum storage balance. It provides them a ratchetted 27 or a lower withdrawal rate for a one-month calendar 28 period, 0.8 percent. 17 1 MR. MACKIE: That's 60 days at 1.2 percent and 2 30 days, or 33 days at 0.8 percent. I'm adding up -- 3 MS GALBRAITH: Yes. It's, it's give or take. 4 We were certainly attempting to meet the market 5 requirement of hedging their product against a given 6 calendar month, so -- 7 MR. MACKIE: That's fine. And I'm not 8 quibbling over three days. 9 But then let's turn to the ten-day storage 10 service. So could you give us the terms and conditions 11 of withdrawal rates under a ten-day service. I assume 12 that's peaking service. 13 MS GALBRAITH: It is peaking service, and it 14 would be ten days of 10 percent per day. 15 MR. MACKIE: Thank you. 16 MS GALBRAITH: No ratchets. We did not sell 17 any of that in this offering. 18 MR. MACKIE: Thank you. 19 And if you turn over to page 5, which is 20 headed, "Storage Service Offer," can you explain the 21 injection rates at the top of page 5? 22 Let me explain -- 23 MS GALBRAITH: Okay. 24 MR. MACKIE: -- why I am having difficulty 25 with this. 26 How is it that Union is able to accept 27 injection rates of up to 5 percent of the maximum 28 storage balance during December to March peak season, 18 1 when gas is being withdrawn from storage? 2 MS GALBRAITH: Those injection rights at 5 3 percent of the maximum storage balance are based on the 4 peaking service. I think we're missing a couple of 5 pages. 6 Yeah, that is definitely the peaking service 7 injection right entitlement. If you go down to the 8 bottom of the page where it says "base," you will see 9 that the injection rights are December 1 to September 10 30th. There are no firm entitlements in October or 11 November. 12 It looks like we are missing a page, which 13 would relate the peak service. I apologize about that. 14 MR. MACKIE: That's fine. That's why we have 15 these technical conferences, to... 16 MS GALBRAITH: Yeah. For all intents and 17 purposes, you can ignore the injection rights at the 18 top, because we did not sell any peaking-related 19 services. There is nothing related to this application 20 on the peaking. 21 MR. MACKIE: Right. And of course you will 22 undertake to provide that missing page to all parties as 23 soon as it is convenient to do so. 24 MR. LESLIE: Yes. 25 MR. MACKIE: Thank you. 26 Now, lower on that same page, also under the 27 "base," Ms Galbraith, injection rights for firm service. 28 The injection rates for firm service appear, to me at 19 1 least, to be very low. Am I correct that the time 2 required to achieve 100 percent injection under these 3 rates would be 150 days? 4 MS GALBRAITH: Yes, sir. 5 MR. MACKIE: I had always understood that 6 Union's injection season, that is, its integrated 7 storage system injection season, generally extends from 8 April the 15th to about September the 30th, after which 9 Union allows the pools to stabilize for pressure control 10 and inventory control reasons. 11 Have I got that generally correct, April 15th 12 to September 30th? 13 MS GALBRAITH: Well, I... I would say it's 14 probably more April 15th through October 31st. We have 15 different pools stabilizing at different points in time. 16 MR. MACKIE: Fair enough. Let's take your 17 extended window. 18 Because from April 15th to September 30th 19 there are 168 days. 20 MS GALBRAITH: Yes. 21 MR. MACKIE: Well, add 30 now for September, 22 so we have 198 days. But your clients have to achieve 23 all their injection over 150 days within that 198 days. 24 MS GALBRAITH: That's correct. 25 MR. MACKIE: That seems to me to be a fairly 26 limiting contract. 27 MS GALBRAITH: Well, it certainly was not an 28 issue at all with any of the customers, and nor is it an 20 1 issue with any of the M12 customers. These are very 2 standard storage parameters. 3 MR. MACKIE: Yes. I'm not criticizing the 4 open season bidding package. I am just trying to come 5 to grips and have an understanding of the contract that 6 you are seeking Board approval of. 7 And if we could move on to page 7, which is 8 entitled, "Terms and Conditions," I have a question on 9 item 4. 10 Have the agreements referred to been executed 11 between Union and its storage customers? 12 It says that "an agreement between the 13 customers and Union shall be executed within 60 days." 14 MS GALBRAITH: Yes. 15 MR. MACKIE: And those are the amending 16 agreements that you have provided, then, attached to 17 each of the gas storage contracts? 18 MS GALBRAITH: That's correct. 19 MR. MACKIE: Okay. Thank you. 20 Now, could we look at the first gas storage 21 contract, which appears under tab 4. And that's the 22 contract between Union and Duke Energy Limited, contract 23 LST-007. 24 Now, according to the first page of that 25 contract... and I am not referring to the amending 26 agreement, but the first page of the storage contract 27 itself, it was negotiated in May of 1998. That's 28 correct? 21 1 MS GALBRAITH: The storage contract was dated 2 May of 1998. 3 MR. MACKIE: So it was negotiated prior to 4 that, and then it was agreed to or executed around that 5 date. 6 Now, that appears to be the modified version 7 of the Phase I contract that was presented to the Board; 8 is that correct? 9 MS GALBRAITH: Yes. 10 MR. MACKIE: Where do I find the Phase II 11 contract between Union and Duke Energy Marketing? 12 MS GALBRAITH: This is... the phase, this is 13 the Phase II contract. It really has, all the 14 amendments are dealt with in the letter schedule. 15 MR. MACKIE: So, if we go back, then, to the 16 letter dated March... 17 MS GALBRAITH: 26th. 18 MR. MACKIE: -- the 26th, 1999, that appears 19 to amend what was previously the Phase I contract, to 20 now incorporate the previously approved Phase I volumes 21 and to add to it the proposed Phase II storage volumes; 22 have I explained that vaguely correctly? 23 MS GALBRAITH: That's correct. Yes. 24 MR. MACKIE: Thank you. You do seem to get a 25 little tied up with your storage contracts. 26 So basically the phase one and the Phase II 27 volumes have all now been incorporated or amalgamated 28 into this one contract? 22 1 MS GALBRAITH: Subject to Board approval and 2 execution. 3 MR. MACKIE: Yes. Yes, that's understood. 4 And without going through each of them, does 5 that also hold true for the other storage contracts, or 6 the contract with Carthage Energy services, for example? 7 MS GALBRAITH: Only with Carthage Energy. 8 Only Carthage and Duke had storage in both phases. Coast 9 and PG&E are -- well, maybe. 10 MR. MACKIE: That's correct. The -- 11 MS GALBRAITH: The other two only had Phase II 12 storage awards. 13 THE REPORTER: I'm sorry, PG and E? 14 MS GALBRAITH: P, G, ampersand, E. And Coast 15 like the soap. 16 MR. MACKIE: So the Coast Energy Canada and 17 the PG&E Energy contracts both commenced on April 1, 18 2000? 19 MS GALBRAITH: Yes. 20 MR. MACKIE: Now, the next contract you have 21 provided, with ERI Services Canada Limited, and that's 22 contract LST-009. 23 MS GALBRAITH: Yes. 24 MR. MACKIE: Now, that contract, I believe, 25 has subsequently been assigned, that's the contract 26 that's been assigned to Coast Energy Canada Limited? 27 MS GALBRAITH: Yes. Coast Energy purchased 28 ERI, the assets. 23 1 MR. MACKIE: I see. Has Union ever executed 2 the assignment agreement entitled, "Assignment 3 Innovation Agreement?" We have an unexecuted copy in 4 the evidence. 5 MS GALBRAITH: Yes, you do, because Union will 6 not sign that until we have approval of the Board of the 7 assignment. 8 MR. MACKIE: I understand. Thank you. 9 Now, after the completion of the oral hearing 10 in Phase I, Union informed the Board that the contract 11 it had negotiate with Kimbel Trading had been assigned 12 to Carthage Energy Services. Should the Board assume 13 that the trading of gas storage contracts will continue 14 amongst third parties? 15 MS GALBRAITH: I'm not sure I understand your 16 question, Chris. 17 MR. MACKIE: Yes. I'll try again, Ms 18 Galbraith. 19 At the time of the hearing of the Phase I 20 application, Union had presented a contract for 21 approval, and that contract was between Union and Kimbel 22 Trading? 23 MS GALBRAITH: Yes. 24 MR. MACKIE: Subsequent to the hearing of the 25 evidence in Wallaceburg, Union informed the Board that 26 that contract had subsequently been assigned from Kimbel 27 Trading, Carthage Energy Service Inc. 28 MS GALBRAITH: Yes. 24 1 MR. MACKIE: Sorry, Carthage Services. And I 2 have referred to that, perhaps incorrectly, as trading 3 of gas storage cracks, one party purchasing a gas 4 storage contract from another party. I am referring to 5 that as trading of gas storage contracts. 6 MS GALBRAITH: All right. 7 MR. MACKIE: Would you like to characterize 8 that differently? 9 MS GALBRAITH: I would -- yes, I would. The 10 Carthage situation with Kimbel was Carthage was always 11 the financial backstopper for the indemnification of the 12 Kimbel contract. 13 When it got to the point where Carthage was 14 providing substantially more, Kimbel had all the 15 paperwork to do business in Canada at the time that the 16 open season was done. Carthage, you know, merely took 17 over what it was financial supporting anyways, even 18 though that was a behind-the-scenes thing. So it's not 19 really a trading issue. 20 The Coast situation is, it is very frequent in 21 this business that one company purchases another 22 company. It's very frequent that one company changes its 23 subsidiaries around, so we, you know, we'll see a, you 24 know, Duke has gone through how many purchases and title 25 changes and reorganizations. 26 I would not say that parties are typically in 27 the habit of trading their storage contracts. They are 28 purchasing these contracts to supplement their gas 25 1 supply portfolio, that they can take to the marketplace. 2 Both of these situations weren't what I would 3 call trading, and I don't expect to see trading, as you 4 would classify it. 5 MR. MACKIE: Well, thank you for that 6 explanation, because with that explanation I agree that 7 "trading" is not the appropriate characterization. 8 I now understand that this was really the 9 acquisition of an asset of one corporation by another, 10 which is quite different from what I understood the 11 situation to be when I had identified it or 12 characterized it as trading. 13 However, that still gives rise, I feel, for 14 concern, and the concern is this, that given that the 15 Ontario Energy Board Act requires the Board to approve 16 the parties for such storage contracts, what precautions 17 or safeguards has Union taken to ensure that title 18 changes and/or trading, were it to develop, of storage 19 contracts will be brought to the Board's attention for 20 approval before that assignment of the contract occurs? 21 MR. LESLIE: Chris, I am advised that in the 22 case of Kimbel Trading and Carthage, the assignment took 23 place while the Board was considering the evidence from 24 the oral hearing, and that the approval that was 25 ultimately granted was in effect an approval of the 26 contract by them with Carthage. 27 I would anticipate that any future assignment 28 of a contract, either a similar kind or under different 26 1 circumstances, would have to be approved by Union, and 2 that Union would have to ask the Board to also approve 3 that assignment under the Act before it could be 4 effective. 5 MS GALBRAITH: And in fact, Chris, or Mr. 6 Mackie, if you were to refer to -- sorry -- to our 7 miscellaneous provisions in the contract under article 8 13, we do have a clause that says shippers may not 9 assign this contract without the written consent of 10 Union and the approval of the OEB. 11 And should Union consent to the assignment, 12 Union will apply for OEB approval, blah blah blah. 13 Which I am informed is a marketing term. I always 14 thought it was a legal term. 15 MR. MACKIE: Thank you. I think you're 16 covered. 17 Now, I have a question of the contract with 18 Kimbel Trading. That is contract LST-006. And that 19 also has an amending agreement attached to it. 20 And if you could look at the top of page 2 of 21 that amending agreement, particularly item 2, which 22 amends the storage volume of 4.0 BCF for the period 23 April 1, 1999 to March 30th, 2000. 24 Now, if you could keep your finger on that and 25 then refer to article 5.01 of the contract, you will see 26 that the maximum storage referred to here is 4.276 27 million gigaJoules. 28 MS GALBRAITH: Yes, that is correct. 27 1 MR. MACKIE: And I am assuming, then, that 2 this is equivalent to the 113,311 x 10(3)m(3) referred 3 to in the amending agreement? 4 MS GALBRAITH: Yes. In E.B.R.O. 499 we sought 5 approval and obtained it from the Board to convert 6 metric volumes to gigaJoules in compliance with the 7 GISB. So this is simply a conversion pursuant to that. 8 MR. MACKIE: So why are your new contracts, 9 then, not all being written and expressed in gigajoules? 10 MS GALBRAITH: Because... they will be. 11 MR. MACKIE: Okay. And this has occurred 12 because you are amending a previous, previously approved 13 Phase I contract? 14 MS GALBRAITH: Yes. 15 MR. MACKIE: To the Phase II. Okay, thank 16 you. I just found that rather confusing. 17 Thank you, Ms Galbraith. I have finished with 18 the contracts. Will you turn to table 2 at page 2-5 of 19 your prefiled. This is a summary table of the Phase II 20 contracts. 21 The total volume under contract from that 22 table is 187,132 x 10(3)m(3); is that correct? 23 MS GALBRAITH: Subject to the math, yes. 24 MR. MACKIE: Well, subject to my calculator 25 working. 26 Now, just suppose for a moment that Union does 27 not receive Board approval to develop all three of the 28 gas storage pools as per this application. How does 28 1 Union suggest the Board determine which of the open 2 season contracts to approve and which to reject? 3 MS GALBRAITH: I would suggest that the Board 4 may want to talk to Union prior to its acceptance or 5 rejection of the -- 6 MR. MACKIE: Well, this the opportunity, Ms 7 Galbraith, because the Board will not come back to Union 8 when it is drafting its decision and ask your advice as 9 to how to accept or reject these contracts. 10 MS GALBRAITH: Well, I guess the question that 11 we would, we, the evaluation we would look at -- and 12 firstly we would hope that the Board would certainly 13 approve all of the storage facilities we're looking 14 for -- is we will look at mitigation opportunities to 15 honour the contracts, certainly understanding the 16 reasons why the pool development may or may not occur. 17 You are asking me to give you a very simple 18 answer without giving me a simple set of parameters to 19 work it, work around it. Is it the big pool, is it the 20 small pool, is storage available in the marketplace, do 21 we -- 22 MR. MACKIE: Well, I will help you. 23 MS GALBRAITH: -- have the ability to go out 24 and buy storage to manage it at a cost that's workable 25 for our company? 26 MR. MACKIE: I'll help you. Just assume with 27 me for a moment that, for whatever reason, the Board 28 does not approve either designation or authorize to 29 1 inject for the Oil City pool. Under those circumstances 2 Union would lose 48,500 x 10(3)m(3) of storage space. 3 MS GALBRAITH: That's very true. Is that the 4 working capacity? 5 MR. MACKIE: That is the working capacity. 6 And netting out the short-term storage space that you 7 have available, that is the surplus of 38,368 times 8 10(3)m(3), Union would face a shortfall of 10,132 times 9 10(3)m(3). How could that shortfall be handled if Union 10 expects all of the open season contracts to be approved? 11 MS GALBRAITH: Well, we certainly look at 12 purchasing an alternative service in the marketplace. 13 So it could be handled that way. You know, I guess I 14 would also need to know was there likelihood that it 15 would never be approved or approved in a subsequent year 16 or merely delayed. Those are all factors we would have 17 to take into consideration. 18 MR. MACKIE: They are factors. I recognize 19 that. But I would ask to you recognize that you are 20 presenting the Board, in my view, somewhat of a Gordian 21 knot, when you bring a package of three pools tied to 22 open season contracts and expect to assume that 23 absolutely everything will get approved, otherwise your 24 contracts are going to fall apart. 25 And I am asking you, therefore, to explain, or 26 to suggest to the Board that, if not all your facilities 27 ultimately are approved, how it can do the best it can 28 in relationship to all the interests that it needs to 30 1 satisfy, how it can deal with these open-season 2 contracts. 3 MR. LESLIE: Chris, I think it seems to me 4 that one alternative in the circumstances that you pose 5 would be that the Board would reconvene to hear 6 submissions on how that hypothetical should be dealt 7 with. Because, as Ms Galbraith has suggested, it very 8 much depends on a number of variables that we can't fix 9 right now. 10 My sense is that the underlying question here, 11 for now at least, may be: is there any way within these 12 contracts themselves of assigning priority to one or 13 more a them over the others? 14 And that's a question we can answer now. A 15 hypothetical may be something that we would have to deal 16 with separately, and I suspect the way that would happen 17 would be the Board might reconvene to get submissions on 18 that rather than act without the information. 19 MR. MACKIE: Yeah, I think that's fair 20 comment, Glenn. 21 And I recognize, Ms. Galbraith, you have tried 22 to help as probably best you can. So I'll move on with 23 the balance of my questions. 24 Referring to page 2.2 of your prefiled 25 evidence and table one of that page, and this is a 26 summary table of your existing M12 and C1 long-term 27 storage contracts and their expiry dates. 28 And I am assuming, and I just want you to 31 1 confirm that, as these long-term storage contracts 2 expire, that you will be making that space also 3 available for open season bidding; is that understanding 4 correct? 5 MS GALBRAITH: We will definitely make the C1 6 long-term expiries subject to open season bidding. We 7 are not definitive on the process we will follow with 8 the M12 contract expiries. We also, prior to going to 9 open season, will take into account the requirement, if 10 any, by Union to utilize this space versus alternatives 11 that Union could use for its enfranchised markets. 12 MR. MACKIE: Does Union have any plans to 13 evergreen any of those contracts with its existing 14 customers as they come up for renewal? 15 MS GALBRAITH: The Act doesn't allow for Union 16 to evergreen any storage contracts. 17 MR. MACKIE: The Act may not, but it would 18 still be possible through discussions to enter into such 19 an agreement. 20 MS GALBRAITH: Not without Board approval. 21 MR. MACKIE: Well, that's true. Because 22 basically I am asking when, for example, in the year 23 2000 there's 390 now times 10(3)m(3) of M12 contract 24 space available. And I think in an interrogatory 25 response you have broken down that space available to 26 us. 27 But I am interested in knowing whether that 28 space then would become subject to open tender through 32 1 an open season contract basis, or whether you would 2 first seek to negotiate a renewal of those contracts? 3 MS GALBRAITH: In prior submissions to the 4 Board, we asked the Board to review a renewal process 5 that we would have liked to have followed with all 6 contracts, particularly since at the time we were 7 seeking that approval the GMI contract, which is the 8 390,000, was up for renewal in 1999. 9 It was our proposal that such services, or 10 such renewals would be subject to an open season with 11 some type of right to match given to customers trying to 12 recognize the balance between, you know, customer 13 loyalty, rewarding those that have used your system, you 14 know, being, being a good partner in the business you do 15 with customers. 16 The Board actually came back and said, Well, 17 you know, 1999 is way too quick to do anything with GMI, 18 review it for two years and go negotiate with them. 19 And that's what we did, and we'll be bringing 20 that forward for Board approval shortly. 21 We do not have a firm policy on how we will 22 renew or evergreen existing longer-term storage 23 contracts. We would like to see how the process with 24 the renegotiation of the contract with GMI goes before 25 we get headed down a path on approvals. 26 The C1 contracts, it is our intent to take 27 those back to the market at this time, but we would like 28 to look at a policy that would... reward customers who 33 1 take longer term service with us. We don't have such a 2 policy in place. 3 And we think going to open season is a good 4 indicator of what the market price should be, and that 5 should give us all greater comfort that we're getting 6 good prices for the service. 7 MR. MACKIE: Thank you, thank you. 8 Could you turn to Schedule I, please, and I am 9 just finishing off now with some questions that relate 10 to the overall need for the project development and the 11 storage space that Union forecasts it will need compared 12 with its forecast of storage space available. 13 If you would look at line 1 in that table, 14 comparing 1999 with 1998, the difference would reflect 15 the Phase I document of the Century pools. That's 16 correct, Ms. Galbraith? 17 MS GALBRAITH: Generally, yes. 18 MR. MACKIE: Why is that increase only 175.2 x 19 10(6)m(3), when the Phase 1 development for 1999 was 20 181.8 times 10(6)m(3)? 21 --- Pause 22 MS GALBRAITH: Because there were changes in 23 the utilization of customers, if you look at line 8. 24 MR. MACKIE: Line 8? 25 MS GALBRAITH: Yes. 26 MR. MACKIE: Which is contract carriage? 27 MS GALBRAITH: Oh, yes, and line 7 changed 28 too. 34 1 MR. MACKIE: But how does that affect the base 2 of company-owned storage in line 1? 3 Isn't that your starting point for this table? 4 MS GALBRAITH: Yes. Yes, it is Mr. Killeem's 5 starting point, I think. 6 MR. MACKIE: Sorry, Mister whom? 7 MS GALBRAITH: Mr. Killeem. 8 MR. MACKIE: Killeem, yes. 9 MS GALBRAITH: K-I-L-L-E-E-M. 10 MR. MACKIE: Thank you. 11 Are you uncomfortable dealing with this table, 12 Ms Galbraith? 13 MS GALBRAITH: Yes. 14 Yes, it is 175.2, the difference there. I 15 think it is probably because of that comment in line A, 16 of line 3, "is lower by 6.6 due to minor changes in 17 expected working capacity." 18 MR. LESLIE: Chris, we think there is an IR 19 that deals with this, and we are going to try and 20 identify it, but at the very least we will revisit it 21 with Mr. Killeem, if the IR doesn't. 22 MR. MACKIE: Well, I don't want to continue 23 down this path, then, if Ms Galbraith is -- this is not 24 her evidence and she is uncomfortable -- because I have 25 a number of very specific questions. I was just trying 26 to reconcile and balance these figures. 27 Mr. Killeem is not here, obviously. So I 28 would be content to withhold those questions, and it 35 1 would be then part of our cross-examination of the 2 hearing. But we need to know then from you that 3 Mr. Killeem is going to be available. 4 MR. LESLIE: Yes, sir. Alternatively, if it 5 suits, you could tell us what the questions are, and we 6 will get the answers for you. 7 MR. MACKIE: All right. I would be happy to 8 put you on if Ms Galbraith is comfortable soldiering on. 9 MS GALBRAITH: If I can't answer them, I will 10 just say so. 11 MR. MACKIE: I had a similar question, then, 12 from 1999 to the year 2000 the difference of the 13 increment in storage available is 230.7 times 10(6)m(3), 14 and we understand that the three pools of Phase 2 15 contribute 225,000 of that volume. I was, therefore, 16 interested in knowing what made up the balance of 5.7 17 times 10(6)m(3). 18 MS GALBRAITH: I will pass on that one. 19 MR. MACKIE: If I could just add to that, for 20 the record, that I cannot get the figures to work out 21 because, of course, there is also an increase in the 22 Phase II development from Year 1 to Year 2 of 9.2 times 23 10(6)m(3). When you factor that in, the imbalance is 24 still there. 25 Would you know, Ms Galbraith, what accounts 26 for the further increase of 50 times 10(6)m(3) in the 27 year 2000 -- 2001? 28 MS GALBRAITH: Yes, I do. 36 1 MR. MACKIE: Thank you. 2 MS GALBRAITH: That would be projected future 3 space that we would look at developing, which we have 4 not been in front of the Board on but which we would 5 plan on looking at. 6 MR. MACKIE: So without becoming too specific, 7 that could be either, for example, a further pool to be 8 developed of the order of 2 Bcf, or it could result from 9 delta pressurizing your existing pools, or further delta 10 pressurizing some of your existing pools? 11 MS GALBRAITH: Yes. 12 MR. MACKIE: Right. 13 Can you just remind me about the 19.3 times 14 10(6)m(3) in line 2 which is unavailable working space? 15 It appears to be permanently unavailable. What is the 16 explanation for that? 17 MS GALBRAITH: You see, I don't recall the 18 specifics of that, but that question was asked and 19 responded to in writing in Phase I, so we may be able to 20 get a copy of that IR at the break. 21 MR. MACKIE: Yes, there was some information 22 provided. That is why I asked whether you could remind 23 me. 24 My recollection is that it is related to space 25 which is unavailable within the Sombra pool. 26 MS GALBRAITH: I think that -- 27 MR. MACKIE: I cannot recollect, though, why 28 it is unavailable or how come it can remain unavailable 37 1 for so long, and if it is permanently unavailable, why 2 it is even part of your inventory of storage space in 3 the first place. That is the dilemma. 4 MS GALBRAITH: I think those questions would 5 be better asked of Mr. Marusic. 6 MR. MACKIE: That would be the Facilities 7 Panel to help with that. 8 No, that's fine. Thank you. 9 I had a few more questions on that table, but 10 I think I am going to pass, and we will hope that 11 another witness, maybe Mr. Killeem or the Facilities 12 Panel, can help with that. 13 Thank you. Those are Board staff's questions 14 on the open season contract. Thank you. 15 Other intervenors, please. 16 MR. VOGEL: I have a few questions in this 17 area. 18 With respect to the need for facilities and 19 your response to a couple of the IRs of the LCSA, as I 20 understand it the send-out model that you have referred 21 to doesn't provide a least-cost alternative for Union to 22 service the requirement of ex-franchised customers. Is 23 that correct? 24 MS GALBRAITH: No. It provides it for the 25 enfranchised customers from Union who manages the gas 26 supply for. 27 MR. VOGEL: Now, in response to one of 28 Mr. Mackie's questions, you indicated that if part of 38 1 this application was not approved Union would then have 2 to consider purchasing the service elsewhere in the 3 marketplace. 4 Following up on that line of questioning, make 5 the assumption that none of Phase II was approved, and 6 as you indicated in your response to interrogatory 7 No. 3, Union's alternative at that point would be to 8 purchase service from a third party, what is the cost, 9 what would the cost to Union be of purchasing service in 10 the marketplace to replace the storage proposed in the 11 Phase II development? 12 MS GALBRAITH: It would depend on how Union 13 were to purchase that service. If we were to purchase 14 that long-term, we would expect to break even. If we 15 were to purchase it short-term, we would expect to lose 16 money. 17 MR. VOGEL: What I am interested in, in order 18 to service the contracts which are the basis of this 19 application, I am interested in a lease cost alternative 20 to Union if this application is not approved. 21 My question to you is, has that been 22 calculated or can it be calculated? What is the lease 23 cost alternative to Union of purchasing service 24 elsewhere if this application is not approved? 25 MS GALBRAITH: And I would expect that the 26 lease cost alternative to Union would be about break 27 even at this point in time. 28 MR. VOGEL: That is for these contracts which 39 1 are being considered by the Board in support of this 2 application? 3 MS GALBRAITH: Yes. 4 MR. VOGEL: That is break even over what 5 period of time? 6 MS GALBRAITH: Over the term of the contracts. 7 MR. VOGEL: Would there be a loss to Union in 8 the short-term? 9 MS GALBRAITH: Maybe. 10 MR. VOGEL: Has that loss been calculated or 11 capable of calculation? 12 MS GALBRAITH: It has not been calculated. 13 MR. VOGEL: Is it capable of calculation? 14 MS GALBRAITH: It is a matter of math, I 15 expect. 16 MR. VOGEL: Would Union undertake to do that? 17 MS GALBRAITH: I don't exactly understand what 18 you are asking for. 19 MR. VOGEL: I am asking for the lease cost 20 alternative, if this project does not proceed, for Union 21 to purchase this service for these contracts in the 22 marketplace. 23 MS GALBRAITH: I have indicated to you that we 24 would break even. 25 MR. VOGEL: Yes. 26 MS GALBRAITH: That is revenue minus cost 27 basically equals zero. I don't understand the further 28 calculations you are looking for. 40 1 MR. VOGEL: You told me that was in the 2 long-term. I asked you in the short-term. 3 MS GALBRAITH: But that was the term of the 4 contract. 5 MR. VOGEL: Yes. I am asking you in the 6 short-term, would there be a loss to Union? You 7 indicated, yes, there would, and that that loss could be 8 calculated, but it hasn't been calculated. 9 Now, can you undertake to calculate it? 10 MS GALBRAITH: Well, I guess -- 11 MR. LESLIE: Mr. Vogel, maybe I better get 12 into this, because I am frankly having a little 13 difficulty here. 14 How can you calculate something without 15 knowing what your contract terms are? 16 MR. VOGEL: Well, you have the contract terms, 17 Mr. Leslie. 18 MR. LESLIE: Actually, I am asking the 19 question of my own witnesses at this point. 20 MS GALBRAITH: Let me just say what I was 21 referring to. I am not looking at a 30-year term. I am 22 saying that if we were looking to provide service for 23 these contracts, that we would look at purchasing a 24 service to break even in the short run. 25 As far as a short-term loss or a profit, there 26 may very well be an opportunistic loss on the short-term 27 space because we don't have it built, because your 28 assumption is the storage is not being built. We would 41 1 not go to the market to buy short-term space to provide 2 short-term service. 3 So if the facilities were built, in the very 4 short-term, ie. this year, we forecast the revenue to be 5 51 cents for the short-term piece. Right now we 6 probably could get a little more money if we can't take 7 it to market because we don't have approval for the 8 space. 9 So there may be in the one-year time frame an 10 opportunity loss. That is all I was saying. But we 11 wouldn't look to go provide that service or replace that 12 service if the facilities are not approved. 13 MR. LESLIE: In the short-term, but you would 14 look at long-term replacement. 15 MS GALBRAITH: Just the long-term contracts, 16 yes, that is what we would look at. We would not look 17 to replace the short-term contracts were the facilities 18 built. We have allowed for a portfolio of terms 19 including one-year terms. We forecast revenue against 20 that short-term. 21 MR. VOGEL: Pursuing that then, if what you 22 did was you replaced it with a long-term alternative, 23 the costing of that and when you would break even would 24 depend upon a revised DCF analysis. Is that right? 25 MS GALBRAITH: I wouldn't do a DCF analysis on 26 it. I quite frankly would look at how much these 27 contracts cost over the next 5-6 years, and I would make 28 a business case on those 5 or 6 years against what I 42 1 could purchase the service for in the market. I could 2 ask Ms Callingham to run that through the DCF model and 3 it would say revenue minus cost, zero, zero, zero. 4 MR. VOGEL: But my question is would that be 5 from year one, is that what you are telling me? You 6 would break even in year one? 7 MS GALBRAITH: No. I would have to look at my 8 five-year package, or my four to six-year package 9 because we are looking at four to six-year contracts. 10 MR. VOGEL: Well, I guess that is what I am 11 asking you to do then, is look at your five-year or your 12 six-year package and define for me, calculate for me 13 these cost alternatives to the Phase II development. 14 Can you do that? 15 MS GALBRAITH: It is not an equivalent 16 alternative, sir. 17 MR. VOGEL: Well, I understand it is not a 18 desirable alternative from Union's perspective. 19 MR. LESLIE: No, she said "equivalent", and I 20 am perhaps if you can amplify what you mean by that, it 21 would help. 22 MS GALBRAITH: Are you asking me to amplify? 23 MR. LESLIE: What you meant by your last 24 statement, yes. 25 MS GALBRAITH: What I would be looking at is 26 managing storage over a four to six-year period to meet 27 the contractual term. I am not looking at an equivalent 28 which has four to six DCF of contracts for a term plus 43 1 space available to take to the marketplace, right, in 2 the short run because I am not going to replace that 3 space, I am not going to have space that is developed 4 and available as part of the portfolio mix of contracts 5 over 30 years. 6 From a marketing point of view, I would from a 7 marketing point of view look at this and say 8 strategically is there value in me replacing these 9 contracts and break even? That would be the questions 10 that I would ask myself. 11 There are the other benefits, the other things 12 that are different. What this project does that we 13 don't value is it gets gas into Ontario and this gas 14 becomes available for anyone to purchase in the province 15 of Ontario. It is here. The equivalent service I am 16 looking at doesn't net gas, expect on a contractual 17 basis. It is subject to the transports to get it here. 18 MR. VOGEL: Let me ask you a question about 19 that open season storage contracts. 20 In response to Board Interrogatory No. 2, you 21 made reference to a new part and market price C1 storage 22 agreement, which is to be filed with the OEB for 23 approval. That is a new form, a precedent form of 24 agreement. Is that contained in the material anywhere? 25 MS GALBRAITH: No. 26 MR. VOGEL: Does it exist? 27 MS GALBRAITH: I'm sorry. It is a contract 28 very similar in form to the contract filed. But the 44 1 contract that we are talking about that has been -- that 2 we are making application to the Board on has not yet 3 been filed with the Board. 4 MR. VOGEL: Does it exist? 5 MS GALBRAITH: The contract negotiations are 6 still being completed. 7 MR. VOGEL: When do you expect to be in a 8 position to file it? 9 MS GALBRAITH: The new year. 10 MR. VOGEL: Excuse me? 11 MS GALBRAITH: The new year. 12 MR. VOGEL: Prior to the hearing in the 13 centre? 14 MS GALBRAITH: I would hope so. 15 MR. VOGEL: And it is your anticipation that 16 if approved by the OEB that formal contract being 17 negotiated would serve as the basis for future pricing. 18 Is that a correct understanding? 19 MS GALBRAITH: I don't understand where you 20 are reading that from, sir. 21 MR. VOGEL: I am looking at the last paragraph 22 of your response to Interrogatory No. 2. 23 MS GALBRAITH: Yes. And this was the 24 discussion that I had with Mr. Mackie really relating to 25 what is the process we will utilize to come to market or 26 to go to market for ex-franchise service contracts as 27 well as renewal issues that happen on expiry of the 28 contracts. 45 1 MR. VOGEL: And what I am understanding from 2 your response, and you correct me if I am wrong, is that 3 this new formal contract that has yet to be filed with 4 the Board is your anticipated model for future 5 contracts. Is that correct? 6 MS GALBRAITH: No. That is incorrect. The 7 contracts that are filed here are the model for this 8 renewed contract. They are the market-based contracts. 9 They are standard form contracts. We are dealing with 10 the process of moving a customer from cost of service 11 space rates here to market-based rates. 12 MR. VOGEL: Yes. 13 MS GALBRAITH: We underwent a process, which I 14 discussed with Mr. Mackie, regarding that we would want 15 it to go to open season and the Board said that wasn't 16 enough time for this first time through. And then we 17 had this other open season that basically established a 18 market price for the time frame. So we had that 19 utilization when we negotiated the extension or the new 20 contract for the renewal. That is the process to which 21 I speak of. 22 MR. VOGEL: I see. So this reference to new 23 market price C1 storage agreement, really that is the 24 open season process that you were talking to Mr. Mackie 25 about. Is that correct? 26 MS GALBRAITH: It is the open season process 27 and it could be the process for renegotiation of the M12 28 contracts as they expire, which are cost service 46 1 contracts but as franchised parties. Those contracts 2 will go to the new C1 market-based prices on expiry. 3 MR. VOGEL: When you refer to new market-based 4 pricing, are you referring to any other component than 5 the open season bidding that you discussed with 6 Mr. Mackie? 7 MS GALBRAITH: No. Actually when I read that 8 paragraph, Mr. Vogel, the reference is to the new 9 storage agreement. 10 MR. VOGEL: Yes. 11 MS GALBRAITH: It is a market price C1 storage 12 agreement. That would be kind of the title. 13 MR. VOGEL: Yes. 14 MS GALBRAITH: This is a new agreement which 15 replaces an old M12 cost of service storage contract. 16 MR. VOGEL: Right. And I am just trying to 17 get at what are the differences. And seeing as I 18 haven't seen the new formal contract, I need you to tell 19 me what are the differences between the old contract and 20 what you are describing now as the new market price 21 contract? 22 MS GALBRAITH: It is primarily related to just 23 updates over time. 24 MR. LESLIE: Mr. Vogel, if it helps, I think 25 the debate here historically was the extent to which 26 customers like GMI and Enbridge and others who were 27 served under M12 service, which is a cost of service 28 rate, could expect to continue to be served for storage 47 1 at least at such rates. And there was a two year 2 extension, as I understand it, of the GMI cost of 3 service contract. They have now negotiated with GMI a 4 replacement contract that contemplates what are 5 described as market-based rates, i.e., market prices. 6 And that contract will be put in front of the Board for 7 its approval. 8 But the differences between the old M12 9 contracts and whatever is being negotiated with GMI are 10 probably not all that material to this -- this 11 proceeding. 12 MS GALBRAITH: There is no -- 13 MR. VOGEL: Perhaps I could just as you this, 14 Ms Galbraith. What is the basis then for the market 15 prices in the new formal contract? Can you describe 16 that process for me or the basis for those prices? 17 MS GALBRAITH: That was the open season 18 process. 19 MR. VOGEL: And that is simply my question. 20 It was just the open season process that you were 21 discussing with Mr. Mackie that you are talking about. 22 Those are my questions, Mr. Mackie. 23 MR. MACKIE: Thank you, Mr. Vogel. 24 Mr. Gorman, does CanEnerco have any questions? 25 MR. GORMAN: No, we don't. 26 MR. MACKIE: Thank you. Are there any other 27 people present that -- 28 MR. LIDDLE: Excuse me, Chris, I just wanted 48 1 to ask a couple of questions here. If I understand 2 correctly, this panel is the one dealing with the 3 section 6 -- 4 MR. MACKIE: Sorry. The court reporter is not 5 getting your voice. 6 MR. LIDDLE: This is Mr. Liddle. It is 7 Liddle, with "Ds". L-I-D-D-L-E. 8 MR. LESLIE: Just so I have got things 9 straight, Mr. Liddle, who do you represent? 10 MR. LIDDLE: I am a consultant to the Lambton 11 Association. 12 MR. LESLIE: Oh, I see. Okay. 13 MR. LIDDLE: Let me go back then. 14 I understand that this is the panel that is 15 addressing the section 6 economic feasibility area? 16 MS GALBRAITH: That is correct. 17 MR. LESLIE: I think we are going to deal with 18 that next. That is for the next iteration of questions. 19 MS GALBRAITH: Weþre not leaving, sir. This is 20 just deals with the open season at this point. 21 MR. LESLIE: Sorry, I don't mean to cut you 22 off. 23 MR. LIDDLE: Oh, that is fine. It is just so 24 I understand. 25 MR. LESLIE: As I understand the proceeding, 26 they are going to deal with that is in the next 27 generation. 28 MR. LIDDLE: In a separate -- okay, I will 49 1 wait until the next round, then. 2 MR. VOGEL: Mr. Leslie, I thought I had 3 indicated in the beginning but the gentlemen sitting 4 behind me are Mr. Liddle, who has introduced himself, 5 and Dr. Napier, both of whom are consultants for Lambton 6 County Storage Association. 7 MR. LESLIE: You probably did and I had just 8 forgotten. Thank you. 9 MR. MACKIE: Are those all the questions then 10 on this area of the evidence. I am told that our coffee 11 and muffins have arrived. So we would like to take a 12 ten-minute break now. We are providing coffee and 13 muffins to try and discourage people from disappearing 14 downstairs into the bowels of the building, not to be 15 seen again for the next half an hour or so, which tends 16 to happen at our hearings. So if folks could refresh 17 themselves and be back here in 10 minutes, then we will 18 push on. Thanks very much. 19 --- Upon recessing at 1026 20 --- Upon resuming at 1042 21 MR. MACKIE: Ladies and gentlemen, we would 22 like to continue with this panel, with project costs and 23 economic feasibility. 24 Are there any parties that would like to go 25 ahead of Board staff? 26 There being none, we will kick off and both 27 Wilf Teper and myself will have questions in this area. 28 Wilf is going to start. 50 1 MR. TEPER: Good morning, again. 2 First question -- in Interrogatory 87, we 3 asked the question about the 10 per cent contingency on 4 the project costs. My question is: In respect of the 10 5 per cent contingency, in Union's forthcoming rates 6 application, have these capital costs associated with 7 the Century II Project -- has the 10 per cent 8 contingency been included? 9 MS CALLINGHAM: Mr. Mallette is responsible 10 for that answer and is on another panel. 11 It's my understanding that it is. But that 12 question would be better asked of another panel, dealing 13 with the costs. 14 MR. TEPER: All right. But -- 15 MS CALLINGHAM: My area of evidence, in this 16 proceeding, relates to the economic feasibility -- 17 MR. TEPER: All right. I will proffer it to 18 that panel the rate -- 19 MS CALLINGHAM: All right. 20 MR. TEPER: All right. In Interrogatory No. 21 89, in that interrogatory, we asked questions about DCF 22 analysis on the various pools on a standalone basis and 23 we received a fairly comprehensive response, with the 24 economic analyses, effectively, in summary form. 25 Could you please explain the assumptions made 26 in determining the revenues for the standalone prices? 27 MS CALLINGHAM: Yes. Because there's not a 28 direct match with the contracts in any specific pool 51 1 that we are requesting approval on, I took the average 2 price of the revenue from the sale of market-based 3 storage, in the total combined pool analysis, and 4 applied that to the space that was made available for 5 each individual pool. 6 MR. TEPER: So, basically, the unit prices per 7 individual case were the same? 8 MS CALLINGHAM: That's correct. 9 MR. TEPER: So it's not as if there was any 10 cherry-picking of, for example, the -- if it was a 11 small-capacity case that it took the best bids and 12 worked their downwards. It was the average for all the 13 bids? 14 MS CALLINGHAM: Correct. 15 MR. TEPER: All right. My next question is 16 about the assumptions on the pipeline facilities costs 17 for the Mandaumin and Bluewater cases as standalone 18 cases. 19 Were the pipeline facilities costs prorated 20 based on the individual storage capacities? 21 MS CALLINGHAM: Yes. A description of that is 22 indicated in Note 2 to the response to Question 89, and 23 the shared pipeline costs, for the Mandaumin and 24 Bluewater Pools, were allocated based on the working 25 space. For each pool. 26 MR. TEPER: Right. So I can assume that it's 27 not as if somebody did a calculation, if it was the 28 Mandaumin Pool alone, what size pipeline would we need 52 1 and how much would it cost, and if it were the Bluewater 2 Pool alone, what size pipeline would we need and how 3 much would that cost? It's just done on a pro rata 4 basis? 5 MS CALLINGHAM: That's correct. 6 MR. TEPER: Had it been done on the latter 7 basis that I have just described, what would have been 8 the direction of the economics? 9 I can elaborate if you like. 10 MS CALLINGHAM: It's my understanding that, 11 directionally, it would produce a higher cost scenario 12 than the approach taken in this response and that the 13 economics would actually worsen. 14 MR. TEPER: Thank you. 15 You haven't got that on a quantitative basis? 16 MS CALLINGHAM: We didn't follow that 17 particular approach in responding to this. 18 The facilities people would have to look at it 19 and say, if it was a strictly standalone and one pool 20 was developed absent another, what would the cost be, in 21 each scenario, and that was not. 22 Although, when you have shared facilities -- 23 at least the experience in Phase I, in instances where 24 we had shared facilities, was that it was a cheaper 25 alternative to building separate facilities for each 26 pool as if the others didn't exist. 27 MR. TEPER: Okay. Well, that makes good 28 sense. 53 1 Would you have any objection to running an 2 analysis on that basis? 3 MS CALLINGHAM: The bulk of the work involved 4 in doing that type of analysis rests with the facilities 5 people and I don't know the extent of time and effort it 6 would take, on their part. 7 That would be better directed to -- I don't 8 know what panel it is. Mister -- hmm? -- the facilities 9 panel. 10 MR. TEPER: So, if they gave you the costs, on 11 that basis, you could run it through your model, without 12 too much difficulty? 13 MS CALLINGHAM: That's correct, that could be 14 done on that basis. 15 However, where it could be done that way, I 16 would have to modify my assumptions with respect to how 17 I did the revenues, as well. 18 If you were to develop one pool and not 19 another, it gets back into the question Mr. Mackie had 20 earlier, to Mrs. Galbraith, you would have to make some 21 kind of a prioritized assumption on what contracts would 22 remain in effect and that you couldn't meet, with the 23 working capacity that was available. You either have to 24 go out and buy another alterative that would be more 25 costly, or you would have to cherry-pick, as you say, on 26 what contracts you would maintain -- and that hasn't 27 been done. But that would be a different approach to 28 revenue determination, as well as costs. 54 1 MR. TEPER: Could I ask you to do that 2 discounted cash flow on that basis, using whatever 3 figures the facilities people give you? 4 MS CALLINGHAM: We can certainly make note of 5 that -- and I think that would be up to the Facilities 6 Panel as to when that could be completed, if it can be. 7 MR. TEPER: Thank you. 8 It's fine after the technical conference, as 9 well. 10 Your answer also stands for the Oil City Pool 11 standing alone, that you used the average unit cost for 12 all the contracts and applied it to the Oil City Pool 13 standalone case? 14 MS CALLINGHAM: That's correct. 15 MR. TEPER: Had the Oil City Pool, on a 16 standalone basis, had a PI of less than one but more 17 than 0.8, would Union have included it as a component of 18 the Century II package? 19 MS CALLINGHAM: Our normal acceptance criteria 20 for a project of this nature, on a standalone basis, 21 would be a PI of one, or an MPV of zero or greater, for 22 a storage development project. 23 Were we to have marketed that separately as a 24 completely stand-alone analysis, we would not likely 25 have done it if we were not going to meet our profit, 26 our investment goals, on the project. 27 Because the space associated with this pool 28 was marketed on a combined approach with all the other 55 1 pools involved and because the total MPV of the project 2 is well in excess of zero -- it is positive $4 million. 3 Because we have already marketed the space on that 4 basis, if subsequent events to that had taken place that 5 resulted in the cost being higher than the revenues, we 6 would have to look at whether that -- I would think that 7 we would maintain that we would still do it, yes. 8 MR. TEPER: Would that be part of your 9 portfolio approach to capital projects? 10 MS CALLINGHAM: This relates to your reference 11 to point 8? 12 MR. TEPER: Yes. 13 MS CALLINGHAM: The portfolio approach to 14 capital projects that require that you would do a 15 project at point 8 relates totally to distribution 16 expansion facilities, not facilities of this nature. 17 It is a separate acceptance criteria than what 18 we would follow for a storage development project. 19 MR. TEPER: Thank you. That is news to me but 20 it is nice to know. 21 MR. MACKIE: Ms Callingham, my understanding 22 is that your evidence states in fact that the economic 23 feasibility analysis was undertaken pursuant to the 24 Board's previous E.B.R.O. 134 guidelines. 25 MS CALLINGHAM: That is correct. 26 MR. MACKIE: In which case, there would be no 27 question of a portfolio approach or the project 28 proceeding at a 0.8 profitability index. 56 1 That would not come into question according to 2 the terms under which you have done your economic 3 feasibility. 4 MS CALLINGHAM: No, it would not. A portfolio 5 approach was adopted as part of the E.B.O. 188 6 proceeding which dealt primarily with distribution 7 expansion facilities. 8 MR. MACKIE: I was a little unclear on your 9 final conclusion in your discussion with Wilf, and that 10 is that given that the Oil City Pool is part of a 11 package of facilities, would you in fact proceed with 12 your development of the Oil City Pool if the PI dropped 13 lower than 1.0? 14 MS CALLINGHAM: Yes. 15 MR. MACKIE: Thank you. 16 MR. TEPER: In the supplementary interrogatory 17 89.1, when you did the economics for the Oil City Pool 18 stand-alone, am I correct in saying that what you are 19 saying here in the DFC analysis is that if your unit 20 price for the storage is greater than $18.72 per 21 thousand cubic metres, only then do you reach a PI of 22 one after 30 years? 23 The $18.72 is the annual revenue equivalent of 24 $908,000 a year divided by the storage space of 48.5 25 million cubic metres. 26 MS CALLINGHAM: I understand how you come up 27 with the $18.72 figure. Would you repeat your question 28 as to what you are looking for? 57 1 MR. TEPER: Yes. Basically, my interpretation 2 of this discounted cash flow is that if you get more 3 than $908,000 per year for 30 years from the storage 4 function, then you have a PI of one after 30 years. 5 Is my interpretation correct? 6 MS CALLINGHAM: Yes. The $18.72 represents 7 the average incremental cost, if you will, of the Oil 8 City Pool alone, and you would need an average price of 9 at least that to break even over the 30-year period of 10 the analysis. 11 MR. TEPER: Thank you. That is very clear. 12 Next question is with respect to interrogatory 13 no. 91 and 91.1. 14 My question is: Does the expected additional 15 1,500 person-hours per year for maintenance and 16 operations translate into one more employee, or do you 17 envisage that the additional person-hours will be 18 absorbed by Union's existing staff? 19 MS CALLINGHAM: I am going to have to ask you 20 again to ask that question of Mr. Marusic. We were 21 jointly responsible for this even though his name is not 22 on the response. He came up with that figure, and he 23 would be better able to answer that. 24 MR. TEPER: Okay. I will bump it to him. 25 I am putting this question to you, but you can 26 bump it to Mr. Marusic as well. This is again 27 interrogatory no. 92. 28 You indicate that the net book value of all of 58 1 Union's storage facilities in southwestern Ontario, on a 2 dollars per thousand cubic metre basis, reflecting 3 depreciation, is approximately $103. 4 That is $103 per thousand cubic metres. That 5 is your net book value. 6 Does this figure include the compression 7 facilities and the associated pipelines necessary to 8 compress the gas for storage? 9 I don't know if you came up with that figure 10 of $103. 11 MS CALLINGHAM: I did not come up with that 12 figure, no. I don't know how Mr. Marusic came up with 13 that figure. You will have to confirm that with 14 Mr. Marusic. 15 MR. TEPER: Interrogatories 93 and 93.1. 16 Union has indicated that they expect that 17 Revenue Canada's treatment of $18,037,000 of pipeline 18 costs and gathering will be under capital cost allowance 19 Class 41 category at 25 per cent per annum for the CCA 20 rate. 21 In the case of Century Phase I facilities, did 22 Revenue Canada allow this classification for similar 23 pipeline and gathering facilities? 24 MS CALLINGHAM: In Century Pool Phase I, the 25 same assumption was made for purposes of the economic 26 analysis. That facility is going into service this 27 year, and we have not filed our tax returns for 1999 28 yet. 59 1 I can say that in the past facilities of this 2 nature have been included in that class and Revenue 3 Canada has accepted them. 4 MR. TEPER: Thank you for your answers. 5 Chris. 6 MR. MACKIE: Thank you. 7 Ms Callingham, I had a number of questions 8 relating to the (technical difficulties) cost of the 9 project, but I gather from the discussion so far that 10 they (technical difficulties) probably relate to the 11 facilities section. So I have to forgo those questions 12 with you at the moment. 13 I do have a couple of remaining questions to 14 discuss with you. 15 Would you turn to paragraph 10 of your 16 prefiled. That is at page 6.2 of your prefiled 17 evidence. 18 In paragraph 10 I wondered if you could 19 explain the circumstances that indicates that the 20 revenue stream of the DCF analysis will be inflated over 21 the second year of the contract term by 1.1 per cent or 22 approximately one-half of the Canadian Consumer Price 23 Index? Why is that restricted just for the second year? 24 MS CALLINGHAM: It isn't restricted to the 25 second year. That's when the escalation provision of 26 the contract kicks in. 27 MR. MACKIE: This escalation would continue 28 thereafter on a year-by-year basis dependent upon the 60 1 CPI Index change in the preceding 12 months -- 2 MS CALLINGHAM: During the remaining term of 3 the contract, yes. 4 MR. MACKIE: Yes, that's right, of course. It 5 is tied to -- 6 MS CALLINGHAM: It is tied to the long-term 7 contracts that are outlined under Section 2. That 8 provision is in that contract. 9 MR. MACKIE: That's good. We are going to 10 talk about that. 11 I wanted to find out, where does the 1.1 12 per cent come from? I ask that because Schedule A to 13 the gas storage contracts suggest that the price will be 14 increased each April 1 by half of the CPI increase for 15 the previous calendar year. I couldn't see any 16 limitation to this 1.1 per cent. 17 MS CALLINGHAM: I think it is simply at the 18 time that the revenue estimate was developed for 19 purposes of the DCF that the CPI was considered to be 20 twice that. The 1.1, it will actually vary in 21 accordance with the actual CPI indicator over time. So 22 it will be one-half of the CPI indicator and it was just 23 an estimate of what CPI would be at the time that the 24 revenue estimate was developed. 25 MR. MACKIE: So in this sentence in paragraph 26 10 we could probably take out the reference to the 1.1 27 per cent so it could read "For the term of the open 28 season contracts, to approximately one-half of the 61 1 Canadian consumer price index." Would I then understand 2 the escalation provision correctly; yes? 3 MS CALLINGHAM: Yes. 4 MR. MACKIE: Thank you. 5 Ms Callingham, I have a question concerning 6 the sensitivity analysis that you have provided at 7 Section 6, Schedule 5, if you would just turn to that. 8 --- Pause 9 MR. MACKIE: Now, the base case, as you have 10 described it, established a project PI of 1 over the 30 11 year period, and that resulted in an average storage 12 rate of $16.625 times 10(3)m(3), whereas your evidence 13 indicates that over the life of the project the actual 14 revenue stream will average out at $18.667 times 15 10(3)m(3). Have I understood that correctly? 16 MS CALLINGHAM: I am not clear on the first 17 part of your question here as it relates to the 6.26 -- 18 16.62. That represents the minimum average rate you 19 would need over the 30 year term of the analysis in 20 order to break even and recover your costs. 21 MR. MACKIE: That's right. 22 MS CALLINGHAM: Right. 23 MR. MACKIE: That results in a PI of 1.0. The 24 overall project PI for the development of all three 25 pools you have shown in the line above is 1.10. 26 MS CALLINGHAM: That's correct. 27 MR. MACKIE: We have seen from the response to 28 Interrogatory 89 that on a standalone basis for the Oil 62 1 City Pool the corresponding PI is presently 1.0. 2 MS CALLINGHAM: That's correct. 3 MR. MACKIE: If the overall project PI were to 4 fall from 1.10 to 1.0, just suppose for a moment that if 5 that were to happen, should I assume then that the PI 6 for the Oil City Pool would fall proportionately? So it 7 would fall from 1 to 0.91? 8 MS CALLINGHAM: Based on the methodology that 9 was employed of averaging anything, that would be the 10 case. 11 MR. MACKIE: All things being equal that would 12 be the case? 13 MS CALLINGHAM: Yes, it was prorate -- it was 14 a proration. 15 MR. MACKIE: That is fine. 16 As I have understood your previous discussion 17 to Mr. Teper, you would still proceed with the project 18 as a whole under those circumstances, because the 19 project PI were 1 even though the PI for the Oil City 20 Pool would be down at .91. Have I stated that 21 correctly? 22 I just want to understand what Union's 23 position on this is. 24 MS CALLINGHAM: Well, when I was speaking of 25 that earlier I wasn't referencing it with respect to a 26 PI of 1. I was referencing with respect to that I am 27 making $4 million over and above what I need to, to make 28 my investment goals. If I want to maintain the 63 1 contract, and the subsequent if that happened that that 2 meant that was 3.5, I am still well ahead of the game 3 and I would go ahead. 4 You are presuming now that, from the point of 5 view that all costs have gone up to the point that I am 6 only breaking even on a combined basis? 7 MR. MACKIE: Yes. 8 MS CALLINGHAM: I would still go ahead. 9 That's what I am asking. 10 MS CALLINGHAM: Yes. 11 MR. MACKIE: Thank you. 12 I just want to discuss your response to both 13 Interrogatory 95 or your non-response to Board staff 14 Interrogatory 95, in which we invited you in a 15 supplementary interrogatory to provide us with the 16 aggregated revenue stream for the first few years while 17 all the Phase II contracts were in effect. 18 I understand Union's position that it does not 19 wish to disclose specific contract prices. That was 20 actually not what we were asking you deviously to 21 disclose, but you have suggested here that by 22 providing -- and I thought I was providing you with an 23 olive branch in this supplementary interrogatory, but it 24 got chewed up and projected. 25 MS CALLINGHAM: Sorry about that. Sorry about 26 your luck. 27 MR. MACKIE: That's fine. 28 I just want to explore with you your lack of 64 1 willingness to provide the aggregate figure for the 2 first four years during which most of those contracts 3 were in existence. 4 MS CALLINGHAM: In the response to 95.1 I 5 referred you back to the table that is shown on page 2-5 6 of the evidence which outlines the parties, the terms 7 and the volume requirements for each individiual 8 contract. If I were to provide you with the annual 9 revenue stream projected in each of the first six years 10 of this project you would be able to determine from the 11 information that is contained on Table 2 what specific 12 prices were by individual parties. 13 MR. MACKIE: I understand that that is correct 14 because in Year 6 you are left with one contract, Duke 15 Energy Marketing, and you are left with your short-term 16 C1 volume, but in Years 1 through 5, while you still 17 have a mixture of these contracts, what harm would 18 disclosure of the total revenue stream over those years? 19 MS CALLINGHAM: Well, once you know what Year 20 6 is you can take that back a step and figure out Year 5 21 and then you can -- 22 MR. MACKIE: I think I am beginning to 23 understand. 24 MS CALLINGHAM: -- and then you can factor 25 that out again and you can only figure out the average 26 for the remaining two. 27 MR. MACKIE: You are assuming that I would set 28 up a series of simultaneous differential -- simultaneous 65 1 algebraic equations and solve them working backwards. 2 MS CALLINGHAM: It isn't that complex. I 3 don't even think they are algebraic or I wouldn't have 4 been able to do it. 5 MR. MACKIE: You are just assuming we are much 6 smarter than we really are. 7 MS CALLINGHAM: You requested information over 8 the first five years of the project? 9 MR. MACKIE: Yes. 10 MS CALLINGHAM: As I understand it. There is 11 only one long-term contract. I should say there is two 12 contracts. I have to look at it. 13 You requested information over the first five 14 years of the project, as I understand it. There is only 15 one long-term contract -- I should say there are two 16 contracts. 17 MR. MACKIE: Well, two contracts are for four 18 years, or is for five and one is for six. 19 MS CALLINGHAM: The way I view this, when you 20 said you wanted them from 2000 to 2005, that I would 21 have to give you the first six years of the DCF 22 analysis, that you were asking for the annual revenues 23 over the time frame for which we have market-based 24 long-term contracts in effect, and thereafter you didn't 25 need the information. 26 So that you were asking for information that 27 would tell you the total revenue stream that we would 28 realize reflecting the long-term contracts over the 66 1 total term of the longest contract. Providing that 2 information -- it isn't a complex calculation, it would 3 be easy to determine what the individual prices are for 4 two of the parties and as you backed up into the fourth 5 year, you would only be able to get an average for two 6 of the parties. But the prices would be disclosed. 7 MR. MACKIE: You are right. I regret that I 8 worded that question a little loosely, and you have 9 responded quite correctly to the wording of the 10 question. I have no complaint in that respect. I just 11 want to explain to you the purpose of that question is 12 that it would have been helpful to Board staff at least 13 to have had an opportunity to review the cash flows, 14 because I view this project as being on the cusp of 15 marginal feasibility -- of economic feasibility -- and I 16 wanted to be able to show the Board that the cash flows 17 had not been disproportionably weighted in the first few 18 years of the DCF analysis to swing it in favour of a PI 19 in excess of one. We don't have that evidence in order 20 to provide that assurance. 21 And with that statement, I will leave the 22 matter, unless you have anything you can add to that. 23 MS CALLINGHAM: Yes, I do have a few things to 24 add. As explained in the evidence, we have used the 25 actual prices under long-term contracts that we know are 26 going to be realized in accordance with the terms of the 27 contract over the first six years. For the first six 28 years, for the balance of space that is un-contracted, 67 1 we have used the price of $18 and for all space 2 available from year 7 to 30, we have used a price of 3 $18. 4 That revenue stream produces an economic 5 result that is very positive and is far from marginal. 6 It produces an MPV of $4 million, which is well in 7 excess of currently approved return requirements. The 8 evidence on the record will show that those assumptions 9 produce a very good economic result. 10 MR. MACKIE: Thank you. 11 Those were Board staff questions. Other 12 questions? 13 MR. VOGEL: I have a couple of questions. In 14 LCSA Interrogatory No. 36, LSCA had asked for certain 15 information regarding the cost of storage rights, and as 16 I understand the response you distinguish, it appears, 17 between what Union pays other companies for those rights 18 and the per acre payment and well payment that Union 19 makes to landowners. Is that correct? 20 In other words, the $1,894,000 shown as the 21 capital cost of storage rights does not include payments 22 to landowners. 23 MS CALLINGHAM: It doesn't include the storage 24 lease payments to landowners, that is my understand, 25 yes -- the ongoing annual lease payments. 26 MR. VOGEL: Does it include anything that is 27 to landowners? 28 MS CALLINGHAM: If you have questions on the 68 1 specifics of what types of payments are included in the 2 $1,894,000 number you will have to ask Mr. Lowe. 3 My name is on this response only in the sense 4 that a payment, an upfront payment of that is capital in 5 nature and, in fact, according to generally accepted 6 accounting principles would be capitalized cost. 7 MR. VOGEL: Yes. 8 MS CALLINGHAM: It is not a cost that is 9 encouraged year after year. It is an upfront "as spent" 10 cost and my involvement in this response is limited to 11 that particular area. 12 MR. VOGEL: I will pursue that with Mr. Lowe, 13 but it is it your understanding that $1,894,000 does 14 include in some amounts that you are not aware of an 15 upfront payment to landowners? 16 MS CALLINGHAM: It is the upfront payment to 17 acquire the storage rights, yes. 18 MR. VOGEL: And to your knowledge, does that 19 include an upfront payment to landowners as opposed to 20 what Union paid other companies for the storage rights? 21 MS CALLINGHAM: It is differentiated from the 22 storage lease payments that are made on an ongoing 23 annual basis into the future. It is differentiated from 24 that, yes. 25 If you want any further specifics in that, you 26 will have to ask Mr. Lowe. 27 MR. VOGEL: Dealing with the $1,894,000, is it 28 a fair assumption on my part that a substantial portion 69 1 of that reflects what was paid by Union to companies to 2 acquire the storage rights? 3 MS CALLINGHAM: As I said, you will have to 4 ask Mr. Lowe on any specifics of what payments make up 5 the $1,894,000. 6 MR. VOGEL: Do you know what companies were 7 paid? You don't have any of that information. 8 MS CALLINGHAM: Mr. Lowe will be able to help 9 you with that. 10 MR. VOGEL: All right. With respect to the 11 original DCF analysis and that which you provided in 12 response to Board Staff Interrogatory No. 89, are these 13 other costs -- that is the cost per acre and the well 14 payment, those annual costs paid to landowners -- are 15 they included in this DCF analysis? 16 MS CALLINGHAM: Yes, they are. 17 MR. VOGEL: And where are they included? 18 MS CALLINGHAM: Are you referring now to 19 question 89 which doesn't have a detailed DCF analysis? 20 MR. VOGEL: It has an attachment to it. 21 MS CALLINGHAM: If I might make a 22 suggestion -- 23 MR. VOGEL: In response to 89, or I can refer 24 you to Schedule 6. 25 MS CALLINGHAM: Can I make a suggestion that 26 is a more appropriate reference here. Under Section 6, 27 Schedule 6 there is a year-by-year DCF analysis and 28 those annual payments are included on the line entitled 70 1 "O&M Expense" and it is a total of $445,000. The lease 2 payments are included therein. 3 MR. VOGEL: And can you tell me what portion 4 of the $445,000 reflects the lease payments? 5 MS CALLINGHAM: Again, this is Mr. Lowe's 6 area. I thought he might have the answer to that in the 7 response somewhere, but I am not absolutely sure. 8 MR. VOGEL: I am not aware that he has, but I 9 should ask Mr. Lowe that question? 10 MS CALLINGHAM: I said that that would be the 11 thing to do, yes. 12 MR. VOGEL: In Interrogatory No. 37 LCSA has 13 asked some questions about the cost of the residual gas. 14 MS CALLINGHAM: I don't have that response 15 with me. I don't believe my name was on it, which is 16 why -- 17 MR. VOGEL: I see. That is another one for 18 Mr. Lowe, I see. Okay. 19 MR. MACKIE: Mr. Vogel, if it will help you, 20 sir, we, Board staff have some detailed questions about 21 the determination of the compensation payments for the 22 residual gas and compared to the actual valuation put on 23 the injected cushioned gas. And we -- those are 24 questions that I put on one side to the next panel. 25 Sorry, not the next panel, it leads to the facilities 26 panel. 27 MR. VOGEL: I have a number of questions 28 dealing with how the lease costs have been incorporated 71 1 into the DCF analysis and the effect that making other 2 assumptions with respect to those costs might affect 3 your DCF analysis. Are those all questions I should 4 address to Mr. Lowe? 5 MS CALLINGHAM: Go for it and I will let you 6 know. 7 --- Laughter 8 MS CALLINGHAM: Is it with respect to just the 9 storage lease payments or is it with the overall costs 10 being lease costs? 11 MR. VOGEL: It is with respect -- it is with 12 respect to the storage lease payments. 13 MS CALLINGHAM: Yes, Mr. Lowe -- 14 MR. VOGEL: And the extent to which they are 15 included in your O&M line. 16 MS CALLINGHAM: Mr. Lowe would be the proper 17 person for you to direct any specific questions related 18 to that area. 19 MR. VOGEL: All right. Well, then I will 20 reserve my further questions for Mr. Lowe. 21 MR. MACKIE: Thanks, Mr. Vogel. Other 22 questions from other parties. 23 MR. LIDDLE: If I could just follow up on 24 Mr. Vogel's, that Mr. Lowe then would also be the one 25 that after we have asked questions about what costs are 26 included that the line of questioning that was addressed 27 in LCSA No. 38 where we had been seeking, in effect, 28 sensitivity for various costs, that that is Mr. Lowe's 72 1 area as well or does that actually come back to your 2 analysis? 3 MS CALLINGHAM: It is really Mr. Lowe's area 4 overall and his evidence on the appropriateness of the 5 detailed information that is requested in 38 and the 6 appropriateness of providing it. He may request my 7 assistance in doing any economics, which I would be 8 pleased to provide. But I think that in the first 9 instance that you should approach Mr. Lowe on the answer 10 and I can certainly -- 11 MR. VOGEL: Mr. Mackie, if I can make a 12 suggestion. This is a fairly critical issue for LCSA. 13 But it would certainly be of assistance to us if Union 14 could organize panels such that this witness is 15 available at the same time as Mr. Lowe is available. 16 MR. MACKIE: Well, let's just find out whether 17 Ms Callingham is going to be available tomorrow, please. 18 MS CALLINGHAM: I wasn't planning on it, but I 19 can certainly make myself available if that is the case. 20 MR. MACKIE: There clearly is a difficulty 21 when a panel is presented to address costs as a 22 component of economic feasibility, that then the costs 23 flow out of other witnesses who are not on this panel. 24 So that, Ms Callingham, if you could be available 25 tomorrow -- anyway, your counsel will advise us. 26 MS CALLINGHAM: Now, Mr. Vogel, as I look 27 further at this response here to 38, the information 28 wasn't furnished because it relates -- you wanted us to 73 1 make a different assumption with respect to storage 2 rights than is actually in effect. I am not sure why 3 you are referring to the body of this question. 4 If you were -- unless you are going to be more 5 specific about it now, I can be here tomorrow afternoon. 6 But I don't have any of this information available and 7 will not provide it anyway. It will have to be done as 8 an undertaking if there is any further detailed analysis 9 required. So -- 10 MR. VOGEL: I leave it up to Mr. Leslie. I am 11 content to deal with this by undertaking, assuming that 12 I get a response to the undertaking in due time. 13 MR. LESLIE: Well, why don't you let me talk 14 to my client over the lunch break, and we will decide 15 what the best way to assist you is. But I mean we do, 16 we are entirely prepared to cooperate. It is a question 17 of whether it is an effective use of Laura's time to 18 have her here or whether it would have to be done by 19 undertaking in any event because of the nature of the 20 calculations. 21 MR. LIDDLE: Well, for my part I think -- all 22 I was going to do was perhaps provide -- try to provide 23 some clarification as the counsel considered this issue. 24 It is a colleague of mine that drafted this request. 25 And where it came from is that in looking at Schedule 6 26 in terms of the DCF analysis, we had made the assumption 27 and it turned out to be the wrong assumption, that 28 because there was no separate line for storage payments 74 1 that the capital amount of 1.89 million must have been a 2 capitalization of annual payments. We realize now that 3 that was wrong. 4 So what we were really after once we know what 5 the component is in the O&M line is to say, Well, that 6 is the assumption you made. But if there were different 7 assumptions on some of the components that were in the 8 assumption you made on Schedule 6, what would be the 9 effect on profitability. 10 So I think that or hopefully that will explain 11 why there was some confusion in how we asked a question. 12 MR. LESLIE: No, and that is where I thought 13 you were going. And I suspect that -- I mean assuming 14 you are going to put different numbers to the witnesses, 15 Ms Callingham is probably in as good a position now as 16 she would be tomorrow to accept those numbers and work 17 with them. But I also suspect that it would take some 18 time and analysis to do that work that isn't going to be 19 possible while the witness is on the stand. 20 MS GALBRAITH: Mr. Liddle, you have also -- 21 the question here is not confined to just the lease 22 payments and asking for sensitivities around different 23 assumptions that underpin those lease payments. You 24 have also asked for different assumptions with respect 25 to storage revenue as I understand it. You want to 26 assume that we are going to get a different market-based 27 price than what we were expecting. Is that -- 28 MR. LIDDLE: Those were some of the 75 1 assumptions, in some of the cases. 2 What it tries to do is establish a matrix 3 that, perhaps, sets some boundaries and what, 4 potentially, could be outcomes over a 30-year period. 5 We are really just seeking some kind of broader 6 sensitivity. 7 And in terms of the effort required, once the 8 number is changed, in terms of how you run the DCF 9 model, I assume it simply means either a one-time change 10 in the revenue stream or a one-time change in the O&M 11 stream, so it wouldn't appear to us to be a major 12 calculation effort. 13 MR. VOGEL: Mr. Leslie, I might just suggest 14 that if you are content with us accepting an 15 undertaking -- I mean I could provide you, in the form 16 of a supplementary IR, the information that we require 17 and, as I say, as long as we get a response to that, in 18 a reasonable time for us to prepare our evidence, I 19 would be content to proceed now. 20 MR. LESLIE: Why don't you let me talk to my 21 client. That sounds reasonable, Paul. I would like to 22 take instructions. 23 MR. VOGEL: Mr. Mackie, I think that deals 24 with our questions. 25 MR. MACKIE: Thank you, Mr. Vogel. 26 Any other parties have questions for this 27 panel? 28 Then, with our thanks, I think we are finished 76 1 with this panel. We appreciate your attendance and your 2 patience with some of our questions, although I gather 3 that Mr. Leslie is going to get back as to the necessity 4 or the availability of Ms Callingham tomorrow so -- 5 MR. LESLIE: With that in mind, Chris, it 6 would probably be sufficient to take a 10-minute break, 7 now, so that I can talk to people. 8 MR. MACKIE: Could you make that five minutes, 9 Glenn? But, anyway, we will certainly take a short 10 break. 11 MR. LESLIE: Thanks. 12 --- Short recess at 1135 13 --- Upon resuming at 1149 14 MR. LESLIE: Having taken a few moments to 15 talk about the nature of the information that was being 16 requested, I think our position is this: If it's 17 appropriate to do the calculations that Mr. Vogel and 18 Mr. Liddle were referring to, Ms Callingham would have 19 to do that in Chatham, in any event -- there's no way 20 she can do it while she's on the stand. 21 There may be a threshold question as to the 22 extent to which we believe it's appropriate to do that, 23 but I think that can be dealt with in the context of Mr. 24 Lowe's evidence -- and I need to talk to Mr. Lowe about 25 this subject. 26 So, I think the most efficient resolution is 27 to deal with this through to Mr. Lowe and, to the extent 28 that further calculations are called for, Ms Callingham 77 1 will do them in Chatham and get the information to 2 everybody as quickly as possible. 3 The next panel is Mr. Jim Egden and Mr. Steve 4 Pardy, and they are dealing with geology and reservoir 5 engineering. 6 MR. MACKIE: Thank you, Glenn. 7 Before I commence with that panel, or before 8 somebody commences with that panel, I just want to 9 announce that I have been informed that, if necessary, a 10 Board panel will sit next week on Wednesday, from nine 11 to 11:30, to deal with any contested issues, if we 12 haven't adopted an issues list by consent. 13 MR. LESLIE: Can I make sure I'm understanding 14 correctly -- 15 MR. MACKIE: Yes, sure. 16 MR. LESLIE: -- the situation, at this stage? 17 My understanding is that your Board staff's 18 suggested issues list, amplified as by Mr. Vogel's 19 comments this morning, represents what's being proposed 20 at this stage; there are no other suggestions for change 21 to the issues list? 22 MR. MACKIE: That's true, at the moment, 23 Glenn, but, of course, we don't have all the intervenors 24 in attendance today. It may well be that the 25 Township -- 26 MR. LESLIE: Oh, you are quite right. 27 MR. MACKIE: -- of Dawn-Euphemia will be 28 represented tomorrow, so I'm not concluding, yet, that 78 1 we have all the additional issues on the table. 2 MR. LESLIE: Fine, Chris. You are right. I 3 had forgotten that there was one other party that plans 4 to be -- 5 MR. MACKIE: I mean I hope we do. And I 6 certainly don't see any problem -- 7 MR. LESLIE: No, I just thought we might be 8 able to deal with this, one way or the other, this 9 afternoon, but you are right, we -- 10 MR. MACKIE: I think we will put it off 11 tomorrow to deal with, conclusively, Glenn. 12 MR. LESLIE: Yes, that's fine. 13 MR. MACKIE: Okay. Is there any party 14 willing, or volunteering, to go first, on geology and 15 reservoir engineering? 16 Welcome, Mr. Egden and Mr. Party, to this 17 technical conference. Thanks for being here. 18 I'm going to begin with the questions relating 19 to the geological interpretation that Mr. Egden has 20 provided -- and thank you, Mr. Egden, for all the 21 interrogatories that you patiently answered. 22 I want to begin with the addendum that you 23 have provided, at the back of your evidence. It's 24 Addendum 1, which is an account of meetings between 25 Union Gas and the Ministry of Natural Resources. 26 I understand that you authored this report, 27 Mr. Egden? 28 MR. EGDEN: That is correct. 79 1 MR. MACKIE: Who attended the meetings, on 2 behalf of Union Gas? 3 MR. EGDEN: Myself and Dave Lowe, in one 4 meeting. And in the second meeting, we had myself, Dave 5 Lowe and Dave Lowe's administrative staff person, Mr. 6 Reinhold Deibler. 7 MR. MACKIE: Sorry? Mister...? 8 MR. EGDEN: Reinhold Deibler. 9 MR. MACKIE: And who were the MNR staff 10 persons who attended? 11 MR. EGDEN: And Mr. Terry Carter and Mr. Rudy 12 Rybansky. 13 MR. MACKIE: Thank you. 14 In the overview of the report of that meeting, 15 Union makes reference to activities within 1.6 16 kilometres of the boundary of a storage area. 17 Can you explain Union's concerns, related to 18 possible drilling and well activities within 1.6 19 kilometres from any DSA? 20 MR. EGDEN: I can't find that reference in the 21 overview. 22 MR. MACKIE: It actually -- it properly 23 appears in the next paragraph, in the second sentence, 24 under the April 21st, 1999, meeting. 25 MR. EGDEN: Okay. I found that. 26 Would you please repeat your question. 27 MR. MACKIE: Can you explain Union's concerns, 28 related to possible drilling and well activities within 80 1 the 1.6 kilometre distance from the boundary of a DSA? 2 MR. EGDEN: Our concerns are basically 3 twofold. 4 First, we don't want to have activities, 5 drilling activities, whereby any of our inventory would 6 be produced through a wellbore that is not under our 7 control. 8 And, second of all, we don't want to see 9 third-party activities that alter the rock, by means of 10 fracturing, in such a wellbore, such that the integrity 11 of our storage operations are compromised. 12 MR. MACKIE: Has it been Union's experience 13 that fracturing does occur and is permitted to occur 14 within 1.6 kilometres of DSAs? 15 MR. EGDEN: Subject to check, I believe that 16 the Ministry has allowed some fracturing operations of 17 various magnitude within the 1.6 kilometres. 18 MR. MACKIE: Mr. Egden, I assume that you are 19 aware of Section 11 of the Oil, Gas and Salt Resources 20 Act, particular 11(2), which I am going to read to you, 21 which states that: 22 "If the point of an injection proposed in 23 an application for a permit under 24 subsection (1) is within 1.6 kilometres 25 of an area designated as a gas storage 26 area under the Ontario Energy Board Act, 27 the Minister shall refer the application 28 to the Board for a report." (As read) 81 1 It is my assumption that any applications for 2 injection permits which could possibly lead to 3 fracturing would be referred to this Board for a report. 4 You are suggesting otherwise? 5 MR. EGDEN: I don't have that information in 6 front of me that you are referring to specifically. 7 Could you just run through that again? 8 MR. MACKIE: Yes. I was quoting from section 9 11, subsection 2, of the Oil Gas and Salt Resources Act. 10 MR. EGDEN: The operating standards? 11 MR. MACKIE: Not the operating standards, but 12 the legislation itself. 13 Do you want me to go through that subsection 14 again, Mr. Egden? 15 MR. EGDEN: Please. 16 MR. MACKIE: It reads: 17 "If the point of injection proposed in an 18 application for a permit under subsection 19 (1) is within 1.6 kilometres of an area 20 designated as a gas storage area under 21 the Ontario Energy Board Act, the 22 Minister shall refer the application to 23 the Board for a report." (As read) 24 My understanding is that that provision would 25 cover any applications for injection for the purpose of 26 fracturing formation. You seem to be suggesting 27 otherwise. 28 MR. EGDEN: I am not contesting the wording in 82 1 section 11, subsection (2) whatsoever. 2 MR. MACKIE: I appreciate that. But you are 3 suggesting that notwithstanding this legislation, 4 fracturing still occurs or has occurred within 1.6 5 kilometres of the boundary of Union's designated storage 6 areas, I take it? 7 MR. EGDEN: That is a fact. 8 MR. MACKIE: Is this the Midway Well that you 9 are making reference to that Mr. James, I think, 10 referred to in his evidence in the Phase I proceedings? 11 MR. EGDEN: That is a specific example. 12 MR. MACKIE: At least that is the one you were 13 referring to a moment ago. 14 MR. EGDEN: Yes. 15 MR. MACKIE: Thank you. At the present time, 16 Mr. Egden, when you -- that is, when you on behalf of 17 Union -- and Union propose boundaries for designation to 18 this Board, are you establishing the boundary of the 19 designated storage area on the supposition that 20 fracturing operations may, and do, occur within that 21 1.6-kilometre boundary? 22 MR. EGDEN: It is certainly one of the factors 23 that we consider. 24 MR. MACKIE: Would that factor, then, lead you 25 to expand the extent or the area to be included within 26 the proposed boundary of a storage area? 27 MR. EGDEN: It might. 28 MR. MACKIE: If these fracturing operations 83 1 within 1.6 kilometres were disallowed, either by this 2 Board or through policy of MNR, how would that impact 3 upon the boundaries that Union proposes for its storage 4 pools? 5 MR. EGDEN: If the nature of the operations 6 that were being allowed in the areas immediately 7 adjacent to the DSAs were changed, it is not outside of 8 the realm of reason that we would want to re-evaluate 9 and review the proposed boundaries that we have put 10 forth under the operating conditions which are imposed 11 upon us as of today. 12 MR. MACKIE: It seems to me -- and this is 13 anecdotal -- that going back ten or twelve years ago 14 Union was content to have a more restricted boundary for 15 its pools; that is, the distance between the actual 16 boundary and the interpretation of the porosity in E1 17 carbonate was much narrower than you are presently 18 proposing. 19 Do you share my view that over the years Union 20 has been expanding the areas to be included within the 21 DSA boundaries? 22 MR. EGDEN: I can't comment on policy or 23 thought process that was taking place in times before I 24 was employed by Union Gas. 25 MR. MACKIE: How long has that been, 26 Mr. Egden? 27 MR. EGDEN: It would be September of 1987. 28 MR. MACKIE: I said 10 to 12 years ago. 84 1 Doesn't that cover the period? 2 MR. EGDEN: It does. But I don't 3 understand -- just let me clarify. Your comments do not 4 reflect my own personal philosophy, which is the 5 philosophy that has been used in determining the DSA 6 boundaries since September of 1987 at Union Gas. 7 MR. MACKIE: Thank you. Coming back to this 8 report of our meeting with MNR, you make reference here 9 that there was general agreement on the geological and 10 engineering principles that Union/MNR agreed upon. 11 What were the general geological and 12 engineering principles that Union and MNR were agreed 13 upon? 14 MR. EGDEN: Are you referring to a specific 15 section of this report? 16 MR. MACKIE: Yes, I am. It is the 17 second-to-last complete paragraph on that first page, 18 and it states that: 19 "The MNR staff was reluctant to endorse 20 this method, as it could appear to be 21 somewhat arbitrary rather than based upon 22 pool specific geological and engineering 23 principles. MNR staff and Union were in 24 general agreement as to what these 25 principles encompassed." 26 MR. EGDEN: At that point in our discussion, 27 the MNR staff and ourselves were talking about the 28 methodology that Union had used with having one 25-acre 85 1 drilling track beyond any drilling track that had the 2 zero edge of gas in it as a fundamental that would 3 outline a DSA boundary, and that the MNR staff were 4 somewhat reluctant to embrace some type of magical 5 formula or a specific number of metres beyond the edge 6 of gas that would apply in every and all cases of 7 setting a DSA boundary simply because they recognize the 8 full specific nature of the geology, such that the 9 distance between the zero edge of the gas in Pool A, for 10 instance, would be different from what it was in Pool B, 11 and that this would stand in the way of establishing a 12 firm policy that could be a blanket statement over all 13 DSA boundaries. 14 We were generally in agreement with them that 15 the more practical or more reasonable approach would be 16 to have the flexibility to tailor a DSA boundary to a 17 specific pool geology on a pool-by-pool basis. The 18 nature of our discussion encompassed geological 19 principles and reservoir engineering principles. 20 MR. MACKIE: Okay. Thank you. 21 Then over the page you state that MNR staff -- 22 this is at the top of page 2: 23 "MNR staff was in general agreement with 24 the geological model and the associated 25 boundary." 26 Does that refer to the boundary that you are proposing, 27 or the boundaries that you are proposing, for all three 28 of the pools in question? 86 1 MR. EGDEN: It means they were in general 2 agreement with the geological model and the associated 3 boundaries that we had. We were not in conflict on any 4 of the geology or the boundaries. There was some fine 5 tuning that we were going to do in further discussions, 6 but we were not in conflict at that point. 7 MR. MACKIE: Following that April meeting, 8 specifically, were there any changes or what changes, 9 rather, were made to the proposed boundary to the Oil 10 City Pool? Because I believe there were some changes 11 following that meeting. 12 MR. EGDEN: In the Oil City Pool there was one 13 drilling tract on the northwest corner that was removed 14 from the original proposed boundary. 15 MR. MACKIE: Could you take us to one of your 16 schedules which best illustrates that? I am going to 17 suggest Schedule 14 as an example. You have actually 18 numbered the tracts, very helpfully, in that schedule, 19 so that it is easy to identify the land in question. 20 MR. EGDEN: It is the one tract on the 21 northwest corner of the Oil City Pool that if it had 22 been in the proposed boundary would have made a 23 rectangle of the proposed DSA. It is an unnumbered 24 track on this schedule, but the number of the track is 25 Tract 6, Lot 16, Concession 5 in Enniskillen Township. 26 MR. MACKIE: Right, thank you. 27 Is that the only amendment or change to your 28 boundary, or the proposed boundary, that came out of 87 1 that meeting, Mr. Egden? 2 MR. EGDEN: That is correct. 3 MR. MACKIE: Okay. Thank you. 4 Now, if you would move on to the top of page 3 5 of your report, the sentence reads there: 6 "It was agreed that Tract 6, Lot 16, 7 Conc. 5, in the North West corner and 8 Tract, Lot 17, Conc. 5, in the North East 9 corner, could be excluded from the DSA." 10 As I understand your evidence, you proceeded 11 to remove one of those tracks, namely Tract 5, but not 12 the other track? I am sorry, it is the Tract 6 that you 13 removed, but not Tract 5. 14 Why is that, Mr. Egden? 15 MR. EGDEN: The northwest corner is Tract 6 in 16 Lot 16. It is in a down position. Gas would not be 17 escaping in that direction from this pool. Tract 5 in 18 Lot 17 is not down and so there is a possibility that 19 the geological risk is higher in that direction and so 20 Tract 5 in Lot 17 was included. 21 MR. MACKIE: Well, I want to take you back to 22 the words that you have provided the Board. It is your 23 report of that meeting and your words are, "It was 24 agreed." 25 Now, you agreed -- you are telling the Board 26 you agreed with MNR that Tract 6, Lot 16, Concession 5 27 in the northwest corner and Tract 5, Lot 17, Concession 28 5 in the northeast corner, could be excluded from the 88 1 DSA. That was the agreement you had with MNR. That is 2 what the wording says. 3 MR. EGDEN: That's what the wording says. 4 MR. MACKIE: Are MNR aware that you are still 5 holding onto Tract 5 in Lot 17? 6 MR. EGDEN: It is my belief that they are. 7 MR. MACKIE: I mean, I suggest they could 8 reasonably conclude from this wording that you were 9 going to remove that tract from the boundary if that is 10 the proposal for designation. 11 MR. EGDEN: Well, that would be your 12 conclusion, but not mine. A discussion with the MNR at 13 the end of the day was that we wanted to have Tract 5 14 in. The MNR initially thought that we could have that 15 tract out. We both agreed that it could probably be 16 out and the union wanted to put it back in, and we did. 17 Our evidence is that Tract 5 is in Lot 17. 18 MR. MACKIE: Okay. Mr. Egden, that's fine, 19 thank you. 20 So MNR are aware of this. Have MNR reviewed 21 this report? 22 I mean, I soon as I saw it in the evidence I 23 got on the phone to MNR and said, "Union has put in this 24 account of the meetings. Were you invited to sign off 25 or to consent or agree to this report?" The response I 26 got back was that they were generally in agreement with 27 it but they wouldn't have given it quite the twist that 28 Union has given the meetings. 89 1 Now, have you confirmed with MNR that they 2 support this report of the two meetings that you have 3 submitted in evidence? 4 MR. EGDEN: Actually, yes, I have. The reason 5 that the MNR staff gave to me that they were not 6 comfortable -- that is probably the wrong word -- that 7 the twist that they were concerned about was that their 8 report did not -- that it was placing the MNR in a 9 higher position of authority than the OEB in the 10 boundary designation. 11 But there was no question, there was no 12 discussion, from either really Rybinsky or from Terry 13 Carter with regards to any of these geological 14 principles or the engineering principles that had been 15 discussed or described in this report. 16 MR. MACKIE: Okay. That's fine, Mr. Egden, 17 and I appreciate your putting in this report. 18 Of course, it is in pursuit of the directive 19 that the Board gave in its decision relating to the 20 Phase I applications. But nonetheless, it is very 21 helpful to know that Union has formally consulted with 22 MNR about the geological interpretation of the pools in 23 question. 24 My only suggestion that I would like to throw 25 out for your consideration is that for future reports it 26 might help a little bit if there were minutes of the 27 meeting or if the other parties had a chance to sign off 28 on the reports, so that we know that it is a 90 1 representation of views from both Union and MNR. But 2 that's not to undermine the significance or the 3 usefulness of this report you are making. 4 Thank you. 5 MR. EGDEN: If I can just add that this 6 directive from the Board was somewhat redundant because 7 both MNR staff and Union had already agreed that we 8 would be in direct communication on DSA boundaries in 9 the future after the Phase I hearing, and that both 10 parties found it to be beneficial to conduct our 11 discussions in such a cooperative atmosphere, and that 12 any of the apparent risks that were on the words here 13 were just as a function of it being a single-authored 14 report. But neither one of us found it necessary to 15 sign off as a committee since the general atmosphere of 16 our discussions were in agreement and cooperative in 17 nature. 18 MR. MACKIE: I assume then that these meetings 19 and discussions are going to take place now on a regular 20 basis whenever Union brings forth an application for 21 designation? 22 MR. EGDEN: That would be our anticipation. 23 MR. MACKIE: Good, thank you. 24 Would you refer to Schedule 26 of your 25 geological interpretation, please, which deals with the 26 boundaries proposed for the Bluewater and the Mandaumin 27 Pool? I want some help. How is the name of that pool 28 pronounced? 91 1 MR. EGDEN: Mandaumin. 2 MR. MACKIE: Mandaumin, thank you. 3 Now, you indicate in your evidence that Bailey 4 Geological Services observed salt plugging in the lower 5 section of the core for wells IDS 4-I and IUE 1-XIV. 6 Can you just help me locate those wells first, 7 Mr. Egden? 8 MR. EGDEN: IDS 4 is in Tract 1 of Lot 4, 9 Concession 1, in Sarnia Township. 10 MR. MACKIE: Thank you. 11 MR. EGDEN: And the second well that you were 12 referring to again, was? 13 MR. MACKIE: It is IUE 1-XIV. 14 MR. EGDEN: That well is in drilling Tract 8 15 of Lot 1, Concession 14, Enniskillen Township. 16 MR. MACKIE: Thank you. 17 Mr. Egden, recognizing that you are addressing 18 an audience of lay people and not geologists, can you 19 explain, please, the significance of the salt plugging 20 that was detected in these two wells? 21 MR. EGDEN: The salt plugging is of relatively 22 little significance in those two wells. 23 MR. MACKIE: Why was it worth mentioning? 24 MR. EGDEN: The evidence that we were seeing 25 in those rocks were indications of debris that 26 originated on both the Mandaumin Reef and the Bluewater 27 Reef. So what we were seeing in lay terms was that 28 there was a potential path of communication back to both 92 1 those reefs in question from those two wells. 2 MR. MACKIE: So the significance then of the 3 salt plugging, if I can suggest this to you, is that the 4 salt plugging played a part in the establishment of the 5 boundary which is identified as the maximum extent of 6 reef debris? 7 MR. EGDEN: That is incorrect 8 The actual presence of reef debris in both of 9 those wells, that is the significant feature. 10 MR. MACKIE: Thank you. 11 --- Pause 12 MR. MACKIE: Mr. Egden, I am obviously 13 struggling with this part of your evidence, and I want 14 you to help me a little bit. 15 In the first instance, what led Union to 16 retain Bailey Geological Services to do a particular 17 examination of these two wells? 18 MR. EGDEN: Both of these wells are part of a 19 standard and complete geological evaluation of the land 20 in question here would involve an examination of the 21 well cuttings in both those wells. 22 Bailey Geological Services is probably the 23 preeminent provider of that type of service in this 24 area, and the principal of that firm resides in London 25 which is where the well samples were. So it became a 26 case of both having the -- a set of eyes, if you will, 27 looking down the microscope at the well cuttings in 28 London and a fairly cost effective way for us to have 93 1 that work done without having to travel from Chatham and 2 London and back. 3 MR. MACKIE: Okay, thanks. So they are 4 specialists in this area. 5 Are the well cards for those two wells in 6 evidence? 7 MR. EGDEN: Yes, I believe they are. 8 MR. MACKIE: Can you take us to them? 9 MR. EGDEN: There is a bunch of well cards at 10 Schedule 18. 11 MR. MACKIE: Yes. 12 Page 7 is the Imperial Union Enniskillen 1/14 13 Well. 14 MR. EGDEN: Right. 15 --- Pause 16 MR. MACKIE: Mr. Trevail is suggesting that 17 page 4 of 9 might be the second well, although it is 18 identified slightly differently? 19 MR. EGDEN: That is the well. That is 20 correct. 21 MR. MACKIE: The short name is IDS 4-I? 22 MR. EGDEN: That is correct. 23 MR. MACKIE: Is the salt plugging identified 24 on these well cards in the A1 carbonate formation? 25 MR. EGDEN: I don't believe it is. 26 MR. MACKIE: The footnote that says "salt at 27 636 metres at page 4 of 9 to the IDS 4-I well" -- but 28 636 metres is in the A2 shale component, not the A1 94 1 carbonate, so it is not relevant to our discussion. At 2 least, I assume it is not relevant to our discussion. 3 Is it? 4 MR. EGDEN: We are referring to a salt water 5 show in a different formation. So yes, I would agree 6 with you, it is irrelevant to our discussion. 7 MR. MACKIE: Now, you explained that you set 8 this boundary that I referred to a moment ago, and the 9 boundary I am referring to is the maximum extent of the 10 reefal debris. That boundary was established upon 11 evidence identifying reefal debris. 12 What basis do you have to show that the reefal 13 debris continues that far out? Does it show up, for 14 example, in the A3 -- sorry -- in the three D-D seismic 15 analysis? 16 MR. EGDEN: The 3-D seismic is certainly a 17 major component of our analysis on trying to determine 18 where the maximum extent of the reef debris will extend. 19 MR. MACKIE: Is there other evidence which 20 leads you to support this boundary of the extent of the 21 reefal debris? 22 MR. EGDEN: Yes, the two wells in question 23 that we have been discussing certainly bring the maximum 24 extent of the debris out to those wells since we were 25 able to determine that reef debris is in both of those 26 wells. 27 MR. MACKIE: Now, if you would go then to the 28 western extent of the Bluewater pool and the point at 95 1 which you have identified Well IDS 4-1. Because of the 2 reefal debris you have included that well within this 3 boundary. What evidence do you have to rely upon that 4 that boundary of the reefal debris swings as far west to 5 impinge upon lot 7 -- sorry -- tract 7, 6 and 3? 6 MR. EGDEN: We saw a structure in the 7 associated geological horizons that indicated that those 8 tracts would have a similar situation as to what we were 9 seeing in the IDS 4-1 well. And if I could refer us to 10 section 3, Schedule 24 with the map of the A1 carbonate 11 structure, you see that the minus 500 metres sub-C 12 contour follows a similar geometry. 13 MR. MACKIE: Now, Mr. Egden, I just want to 14 make sure that I have understood this clearly, and 15 whether I have or not doesn't matter, but somebody 16 reading the record wants to make sure they have 17 understood it. 18 I am advised by Mr. Trevail that the A1 19 carbonate structure map that you have just referred me 20 to in Tab 24 is valid and appropriate and it is based 21 upon that that you have reflected the extent of the 22 reefal debris in the A1 carbonate. Have I stated that 23 correctly? 24 MR. EGDEN: That is fairly correct, yes. 25 MR. MACKIE: Do you want to qualify my fairly 26 correctness? This is your chance. 27 MR. EGDEN: The A1 carbonate structure map 28 again is a key component in trying to determine geometry 96 1 of this extent of the reef debris in the A1 carbonate. 2 MR. TREVAIL: Just one question for 3 clarification, Mr. Egden. Did you use the 3D seismic to 4 assist in the interpretation of the A1 carbonate 5 structure map? 6 MR. EGDEN: Yes, we did. 7 MR. TREVAIL: Thank you. 8 MR. MACKIE: Now, we have identified two 9 wells, Mr. Egden, the two that we have been referring to 10 and for which we looked up the well cards and they, 11 obviously, played quite a key role in establishing this 12 boundary, the southern extent of this boundary around 13 the pool. Which were the other wells that have provided 14 key information in establishing the extent of this 15 reefal boundary? 16 MR. EGDEN: There is a well in tract 2, lot 3, 17 concession 2 in Sarnia Township. I believe it is CU 18 No. 3. The well that is on the northwest boundary there 19 just outside of the proposed DSA. 20 MR. MACKIE: Yes. 21 MR. EGDEN: And on examination of -- detailed 22 examination with a microscope of those well cuttings, we 23 did not see any reef debris. So again, that was key in 24 determining how far not to go on that side. 25 MR. MACKIE: Understood. Thank you. 26 Understood. 27 Are there any other wells you can point to 28 that help with the establishment of this total envelop 97 1 around the two reservoirs in question? 2 MR. EGDEN: There is another well in drilling 3 tract 4 of lot 3, concession 2 in Sarnia Township and, 4 of course, the wells that are right in the -- in the 5 reefs themselves. They were all used. So in summary 6 all of the wells inside the proposed DSA have been 7 examined. 8 MR. MACKIE: We just want you to go back. 9 Which was the well you specifically identified, I just 10 didn't pick it up, on the map? 11 MR. EGDEN: MUS 4-3-2. It is in drilling 12 tract 4 of lot 3, concession 2, Sarnia Township. 13 MR. MACKIE: Thank you. 14 Now, is reefal debris most commonly found to 15 the south and the southeast of Pinnacle reefs, that is 16 to the leeward side of such reefs formed as a result of 17 wave action during their formative years? 18 MR. EGDEN: That is a general statement that 19 has been made in the past but I think that today people 20 that are -- make their living at examining these rocks 21 here might find some exception to such a broad 22 statement. But in general the statement has some 23 validity. 24 MR. MACKIE: Well, sometimes we refer to 25 things as a general rule of thumb, as a general 26 explanation as to cause and effect. I mean does that 27 statement have some validity within that context. I 28 mean, by and large, we expect more reefal debris to form 98 1 on the leeward side of these reefs while they were 2 growing in that warm Mediterranean Sea type of 3 environment? 4 MR. EGDEN: Well, to understand my position 5 here is that we are looking at the DSA boundary on each 6 pool, on a pool-specific basis, and in doing that we 7 look at all of the data that is in front of us on a 8 pool-specific basis. So it is contradictory to then go 9 back to a general rule of thumb. 10 I'm not trying to get in your way, Mr. Mackie, 11 but I would just like to point out that when we have the 12 level of detail from well cuttings from 3-D seismic on a 13 specific pool, it's somewhat awkward to be using 14 rule-of-thumb type statements to describe the highly 15 detailed data that we have in front of us to analyze, as 16 I'm sure you can appreciate. 17 MR. MACKIE: Fair enough. Thank you. 18 Now, I want to go back to the main body of 19 your evidence, Mr. Egden. 20 I'm going to refer you, first of all, to 21 paragraph 14, page 3-5. 22 You state, in that paragraph, that the 23 deliverability for the new injection/withdrawal wells is 24 estimated based on the results from flow tests, 25 petrophysical logs, reservoir core drilling cuttings and 26 well records obtained from existing wells in the 27 reservoir. 28 So, is that how the deliverability was 99 1 established, for each of the pools? Or was that just 2 for the first pool that you are considering here, which 3 I think is the Oil City Pool? 4 MR. EGDEN: That's how we consider the -- or 5 how we determine what our estimates are going to be of 6 deliverability for all pools. 7 MR. MACKIE: Well, why then, for the Bluewater 8 and the Mandaumin Pools, have you based the well 9 deliverability upon deliverabilities from the 10 Enniskillen 28 Pool? 11 MR. EGDEN: Well, there may be some 12 misunderstanding here. The reservoir core or the flow 13 records, or well records, do not have to be from the 14 specific pool that we are trying to establish 15 deliverabilities for. We could look at other pools that 16 we feel are geologically similar and use the flow tests 17 from those pools or the reservoir core from those pools 18 to determine that we have got the right comparative 19 deliverabilities in front of us. 20 MR. MACKIE: And did you choose the 21 Enniskillen 28 Pool because it's geologically similar to 22 the Bluewater and Mandaumin Pools or because it's the 23 nearest and closest formation to these two pools to be 24 designated? 25 MR. EGDEN: We picked it because we felt it 26 was the most similar to these pools, in terms of 27 geology. 28 --- Off record discussion 100 1 MR. MACKIE: I'm assuming, Mr. Egden, or Mr. 2 Pardy, that Union simply doesn't have any absolute open 3 flow tests for the Bluewater and Mandaumin Pools. Is 4 that correct? 5 MR. PARDY: I believe on the Sarnia 5-3-II 6 well, in the Bluewater Pool, that there was an absolute 7 open flow test done. 8 MR. MACKIE: And does that not provide you 9 with sufficient data to extrapolate your assumed 10 deliverability from the new wells? 11 MR. PARDY: I think it does provide us with 12 data that we can use to determine where our assumptions 13 need to go. However, the location of the well in the 14 pool and where it is -- if it's in a good geological 15 location or a poor geological location is also a factor 16 that we would have to consider. 17 MR. MACKIE: Well, for the Bluewater Pool, you 18 are proposing two injection/withdrawal wells, I 19 recollect -- one of which has already been drilled as a 20 stratigraphic test well -- and you have one drilling 21 licence application before the Board, at this time. So, 22 were those two injection/withdrawal wells based upon 23 that absolute open flow test, or based upon the 24 comparison with Enniskillen 28? 25 MR. EGDEN: The Sarnia 5-3-II well, when we 26 looked at that well, and the seismic information, we saw 27 that that well was not going to be an exact comparator 28 for the two new wells. Simply stated: its location, 101 1 from a geological and geophysical perspective did not 2 look as favourable as the two new wells. So it would 3 not be prudent for us to use that well, in its totality, 4 for the comparison on deliverability since we expected 5 the new wells to be of a different deliverability. 6 MR. MACKIE: Okay. Thanks. 7 In paragraph 21, you provide the results of 8 the absolute open flow rates for two wells. And then 9 you also state that, in July of 1993, a four-point 10 isochronal test was conducted on the ME 7-17-V well. 11 Can you just clarify and explain, please, what 12 a "four-point isochronal test" is and how it's 13 conducted? 14 MR. PARDY: Basically, what we are referring 15 to there is it's the type of testing that we would do on 16 all of our wells and you are doing a certain period of 17 flow, let's say, for argument's, an hour, so you flow 18 the well for an hour, you shut it in for an hour, flow 19 it for another hour, and you would do four of those flow 20 and shut-in periods. And then, from that information, 21 you can derive the coefficients that represent the 22 deliverability of that well. 23 MR. MACKIE: Well, you say that sort of test 24 is done on all of the wells, but the evidence suggests 25 that wasn't done on HE -- on ME 7-17-V well -- I beg 26 your pardon. I have misstated that well reference. 27 Why was that test not done on the HE 2-17-IV 28 well? 102 1 MR. PARDY: I think what I was saying when I 2 said "all of Union's wells" is Union's storage -- in 3 general, we do this on all our storage wells. So the 4 wells that would be in our other pools, that we would 5 use every year, we have done those testings. On the 6 2-17-IV well, that testing has not been done. 7 MR. MACKIE: And by your "storage wells", I 8 understand you to be referring to your 9 injection/withdrawal wells? 10 MR. PARDY: That's correct. 11 MR. MACKIE: Okay. Thank you. 12 I'm running out of steam, a little bit, and I 13 think that my questions, or our questions, could be 14 improved if I sat down and spent some time with Bob 15 Trevail. 16 If this is satisfactory, we will break for, 17 now, for lunch, and I think we might have another half 18 an hour of questions, or a bit less, for this panel. 19 Thanks everybody. So, we will reconvene at 20 1:45. 21 --- Luncheon recess at 1245 22 --- Upon resuming at 1345 23 MR. MACKIE: Mr. Egden, we are ready to push 24 on, if you are. 25 MR. EGDEN: Okay. 26 MR. MACKIE: Several well licences were issued 27 by MNR for the three pools in question on the basis that 28 they were to be stratigraphic test wells. 103 1 Can you explain what a stratigraphic test well 2 is and how it differs from an injection withdrawal well? 3 MR. EGDEN: Of course we can't drill an 4 injection withdrawal well in to an area that does not 5 have DSA status attached to it yet. And in many of the 6 pools that we bring to the Board for development the 7 well records are somewhat sketchy. We may have an older 8 well, no core, no logs, poor quality logs, this type of 9 thing. 10 So it has been our practice to drill a test 11 well into the reservoir prior to filing our evidence to 12 confirm data and to try and enlighten the Board or help 13 the Board with the determination of reservoir 14 parameters, et cetera. 15 MR. MACKIE: The Oil City's Pool, I believe, 16 well UOC No. 1, was drilled as a stratigraphic test 17 well. Is that correct? 18 MR. EGDEN: That is correct. 19 MR. MACKIE: What did you learn geologically 20 from the drilling of that well that was not already 21 apparent from the existing wells and from the 3-D 22 seismic analysis? 23 MR. EGDEN: We obtained a core over the 24 reservoir section, plus some of the caprock through that 25 wellbore. 26 MR. MACKIE: Has the core through the caprock 27 been analyzed yet, and is that data available? 28 --- Pause 104 1 MR. MACKIE: If I can help, Mr. Trevail has 2 just directed me to interrogatory 15. 3 MR. PARDY: That is correct; it is covered in 4 Board Staff I.R. No. 15. 5 MR. MACKIE: I wasn't aware of that; thanks. 6 Were any flow tests undertaken on this well? 7 MR. PARDY: No, we did not do any flow tests 8 on this well. 9 --- Pause 10 MR. MACKIE: I think the answer was that you 11 didn't do any flow tests on those wells. And the reason 12 for that is? 13 MR. PARDY: The main reason that we didn't do 14 a flow test on this well is because of the pressure that 15 is in the reservoir. The pool is only just above I 16 think 835 kPa. When you try to test the reservoir at 17 such a low pressure as that, generally you don't get 18 information that is applicable to the range of pressures 19 that we will be operating under. 20 MR. MACKIE: So that pressure is below low 21 cushion pressure, I believe. 22 MR. PARDY: Yes. 23 MR. MACKIE: Could you turn to Schedule 12 24 with me, which shows the cross-section of the Oil City 25 Pool. That shows the location and the depth of the 26 stratigraphic test well, UOC-1. 27 What accounts for that small blip at the top 28 of the reservoir? 105 1 MR. EGDEN: The reef is just taller at that 2 point. 3 MR. MACKIE: So that accounts for the 4 shallower depth which we see for that well intersecting 5 the top of the Guelph, which is at 525.4 metres. 6 Is that correct? 7 I think I got that from the well card. 8 MR. EGDEN: If that is the number that is on 9 the well card, that would be correct. 10 MR. MACKIE: I think it is, Jim. 11 From the cross-section, I take it that it is 12 the A2 anhydrite which is the caprock over this 13 reservoir. 14 MR. EGDEN: That is correct. 15 MR. MACKIE: Why is that caprock apparently 16 thicker over and to the east of the reservoir, 17 significantly thicker, than it is over the reservoir to 18 the west of the UOC-1 well? 19 MR. EGDEN: The A2 anhydrite is not always the 20 same thickness over every reef. It is quite common for 21 it to vary in thickness, from several metres to zero. 22 That is what we see on this pool. 23 MR. MACKIE: To what extent is the integrity 24 of the caprock affected when its thickness varies to 25 that extent? 26 MR. EGDEN: Not all caprock is the A2 27 anhydrite, and caprock on this pool held gas for several 28 hundred million years. So it is obviously functioning. 106 1 MR. MACKIE: I wasn't suggesting the evidence 2 indicated that the caprock was in danger. But Union 3 does have plans to significantly delta pressure these 4 pools. In the case of two pools the delta pressure is 5 going to be twice the discovery pressure. 6 So I assume that a consideration is the state 7 and the integrity of the caprock. 8 MR. EGDEN: I think what is extremely easy to 9 overlook but must be remembered is that it isn't 10 necessarily one of the discovery pressures being doubled 11 or tripled. It is: What is the pressure going to be 12 when it is delta pressured? 13 The resulting pressure gradient of .7 psi per 14 foot is what is being achieved here, which has been used 15 in all of the pools that that we have delta pressured 16 quite successfully. It is a number that we are very 17 comfortable with. 18 MR. MACKIE: Could I ask you whether the A2 19 anhydrite and the A1 anhydrite, which sometimes acts as 20 a caprock, are both as effective as a caprock medium? 21 MR. EGDEN: Could you clarify that question 22 for me? 23 MR. MACKIE: I am going to restate it. 24 What differences in properties exist between 25 the A2 and the A1 anhydrite that might affect their 26 effectiveness as a caprock? 27 MR. EGDEN: Well, we don't have any core data 28 on the A1 anhydrite so I can't comment on the physical 107 1 characteristics of the A1 anhydrite as a caprock. 2 MR. MACKIE: Thank you. Mr. Trevail is just 3 drawing that to my attention. 4 Would you turn to Schedule 9, please, 5 Mr. Egden, and particularly the envelope or the boundary 6 which you have displayed here, which is the maximum 7 probable extent of the A1 porosity. 8 I want to understand how you have developed 9 that envelope around the pool. 10 The first observation I make is that there 11 does not appear to be any well control data to support 12 that envelope. Is that correct? 13 MR. EGDEN: In this particular pool, we did 14 not have any well control out beyond the Husky 15 Enniskillen 2-17-IV well or the McClure Enniskillen 16 1-16-IV well. 17 So the outer edges of the maximum probable 18 extent of A1 porosity was derived largely from seismic. 19 A 3-D seismic survey was shot over this pool to provide 20 that information. 21 MR. TREVAIL: Mr. Egden, with regard to the 22 3-D seismic, is the 3-D seismic data capable of directly 23 detecting the presence of force dolomite and the A1 24 carbonite or is such force dolomite inferred from 25 changes in the various characteristics of the seismic 26 signal, such as amplitude and frequency content? 27 MR. EGDEN: We look for changes in the seismic 28 signature in the A1 interval and combine that with 108 1 changing structure values in the underlying guelph or 2 the top of the A1 carbonate. So it is a combination of 3 factors with the seismic data. 4 MR. TREVAIL: You feel that is a reliable 5 method for determining these boundaries? 6 MR. EGDEN: (off mic...) 7 MR. MACKIE: Now, this boundary or envelope, 8 as I refer to it in this instance, follows the 380 metre 9 contour of the A1 carbonate formation as shown on this 10 structure map. What is the significance of that contour 11 in particular? 12 MR. EGDEN: The two items we are talking about 13 here, the edge of the A1 carbonate, and the top of the 14 A1 carbonate, are not related in this case. We are 15 comparing apples to oranges there. 16 MR. MACKIE: But you agree with me that the 17 boundary or the envelope that you have shown -- 18 MR. EGDEN: Is following it quite closely, but 19 it is not for any reason other than the fact that the 20 two of them are there at the same time. 21 MR. MACKIE: It is fortuitous? 22 MR. EGDEN: Yes. 23 MR. MACKIE: Thank you. 24 Given the lack of significant well control 25 data in or close to the boundary or the envelope that 26 you have drawn, could I characterize that envelope as an 27 estimate? 28 MR. EGDEN: I would direct you to the label 109 1 that is on that envelope, "Maximum Probable." The key 2 word there is maximum and probable. We are not 3 indicating this is a hard and fast edge, which we have 4 tried to graphically illustrate with a dashed line 5 rather than a solid line and the use of the two words, 6 maximum and probable. 7 MR. MACKIE: Fair enough. 8 I take it that if there were such an envelope 9 to be drawn as the minimum probable extent of the A1 10 porosity, I mean, that would simply follow the zero 11 isopach of the gross gas or -- 12 MR. EGDEN: It would be out beyond the two 13 wells, the 2-17-IV well and the 1-16-IV wells, since 14 both of those have a "1" in them. 15 MR. MACKIE: Sure. That's fair enough, Jim. 16 Thank you. 17 Could you give us some idea of the costs that 18 are being incurred on obtaining geological information 19 for this pool? For example, how much did Union pay for 20 the 3-D seismic shooting and analysis? 21 MR. EGDEN: I would have to find that in the 22 evidence, but we have it here. 23 MR. MACKIE: I have several questions. Let me 24 just put these to you and then maybe that could be 25 obtained and consolidated as one spot. I just don't 26 want to pepper you with having you searching these out 27 separately. 28 I am also interested in knowing how much the 110 1 core analysis cost and how much Union paid to Bailey 2 Geological Services and any other costs associated with 3 the determination of the geology relating to the Oil 4 City Pool. 5 MR. EGDEN: I don't have that type of 6 breakdown in front of me, nor would I be able to provide 7 it right now. 8 MR. MACKIE: No. That is fine, Mr. Egden. 9 This probably should have been an interrogatory. I 10 appreciate that. 11 What I am asking then, is whether you would 12 undertake to provide that information at your 13 convenience or hopefully next week sometime? 14 Is that a problem? 15 MR. EGDEN: I sense that it is, but I don't 16 know why. 17 MR. MACKIE: I am sensing it is too, but I 18 don't know why. Come on, Jim, tell us. 19 MR. EGDEN: No, I am looking for clarification 20 on procedure here as far as -- to me it seems like that 21 is more of an IR-type question. 22 MR. LESLIE: Oh, don't worry about it. Chris 23 will get you -- 24 MR. MACKIE: Don't worry about procedures. 25 The purpose of this discovery process is to get as much 26 on the record as possible as is reasonably relevant and 27 in order to reduce time spent in cross-examination of 28 the hearing. That will be to everybody's advantage. 111 1 MR. EGDEN: Right. 2 We have had the costs of core analysis and 3 interpretation of seismic and extra consulting for 4 geological work or whatever -- is for the most part, 5 captured by the economics on this project overall. Now, 6 that is not to say that there isn't a few dollars here 7 for Bailey Geological Services that were not 8 specifically identified. 9 But in terms of are we looking at the costs 10 being substantially different from what we have put 11 forward, it would be -- the answer to that would be 12 "no", but if the exact number is required then we can 13 find that number and bring it forward. 14 MR. MACKIE: Well, no, I haven't asked you 15 whether the numbers match exactly what is being 16 incorporated in the DCF analysis. I have asked you to 17 undertake to provide this data for us subsequent to this 18 technical conference, and then we will take it forward 19 if an issue comes up about it. 20 Have you consented to that? I think your 21 counsel has, actually. 22 MR. LESLIE: Well, I think I have too. But 23 perhaps I should ask Jim if there is any -- is there any 24 difficulty with providing this information to him? Is 25 it confidential in any way? 26 MR. EGDEN: No, no. 27 MR. LESLIE: Okay. 28 MR. EGDEN: If you could just review then what 112 1 the elements were of that undertaking, please? 2 MR. MACKIE: Yes. Yes, I will. 3 How much did Union pay for the 3-D seismic 4 shooting and analysis and interpretation? How much did 5 the core analysis cost and how much did Union pay Bailey 6 Geological Services for their work? 7 MR. EGDEN: For the Oil City Pool? 8 MR. MACKIE: For the Oil City Pool. 9 MR. EGDEN: Okay. 10 --- Pause 11 MR. MACKIE: In paragraph 31 of your prefileds 12 dealing with the Oil City Pool, you make reference again 13 to the lands that are applied within the DSA to protect 14 the reservoir from third-party drilling and for 15 subsurface inventory containment. 16 Is that separate from the issue that we were 17 discussing first thing that came out of your meeting 18 with MNR? I don't understand why third-party drilling 19 to the reservoir can be a danger. 20 MR. EGDEN: Third-party drilling in the area 21 outside of the designated storage area, if fracturing 22 is -- if a fracturing program is approved by the MNR and 23 those fractures extend into the DSA can be an impact 24 item for us as a storage operator. 25 It is probably also important to point out 26 that the fact that there is a designated storage area 27 designation on these lands, it doesn't prohibit an 28 exploratory well from being drilled on those lands. 113 1 MR. MACKIE: It doesn't prohibit it, but any 2 such drilling licence would come to this Board for a 3 report to the Minister before that licence could be 4 issued. 5 MR. EGDEN: I believe that is what the 6 regulations call for. 7 MR. TREVAIL: But in fact, this sentence that 8 we are discussing in paragraph 31, I realized, and I 9 might have misled you, is with reference to the 10 additional lands that you require in addition to the 11 existing unit area boundary, and you displayed that on 12 Schedule 15. Would you just like to take a look at that 13 for a moment? 14 --- Pause 15 MR. MACKIE: Actually Mr. Trevail has made an 16 interesting and helpful observation here. He points out 17 that by extending the boundaries of the DSA beyond the 18 unit area, you are actually incorporating the complete 19 tracts rather than bisecting them. 20 MR. EGDEN: Absolutely. 21 MR. MACKIE: And we understand that, of 22 course, to accord with regards to the general policy 23 preferred by MNR? 24 MR. EGDEN: When we drew up this boundary, as 25 far as following the drilling tract boundary it was 26 following direction of OEB staff in the past and MNR 27 staff and I think that Schedule 15 illustrates that 28 through the lands that were cross-hatched. It is clear 114 1 how much of the land was in a partial drilling tract and 2 how much wasn't. 3 MR. MACKIE: That is fine, Mr. Egden. I now 4 understand the reference to -- for taking reservoir for 5 third party drilling and, of course, we are in support 6 of having complete tracts incorporated either in or 7 outside of a DSA, but not straddling a DSA as the unit 8 agreement was originally formed. So there is no issue 9 there. 10 I am moving on now to -- from the Oil City 11 pool to the Mandaumin and Bluewater pools. I just have 12 a few more questions to finish up with here. 13 Now, paragraph 39, you indicate that the 14 development of the Mandaumin pool will require four 15 injection/withdrawal wells and two Guelph observation 16 wells. Am I correct that two injection/withdrawal wells 17 have already been drilled as stratigraphic test wells in 18 the Mandaumin pool? 19 MR. EGDEN: That is correct. 20 MR. MACKIE: And if you will turn to figure 9, 21 which is to be found on page 3/11, the cross-section, 22 the Mandaumin pool appears to be relatively wide and 23 flat. Why did Union -- did you Union, rather, consider 24 drilling a horizontal well in place of two vertical 25 injection/withdrawal wells? 26 MR. EGDEN: No. 27 MR. MACKIE: Why not? 28 MR. EGDEN: Horizontal drilling in this type 115 1 of reservoir is not the desired way to exploit the 2 reservoir. 3 MR. MACKIE: In what type of reservoir is 4 horizontal drilling the appropriate way to exploit the 5 reservoir? 6 MR. EGDEN: The ideal reservoir for horizontal 7 drilling would be one that is -- covers a large aerial 8 extent but is thin, such that a well that is going 9 horizontally would expose more feet of pay to the 10 wellbore. In a reservoir such as this, horizontal 11 drilling is not the best way to exploit the reservoir. 12 MR. MACKIE: But, Mr. Egden, doesn't this 13 cross-section that I have referred you to indicate that 14 the Mandaumin reservoir is wide with a flat crestal 15 area? 16 MR. EGDEN: No, it doesn't. The top of the 17 Mandaumin pool as we look at this cross-section is 18 higher on one side than it is on the other and it gives 19 no indication to the internal reservoir characteristics 20 which are the single most important issue to be 21 concerned with in determining whether horizontal 22 drilling is applicable or not. 23 MR. MACKIE: Is this cross-section drawn on an 24 east-west access? I assume that it is since the 25 Bluewater pool is shown to the left of the Mandaumin 26 pool. 27 MR. EGDEN: It is generally on a -- on a 28 southwest/northeast line. But the purpose of this 116 1 cross-section is just to show the relative size and 2 position of the Bluewater pool to the Mandaumin pool, 3 and I think that we are trying to read some information 4 from this cross-section which simply is not on this 5 cross-section and is probably a dangerous area for us to 6 go into. 7 MR. MACKIE: Okay. Well, fine. Let's go into 8 the dangerous area. 9 Putting aside the cross-section, has Union 10 ever drilled a horizontal injection/withdrawal well? 11 MR. EGDEN: No. 12 MR. MACKIE: Why is Union -- why has Union 13 chosen never to drill a horizontal well? 14 MR. EGDEN: Because the vertical wells perform 15 better for us than horizontal wells in our storage pools 16 to date. We see horizontal permeability on the order 17 of -- an order of magnitude greater than the vertical 18 permeability, and if we put a horizontal well into a 19 reef in a tight section, it would not be a -- would not 20 be a good investment for us from a well standpoint. 21 MR. MACKIE: Okay, Mr. Egden, could you -- 22 MR. EGDEN: In essence, our vertical wells are 23 horizontal wells standing on end. 24 MR. MACKIE: Well, I am not sure that I would 25 buy into that because a horizontal well has a 26 significant curved trajectory which could be within the 27 Guelph formation itself. I mean you end up with a 28 large -- 117 1 MR. EGDEN: These reservoirs have a 2 substantial amount of heterogeneity in them. We have 3 looked at horizontal drilling as an option and discarded 4 it as -- not as a viable option for the type of 5 operations that we conduct. 6 MR. MACKIE: Let's turn to Schedule 21. It is 7 Schedule 20 which shows the Guelph structure of the 8 Mandaumin pool. 9 Now, I have in mind that instead of drilling 10 both wells, UMD No. 3 and UMD No. 5, which are on 11 approximately a southeast access, that those two wells 12 could have been replaced by one horizontal well with a 13 surface location slightly to the north of UMD No. 3. 14 MR. EGDEN: I don't doubt that we could put a 15 wellbore into this pool from any point on the surface 16 and direct it anywhere we want in the subsurface. But I 17 have substantial doubts whether that would give us the 18 performance that we are requiring from an 19 injection/withdrawal well. I think we want to 20 substantiate the difference between could we and should 21 we, and I don't have any evidence in front of me to help 22 me say that a horizontal well would have been a better 23 option at this point. 24 MR. MACKIE: My understanding is, Mr. Egden, 25 that on average the drilling of a horizontal well would 26 be approximately 75 per cent of the cost of drilling two 27 vertical wells into the Guelph formation, but that such 28 a horizontal well could have the potential to intercept 118 1 a greater pay zone. As a general concept, is that 2 understanding correct? 3 MR. EGDEN: I don't have evidence to support 4 horizontal drilling in front of me. 5 MR. MACKIE: What sort of evidence would you 6 be looking for to support drilling a horizontal well in 7 place of two vertical wells? 8 MR. MACKIE: If I had a horizontal pay section 9 that was not very thick, let's say we had something on 10 the order of 10 feet thick, it was mappable to have a 11 large aerial extent in a horizontal sense, then putting 12 a horizontal wellbore into that would be more desirable 13 than drilling several vertical wells. 14 MR. MACKIE: I recognize, Mr. Egden, that your 15 responsibilities and concerns are primarily geological 16 when it comes to the question of the number and the 17 siting of injection/withdrawal wells. But I take it 18 that it is recognized that siting these wells can have a 19 significant impact upon landowers' property, both the 20 drilling of the well, the location of the well, the 21 construction of access roads to the well site and the 22 gathering lines necessary to service those wells. 23 MR. EGDEN: I don't dispute that you gather 24 that. 25 MR. MACKIE: And couldn't some of that impact 26 be avoided by the drilling of a horizontal well in place 27 of two vertical wells? 28 MR. EGDEN: One horizontal well drilled would 119 1 have less impact than two vertical wells that were being 2 drilled with the same equipment that were there for the 3 same length of time. You know, all things being 4 considered equal, one is less than two. However, you 5 know, are the impacts of the horizontal well the same 6 as; are they half of two cable tool wells? 7 I'm not aware of any studies that would 8 quantify all those types of impacts, so I don't think 9 that I can answer detail on that. 10 MR. MACKIE: Well, I mean this line of 11 questioning falls out of the fact that we have Consumers 12 Gas before this Board regularly and it has successfully 13 completed two horizontal wells in its storage pools. We 14 have CanEnerco that's drilling a horizontal well and is 15 doing quite successful. 16 Does Union actually consult with these other 17 parties, in the general area of gas storage pool 18 development and operation? 19 MR. EGDEN: Could you run the specifics on 20 that question back to me, again, please? 21 MR. MACKIE: I will. 22 Does Union have consultation meetings with 23 other operators of gas storage pools, such as Consumers 24 Gas and CanEnerco Limited, to discuss and review more 25 efficient and less costly ways of developing their gas 26 storage interests? 27 MR. EGDEN: I would say, in general terms, 28 that we are in close contact with most of our industry 120 1 partners because it is a small industry and that there 2 really are no surprises that are hiding in one shop over 3 another. 4 MR. MACKIE: So, you do consult with your 5 fellow storage companies, or companies operating storage 6 pools? On a formal basis. 7 MR. EGDEN: We don't sit down formally to draw 8 up our drilling program and ask CanEnerco to come in and 9 approve it, nor do we ask Consumers Gas to come in and 10 approve it, if that's what you are asking. 11 MR. MACKIE: No, that wasn't my question. 12 MR. EGDEN: But we meet -- we see each other, 13 on a relatively regular basis, throughout the year, at 14 various industry functions, just in general contact, and 15 I don't think that there's anything that anybody is 16 doing that is any great secret over what other people 17 are doing. 18 However, I must caution you against comparing 19 the horizontal storage wells that Consumers Gas has in, 20 say, the Black Creek Pool and comparing them to a 21 pinnacle reef because it's not a pinnacle reef. 22 MR. MACKIE: That may be a very fair and 23 appropriate observation. 24 MR. EGDEN: It's actually a very important 25 point. 26 MR. MACKIE: Yes. I accept that, that each 27 reef needs to be judged on its own merits. 28 MR. EGDEN: That would be a very good 121 1 statement. 2 MR. MACKIE: However, I'm going to propose a 3 new resolution, or resolution for the new millennium, 4 Mr. Egden: Union will consider drilling more horizontal 5 wells. 6 How does that grab you? 7 MR. EGDEN: Actually, we consider horizontal 8 drilling as part of our overall development plans for 9 all of the pools that we are bringing forward for 10 development, not just new pools but new well drilling, 11 and have done so for the last number of years -- and, if 12 I was going to estimate, I would say for the last five 13 or six years. 14 In fact, we sent some of our management people 15 on horizontal drilling courses just to evaluate that 16 specific possibility and its applicability to our 17 situation. 18 So, in actual fact, we are ahead of your 19 questioning, but perhaps we haven't made it clear to you 20 that we are doing that -- and if so, I apologize for 21 that. 22 MR. MACKIE: No, there's no apology necessary. 23 I'm just curious as to why we haven't yet had an 24 application from Union relating to horizontal wells, and 25 it seemed to me that the Mandaumin Pool was such an 26 opportunity, but you have explained that it's not 27 appropriate. 28 I'm moving on, now, and I just want to ask you 122 1 about the reservoir pressure data for both the Mandaumin 2 and the Bluewater reservoirs. 3 I assume that it's been ascertained those two 4 reservoirs are not in communication with each other? 5 MR. PARDY: That's correct. 6 MR. MACKIE: So, will Union be able to operate 7 those two pools quite independently of each other, as 8 storage pools? 9 MR. PARDY: That is correct. 10 MR. MACKIE: Could you turn to Schedule 28, 11 for a moment? 12 I think the evidence indicates that the 13 Bluewater Pool is still in production? 14 MR. PARDY: Actually, it is no longer in 15 production. It was shut in, in July of 1999. 16 MR. MACKIE: Okay. So the pressure, for July, 17 1999, the 2,303 kilopascals, is close to the present 18 pool pressure; there's been no further production? 19 MR. PARDY: That is correct. 20 MR. MACKIE: There might have been some minor 21 pressure recoveries, but that's all? 22 MR. PARDY: Correct. 23 MR. MACKIE: Okay. Thank you. 24 Now, Mr. Pardy, these may be questions for 25 you, in terms of the Union's ultimate intention of how 26 the Bluewater Pool is to be operated. 27 At Paragraph 9, you mentioned that the 28 calculated original gas in place is 32,729 times 123 1 10(3)m(3). 2 MR. PARDY: That was which paragraph? 3 MR. MACKIE: I think that's the wrong 4 reference. It's probably "19" and I messed up on the 5 word processing. 6 MR. PARDY: I think in Schedule 29 that 7 information is given. 8 MR. MACKIE: That's correct. That comes from 9 your calculations. 10 And then, in the summary table to the 11 application, which is Section 1, Schedule 1, the 12 inventory of the pool is increased to 66,500 times 13 10(3)m(3), at a maximum operating pressure of 9,517 14 kilopascals. 15 MR. PARDY: That was the peamock inventory you 16 were referring to. Is that correct? 17 MR. MACKIE: Yes. 18 MR. PARDY: Yes. 19 MR. MACKIE: Is it prudent to raise the pool 20 pressure to double the discovery pressure in one 21 injection cycle? 22 MR. PARDY: Obviously, in our application, 23 here, that is what we have proposed, and we are 24 comfortable with doing that. 25 MR. MACKIE: And why are you comfortable with 26 that? 27 MR. PARDY: Union has 17 other storage pools 28 that we have successfully delta pressured to -- or, 124 1 sorry, 15 of those we have successfully delta pressured 2 to a grading of .7 psi per foot; and that's what we are 3 proposing in this reservoir. 4 MR. MACKIE: And we have some discussion on 5 the possible reefal debris surrounding this and the 6 other pools. 7 Does Union have any information as to how much 8 inventory will migrate into the reefal debris and the A1 9 porosity when you double the discovery pressure? 10 MR. PARDY: We don't have any direct 11 information on that, no. 12 MR. MACKIE: Doesn't that go to the question 13 of prudence and whether the pressure should be doubled 14 in one injection cycle? 15 MR. EGDEN: We have taken pools to the same 16 pressure gradient in the immediate area, both the Dow A, 17 Sarnia Dow A Pool and the Enniskillen 28 Pool, and both 18 of those, it's had no negative impacts from delta 19 pressuring, at all. 20 And, again, as I was referring to earlier, one 21 should look at the actual pressure gradient that we are 22 going to take the pool to rather than the increase from 23 discovery pressure simply because the rocks have been 24 Michigan-based and, in particular, in this immediate 25 vicinity, have shown that they can successfully have 26 storage operations working at that type of pressure 27 gradient. They may actually be able to handle storage 28 operations at a substantially higher pressure gradient, 125 1 perhaps .8 or .85. But I don't have any operations, 2 right at the moment, that tell me that that would be an 3 unsafe pressure, but we do have substantial evidence to 4 show us that the .7 psi per foot is very acceptable, 5 very attainable and has had safe operation for a number 6 of years, to date, in very similar pools in the 7 immediate area. 8 MR. MACKIE: The .7 psi per foot depth is not 9 an issue. That will be proposed in the conditions of 10 approval and imposed by the Board. 11 It's a question of how prudent it is to go to 12 that degree of delta pressure in one injection cycle. 13 MR. EGDEN: Well, I believe that we have both 14 the Dow A, Sarnia Dow A Pool and the Enniskillen 28 Pool 15 that were significantly changed on their pressures, both 16 with no incident, both with no problems, both with safe 17 operations; and so, I would hope that the Board, in any 18 type of conditions that they would bring forward, would 19 certainly take those two pools and the operations and 20 the history of those pools into account before setting 21 conditions that would be put to Union. 22 MR. MACKIE: In those pools there was no 23 significant loss of gas or migration of gas into the A1 24 carbonate? 25 MR. EGDEN: None that I am aware of. 26 MR. MACKIE: Thank you. 27 At paragraph 58 -- and this is an observation, 28 I think, on the Bluewater and the Mandaumin pools, you 126 1 indicate that the proposed designated storage area is 2 larger than the existing production unit and included 3 additional lands all around the pool. 4 I don't fully understand when you bring forth 5 a designation to the Board this comparison to the 6 original production unit. 7 Given that Union is now the processor of 8 three-dimensional seismic data which presumably was not 9 available when the original unit was approved, what is 10 the purpose of the validity of comparing the DSA to the 11 production unit? 12 MR. EGDEN: The production unit and the 13 Production Unit Agreement are administrative issues. 14 However, if the reservoir is determined to extend beyond 15 what was originally mapped, I don't think it would be 16 complete on Union's part not to reference the production 17 unit and the extent of the reservoir as it was mapped 18 under that production unit, if it is substantially 19 different from what the newer technology has brought to 20 light. 21 MR. MACKIE: Has that occurred with one of the 22 pools? I recollect your attempting to amend the 23 existing unit agreement -- 24 MR. EGDEN: Questions regarding the amending 25 of the production unit should be directed to Dave Low. 26 MR. MACKIE: Thank you. Could you turn to 27 Schedule 33. This shows the unit area and the proposed 28 area for designation for the Bluewater Pool, Mr. Egden. 127 1 I believe that in fact it is this unit area 2 which Union is attempting to renegotiate? 3 My question to you -- and I am not sure 4 whether you can answer this -- is: Will the new unit 5 area encompass the base of the gas as shown on the gross 6 gas isopach in your Schedule 21? 7 MR. EGDEN: Yes. 8 --- Pause 9 MR. TREVAIL: In response to Interrogatory No. 10 33 you mentioned that the data from the UMD-1 and UMD-4 11 wells are being evaluated and incorporated into the 12 geological interpretation, and also reviewing the core 13 analysis from the wells drilled in the Mandaumin Pool it 14 appeared that any porosity there was essentially 15 salt-filled. 16 Are you also going to be conducting a 17 geophysical evaluation to tie the results of the wells 18 together? 19 MR. EGDEN: That is correct. 20 MR. TREVAIL: Would this new geophysical 21 evaluation -- do you anticipate having to reposition any 22 of the proposed wells that are now on the books? 23 MR. EGDEN: That evaluation of the geophysical 24 information and tying it to the well results is not 25 complete. So it would not be proper for me to comment 26 on it at this point in time. 27 However, this salt-plugging that was in the 28 UMD-4 well may have an impact on some well placement. 128 1 We anticipate that if there is any change with that that 2 we would bring that forward as an update to the 3 evidence, probably early in the New Year. 4 MR. TREVAIL: Thank you. Would you anticipate 5 any changes to the working volumes of the reservoir 6 itself? 7 MR. EGDEN: No. The actual volume of gas that 8 was in the reef and what we have from working volumes is 9 not impacted by the core analysis that we see in front 10 of us. 11 MR. MACKIE: Thanks, panel. Those are the 12 Board Staff questions. 13 MR. VOGEL: Mr. Egden, I have a few questions 14 for you and I expect the consultants will probably have 15 some questions for you as well. 16 --- Pause 17 MR. VOGEL: Mr. Egden, in your response to 18 Lambton County Interrogatory No. 4, you discuss Union's 19 past experience with enlarging the GSA. I gather from 20 that response that where that has occurred, it is as a 21 result of issues with respect to porosity or the third 22 party drilling that you have discussed with Mr. Mackie. 23 Is that correct? 24 MR. EGDEN: That is correct. 25 MR. VOGEL: With respect to the acres that 26 Union presently has under lease or is proposing to lease 27 which fall outside the DSA on these proposed pools, the 28 so-called outside acres, is there any issue that those 129 1 outside acres are required for other purposes of 2 porosity or to protect from third party drilling? 3 MR. EGDEN: Just to clarify your question, are 4 you asking me if the lands are outside of the proposed 5 DSA boundary be required in the future? 6 Is that it? 7 MR. VOGEL: Either currently required or in 8 the future, to address these issues of porosity and 9 third party drilling which have resulted in other DSA 10 expansions in the past. 11 MR. EGDEN: No, I don't expect them to, not 12 based on the evidence we have in front of us. There is 13 probably a point of clarification that would help us 14 here to look at the five cases of enlargement that we 15 have outlined in the accompanying attachment to IR No. 16 4. 17 In each and all of those cases, that was 18 before the advent of designs that we are using today to 19 protect our 3-D seismic. 20 We feel fairly comfortable that what we have 21 proposed right now did not change in the future. We 22 have taken the porosity and the A1 into account, and how 23 much land we need inside of the DSA to protect ourselves 24 from third party drilling. 25 MR. VOGEL: I would like to take you back to 26 where Mr. Mackie started with you this morning, which 27 was Addendum 1 to your evidence, the report of Union and 28 the MNR's meetings. 130 1 There is a reference on the first page of -- 2 I'm sorry, the second page of that letter. It makes 3 reference to the distribution by the MNR of a draft 4 policy dealing with the setting of DSA boundaries. 5 What was that draft policy? 6 MR. EGDEN: In Phase I of Century Pool there 7 was substantial discussion regarding what the actual 8 policy and procedures should be on setting DSA 9 boundaries. At the same time, there had been some 10 activity just outside of a designated storage area where 11 an operator wanted to have a fracture operation in a 12 well bore, and it was -- certainly, there was some 13 confusion amongst the storage operators and the Ministry 14 of Natural Resources on what was to be allowed and what 15 was not to be allowed and under what cases would it be 16 allowed or why would it not be allowed. As a result, we 17 have had substantial discussions with the Ministry of 18 Natural Resources. Internally, at the Ministry the 19 staff there were trying to draft a policy that would 20 bring some clarity to this issue. 21 As far as I know, that policy has not been 22 formalized and released as policy. It is a work in 23 progress and it is still in draft form. So I would be 24 uncomfortable in trying to answer questions on something 25 that was still in progress. I would have to redirect 26 any questions like that to the MNR themselves. 27 MR. VOGEL: Does Union have a copy of the 28 policy, the draft policy? 131 1 MR. EGDEN: We were given a copy of the policy 2 in the stage that it was at in April of '99, but I do 3 know that it had undergone more revision. I don't know 4 what stage it is at right now, so I don't have a current 5 copy of that. 6 MR. VOGEL: Can you produce a copy of what you 7 do have? 8 MR. EGDEN: Yes, I could. 9 MR. LESLIE: Mr. Vogel, I think we would 10 probably want to check with the Ministry first to make 11 sure they didn't have any objection to that, but subject 12 to that. 13 MR. VOGEL: All right. And Mr. Leslie, while 14 you are checking with the Ministry you might ask them 15 for the most recent version of the draft policy as well. 16 MR. LESLIE: Why don't I give you the phone 17 number? 18 MR. VOGEL: So your knowledge of that policy 19 hasn't been finalized to this point? 20 MR. EGDEN: To the best of my knowledge it 21 hasn't been finalized, but I know that there has been 22 changes made to it from the version that was shown to us 23 in April. 24 My understanding is that the MNR are welcoming 25 input from interested parties, so they would probably 26 welcome your call. 27 MR. VOGEL: There is also reference in this 28 report to a policy of the Michigan DNR, with respect to 132 1 maintaining a minimum buffer zone of 40 acres. Was that 2 part of your discussion that you had with the MNR? 3 MR. EGDEN: We did have some discussion on 4 that and both Union Gas and the Ministry of Natural 5 Resources were in agreement that a "made in Ontario" 6 policy would probably be best for Ontario storage 7 operations. There are some differences in geology that 8 happened between here and Michigan where the storage 9 pools are operated. There is a lot of similarities, but 10 there are some differences such that a made-in-Ontario 11 policy is probably a better way to go. 12 MR. VOGEL: Can you tell me does Union conduct 13 any operations in Michigan? 14 MR. EGDEN: No. 15 MR. VOGEL: Can you tell me what led to -- do 16 you have any other information on what is in your report 17 here? Can you tell me what led to the development of 18 this policy in Michigan? 19 MR. EGDEN: No, I can't. 20 Actually, the discussion that I was having 21 with the Michigan Public Service Commission staff people 22 was at a dinner meeting at the Michigian Basin 23 Geological Society, of which I am a member, meets on a 24 monthly basis at a dinner meeting, bring in speakers. 25 It was in an informal atmosphere like that that I had 26 asked two of their staff members, "Do you have a policy? 27 What are some of the guidelines that go with that, and 28 would you mind if I gave your name to the MNR staff and 133 1 let them call for you input?" They welcomed contact 2 from the MNR. 3 I can't say whether the MNR was in contact 4 with them but it was an informal setting, like you say, 5 at a dinner meeting of the Michigan Basin Geological 6 Society. 7 MR. VOGEL: In response to Mr. Mackie's 8 questions you dealt with in some detail with how you 9 determined the boundaries for DSAs. I note in this 10 report that you refer to situations in which a DSA 11 boundary was determined for purely administrative 12 reasons. Would I be correct in concluding that there 13 are reasons beyond geology which dictates DSA 14 boundaries? 15 MR. EGDEN: I would be uncomfortable with your 16 terminology of "dictate" but there are definitely 17 administrative issues that need to be considered in 18 setting a DSA boundary. The discussion that we had had 19 with the Ministry of Natural Resources, at the urging of 20 the Ministry of Natural Resources, was limited to those 21 discussions surrounding the subsurface clients, the 22 geology and the reservoir engineering. The MNR staff 23 were quite clear in pointing out that it wasn't their 24 mandate to handle lands that could be included or could 25 be excluded for so-called "administrative reasons." 26 MR. VOGEL: On the boundaries that you are 27 advancing or proposing in this application, am I correct 28 in concluding from the evidence you have given thus far 134 1 that beyond the geology, beyond the edge of the gas, 2 certainly one of Union's principle objectives is to 3 protect their pools from third-party interference? 4 MR. EGDEN: That's correct. 5 MR. VOGEL: And in some measure would I be 6 correct in saying that the outside acres help Union to 7 achieve that purpose? In other words, outside acres 8 beyond the boundaries of the DSA assist Union in 9 preserving the integrity of its pools? 10 --- Pause 11 MR. EGDEN: I am trying to -- I am somewhat at 12 a loss to provide an answer for that because the answer 13 is really somewhat location specific. With specific 14 pools if we feel that strongly that we don't want to 15 have lands under someone else's controls or leases we 16 may go out and try and get some leases in place. 17 MR. VOGEL: Outside the boundaries of the DSA 18 for that administrative-type purpose you described 19 protecting the integrity of the pool? 20 MR. EGDEN: It could be for a variety of 21 reasons and one of them could be the administrative 22 reason that you are outlining. 23 MR. VOGEL: What would some of the other 24 reasons be? 25 --- Pause 26 MR. EGDEN: We may not have hard scientific 27 data in the form of well control or seismic control that 28 would indicate that some outside acres could be at risk 135 1 for us. So we would try and get those lands under lease 2 rather than seeing that be in someone else's control. 3 MR. VOGEL: Okay. Fair enough. 4 Those sorts of factors would be applicable to 5 the pools that you are proposing here and the function 6 performed by outside acres here. Is that fair? 7 MR. EGDEN: I would say there is some validity 8 to that statement. 9 MR. VOGEL: I was interested in your responses 10 to Mr. Mackie's questions with respect to horizontal 11 drilling, in particular with respect to the Mandaumin 12 pool. Union's response to Board Staff Interrogatory 13 No. 129 confirms that you have no written landowner 14 acknowledgement with respect to the one on the proposed 15 wells in Mandaumin, UM No. 6. You are aware of that, 16 are you? 17 MR. EGDEN: Yes, I am. 18 MR. VOGEL: And are you familiar with the 19 amending agreement that was entered into with a number 20 of the Mandaumin landowners in January of 1998? 21 MR. EGDEN: Well, I am aware that there is 22 that agreement, but I am not the witness that can 23 testify to the detail held in that agreement. 24 MR. VOGEL: That would be Mr. Lowe? 25 MR. EGDEN: That is correct. 26 MR. VOGEL: Well, let me just pursue this with 27 you as far you can take it. One of the paragraphs in 28 that agreement, paragraph 13, deals with Union's rates 136 1 with respect to establishing new well facilities, and 2 the agreement that you have with this particular 3 affected landowner where you are proposing to locate 4 UM No. 6 provided -- the agreement provides for the 5 location of primary wells and secondary wells. Are you 6 familiar with that? 7 MR. EGDEN: Yes, I am somewhat familiar with 8 that. 9 MR. VOGEL: And the primary wells, as I 10 understood it, are the ones which are to be located 11 adjacent to the roads as those access roads, the 12 location of which was agreed to as part of this 13 agreement. Is that correct? 14 MR. EGDEN: Again, I am familiar that there 15 were different classes of wells with that and certain 16 accommodations were being made with landowners to try 17 and put some structure to the development, yes. 18 MR. VOGEL: But this particular well, 19 UM No. 6, under this classification I assume would fall 20 within the classification of a secondary well or a 21 midfield installation. Is that correct? 22 MR. EGDEN: I would have to let you clarify 23 that with Dave Lowe. 24 MR. VOGEL: Are you aware that under this 25 agreement Union has no right to construct a secondary 26 well on this property? 27 MR. EGDEN: I really have to refer questions 28 on the detail of that amending agreement to Dave Lowe. 137 1 MR. VOGEL: Let me just ask you this question. 2 Make the assumption that Union has no right, contractual 3 right to locate the well where you are proposing to 4 locate it. What is Union's alternative? 5 MR. EGDEN: I'm not sure I am clear on your 6 question. If we -- 7 MR. VOGEL: Make this assumption that Union is 8 restricted by contract in where it can place the well 9 and where you are proposing to place it isn't allowed 10 under the contract that you have. What is your 11 alternative? 12 MR. EGDEN: I have to really kind of kick that 13 over to Dave Lowe. I mean he is the writer of that 14 amending agreement and -- 15 MR. VOGEL: No, because Dave Lowe is not going 16 to tell me where you could alternatively place the well. 17 Let me ask you this question, Mr. Egden. 18 Could you -- in response to Mr. Mackie's 19 questions regarding horizontal drilling, you indicated 20 that you don't have any evidence before you which would 21 indicate that horizontal drilling in the case of the 22 Mandaumin pool is a better option than the vertical 23 wells that you are proposing. Is that a fair summary of 24 your evidence? 25 MR. EGDEN: That is a fair summary of my 26 evidence as it stands at this point, and that is not to 27 preclude that with further drilling and more information 28 on this pool that horizontal drilling would not be an 138 1 alternative to be considered in the future. And that is 2 an important point. 3 MR. VOGEL: So would I be correct in saying 4 that if for whatever reason you are precluded from 5 placing UM No. 6 where you want to, then horizontal 6 drilling might be something that Union could investigate 7 as being a solution to its problem in terms of placement 8 of this well? 9 MR. EGDEN: It's possible. 10 MR. VOGEL: And that investigation of 11 horizontal drilling hasn't been conducted to date? 12 MR. EGDEN: That is untrue. 13 MR. VOGEL: Well, you said you had not 14 evidence before you. Have you got any evidence before 15 you of evaluating horizontal drilling in connection with 16 the Mandaumin pool? 17 MR. EGDEN: I said I had no evidence in front 18 of me to say that horizontal drilling was a preferred 19 alternative at this point on this pool, but that is not 20 to say that we haven't considered horizontal drilling as 21 being a preferred method in here. 22 MR. VOGEL: Well, my question is, have you 23 done an evaluation of horizontal drilling on the 24 Mandaumin pool as an alternative? 25 MR. EGDEN: My boss said to me a few years 26 ago, "Can we drill a horizontal well in the Mandaumin 27 pool," and I said we would take a look at it. So we 28 took a look at it and we didn't have the evidence in 139 1 front of us to support horizontal drilling as a 2 preferred method of exploiting this reservoir with the 3 information in front of us at present. 4 MR. VOGEL: Have you done a report and updated 5 it with respect to the evidence that has more recently 6 come into your possession to reevaluate that option? 7 MR. EGDEN: No, we are in the process of 8 trying to finish the evaluation of what those two 9 stratigraphic test wells were telling us and how that 10 ties with the other data. 11 MR. VOGEL: Okay. And as part of that 12 analysis it is your undertaking to file with the Board 13 early in the new year, and is part of that analysis 14 going to include a consideration of horizontal drilling? 15 MR. EGDEN: But we will -- we do not take 16 horizontal drilling off the table and not revisit it at 17 all. It is one of the -- one of the alternatives that 18 we will be considering in that type of analysis. 19 MR. VOGEL: Okay. Also on that same line of 20 questioning in response to Mr. Mackie, you indicated 21 that Union has never drilled a horizontal well and I 22 have your response to his question being that the reason 23 for that is because you have been satisfied with the 24 performance of the vertical wells better than horizontal 25 wells. Are there any horizontal wells located in 26 Union's storage pools presently? 27 MR. EGDEN: No. 28 MR. VOGEL: So within Union's own storage 140 1 pools you would have no basis for making a comparison 2 between the operation or performance of vertically 3 drilled wells or horizontal wells. Is that fair? 4 MR. EGDEN: Well, that is not really fair 5 because we don't consider just our own wells in trying 6 to evaluate what type of operations we should do. We 7 look at -- we look at a much larger scope of operations 8 than just our own wells. 9 MR. VOGEL: And whose operations have you 10 compared then? 11 MR. EGDEN: We look at everyone's. 12 MR. VOGEL: Like whose? 13 MR. EGDEN: Like everyone's. Everybody. 14 Every type of operation that is going in North American, 15 in the world if you want for this. And I'm not trying 16 to be presumptuous on this, but the drilling of oil and 17 gas wells is -- it's a global business and we have to 18 stay on top of that technology. Whether it be geology, 19 whether it be well drilling, whether it be seismic 20 techniques, what is happening on the other side of the 21 world is information that comes to us in a variety of 22 means and things that we do go to other people. And our 23 industry, it is a global industry and we are looking at 24 things all the time. 25 MR. VOGEL: What is it about the operations of 26 other people that has caused Union to conclude that what 27 works well for other people wouldn't work for Union? 28 MR. EGDEN: Well, what I had stated before is 141 1 that we don't have a storage pool that in this type of 2 reservoir in this part of the world is showing that 3 horizontal drilling is outperforming vertical -- 4 vertical wells at this point. 5 MR. VOGEL: But perhaps as Mr. Mackie says 6 that is just because the horizontal wells haven't been 7 drilled yet. Is that a possibility? 8 MR. EGDEN: I wouldn't agree with that 9 statement. 10 MR. VOGEL: Is it your position, or is it 11 Union's position, that there's sufficient experience 12 with horizontal drilling in this part of the world, 13 then, and the unique circumstances you are referring to 14 here, to make that determination that it's inappropriate 15 for this area? Is that Union's position? 16 MR. EGDEN: Can you repeat that? 17 MR. VOGEL: Is it Union's position that 18 there's something -- that there's been sufficient 19 experience with horizonal drilling in this area to 20 satisfy Union that what works well in many other parts 21 of the world wouldn't be appropriate here? 22 MR. EGDEN: No, that's not Union's position. 23 MR. VOGEL: What is Union's position? 24 MR. EGDEN: Union's position is that we 25 evaluate each pool development on a 26 development-by-development basis and that if there is an 27 emerging technology that we feel has an appropriate 28 application, then we would probably embrace that 142 1 technology. 2 MR. VOGEL: And does Union feel that there has 3 been sufficient or has not been sufficient experience 4 with horizontal drilling in this area to be able to 5 determine its application for a pool like Mandaumin? 6 MR. EGDEN: I don't think there's enough 7 information in front of us, at present, to make a 8 determination, in its totality, about horizontal 9 drilling or about the Mandaumin Pool to either discard 10 horizontal drilling completely or to move to horizontal 11 drilling on its own, either. 12 MR. VOGEL: That's fair enough. Okay. 13 In your response to one of the Lambton County 14 interrogatories, Union provided maps for nine of the 17 15 existing pools. And my understanding was that the maps 16 in that form are not available for pre-1989 pools. Is 17 that correct? 18 MR. EGDEN: That is correct. That type of 19 format was one that we started to provide to the OEB; so 20 we have used the maps from those hearings and supplied 21 that in the answer. 22 MR. VOGEL: With respect to the pre-1989 23 pools, are there maps available, even if in different 24 format? 25 MR. EGDEN: I can't answer that question. For 26 some of the pools, there may be some maps that are of -- 27 that are somewhat similar but not in exact same format. 28 MR. VOGEL: Can Union produce whatever 143 1 pre-1989 maps there are, even if they are not in the 2 same format? 3 MR. EGDEN: I can't guarantee that. 4 MR. VOGEL: If they exist? 5 MR. EGDEN: If they were readily available, we 6 would have no reason to hide them. 7 MR. VOGEL: Can I have an undertaking to 8 determine if they are readily available and if they are, 9 to produce them? 10 MR. EGDEN: Yes, we can take a look at that 11 and provide what we have. 12 MR. LIDDLE: I just have a very few questions; 13 I think, between Mr. Mackie and Mr. Vogel, most of them 14 have been covered. 15 There's been a lot of discussion about 16 horizontal and vertical drilling, and I guess I would 17 like to ask about sort of "lazy-boy" drilling, if you 18 like -- it's something between horizontal and vertical, 19 in terms of directional drilling -- and whether in your 20 examination you have considered not horizontal drilling 21 but deviations of 10 or 15 per cent from vertical which 22 would still get, essentially, penetration of the 23 reservoir vertically without the disadvantages you see 24 from a full horizontal? 25 MR. EGDEN: Well, we don't discount 26 directional drilling, either, out of hand. We try and 27 look at all of the tools that are available to the 28 drilling people and then pick the ones that are the most 144 1 appropriate. 2 MR. LIDDLE: In terms of appropriate drilling, 3 you prefer cable tool drilling, as I understand it -- 4 and perhaps you could just explain the reasons why cable 5 tool is preferable to rotary? 6 MR. PARDY: The biggest reason that we prefer 7 cable tool to rotary is we have found that it's cheaper. 8 We can drill the well for less money; when we build a 9 well pad, a drilling pad, we need a smaller drilling pad 10 for cable tool drilling; when the operation is going on, 11 cable tool drilling is not as noisy as rotary drilling. 12 So, for those reasons, we have said, if it's cheaper and 13 it provides the same product and it causes more -- the 14 rotary drilling causes more of an environmental impact, 15 we prefer to stay with cable tool drilling. 16 MR. LIDDLE: And are there limitations to 17 cable tool drilling, in terms of the amount of vertical 18 deviation, for instance, if you were to go to 19 directional drilling? 20 MR. PARDY: If we wanted to go to directional, 21 we would have to use a rotary drilling rig. 22 MR. LIDDLE: Have you considered, in your 23 optimization of well drilling, wellbore diameter in 24 terms of fewer but larger wellbores to enhance 25 deliverability? 26 MR. PARDY: I think there becomes a certain 27 point where the additional size of diameter in your 28 casing you are not gaining anything, from a pressure 145 1 drill standpoint. 2 MR. LIDDLE: But you have examined that the 3 size you currently drill is a reasonable optimum? 4 MR. PARDY: Yes, we have. 5 MR. LIDDLE: In terms of the Michigan 6 practice, which you have described to Mr. Vogel, given 7 that there are some -- always some differences, on a 8 reservoir-specific basis, it is generally true that the 9 Michigan storage development is quite similar, 10 geologically, to Ontario? 11 MR. EGDEN: That's a fair statement. 12 MR. LIDDLE: And would it be fair to say that, 13 in a general sense, again, that applying the Michigan 14 practice, in terms of the 48-acre buffer, would result 15 in larger DSAs than what has been, I think as you 16 described them, "made in Ontario" policy that has 17 evolved? 18 MR. EGDEN: Well, it would, with the proviso, 19 though, that if Michigan had 25-acre drilling tracts, 20 then their DSAs would be smaller. 21 MR. LIDDLE: Oh, it's largely the result of 22 sort of an administrative difference, in terms of what 23 the size of the drilling tract -- 24 MR. EGDEN: There's a difference in the 25 survey. Their operations are based on 40-acre drilling 26 tracts. And in Ontario, for slurry and drilling, it's 27 based on a 25-acre drilling tract. So, there will be 28 some problems in translations that are directly related 146 1 to those facts. 2 MR. LIDDLE: Now, in terms of the new 3 technology, 3-D seismic, and so on, that is available to 4 the industry, which has helped in understanding the 5 reservoirs, has that same new technology led to any 6 resurgence of drilling, in the sense of operators' 7 drilling areas which had previously been thought to be 8 finished, in terms of any drilling potential in looking 9 for new production? 10 What I am getting to here is: Is there any 11 sign that there will be more drilling around existing 12 reservoirs? 13 MR. EGDEN: 3-D seismic is giving a clearer 14 picture of what's in the subsurface than what was seen 15 before -- a higher degree of resolution -- and so, it is 16 resulting in drilling some wells that may not have been 17 drilled before, but, by the same token, it's also 18 resulting in the non-drilling of some wells that might 19 have been drilled before; and what I'm saying there is 20 that one of the prime benefits of 3-D seismic is the 21 reduction in the number of dry holes that industry 22 drills, in general, and increasing the success rate. 23 So it's one of those things that is benefiting 24 both sides of the equation: fewer drilling of dry holes 25 and more drilling of successes. That is certainly 26 bringing re-evaluation to areas that might have been 27 passed by in the past. 28 MR. LIDDLE: Following on from that, it would 147 1 suggest that even though there have not been any new 2 wells drilled in some areas for 25 years, that doesn't 3 mean that there are no possibilities in the future that 4 someone will come in and try something. 5 MR. EGDEN: That is true. Actually, what I do 6 as a standard part of our evaluation of lands before 7 applying for designation is that we try to have all of 8 the lands covered with our 3-D seismic survey. One of 9 the reasons for that is to ensure that in the areas 10 where there is no well control, we get as clear a 11 picture as we can of what is in the subsurface. 12 If we were to identify another reservoir in 13 that case, we would want to drill it. And I am sure 14 that the landowners would like us to drill it and get 15 the royalty income from the ground and into their bank 16 accounts. 17 We assess the risk of inventory removal. We 18 also assess the likelihood of there being other drilling 19 targets in between the wells that are already there. 20 MR. LIDDLE: And if there were sort of 21 possibilities suggested by such 3-D seismic, that might 22 influence the size of the DSA on a particular side of 23 the pool where you had some seismic that said well, it 24 is not clearcut but it is sort of interesting. It might 25 be one of those judgment reasons as to how you set a 26 DSA? 27 MR. EGDEN: It's a factor, yes. 28 MR. LIDDLE: You make the statement that the 148 1 lower original pressure in these reefs is, by your 2 interpretation, due to the fact that they were cut off 3 from filling fully somewhere back in geologic time. 4 MR. EGDEN: Yes, that statement is in our 5 evidence. 6 MR. LIDDLE: Would you agree that that is not 7 something that anybody can really prove? It is a 8 supposition and that's what it is. 9 MR. EGDEN: I disagree with that. What that 10 shows -- and it is a clear demonstration that the 11 reservoir that pressure system (technical difficulties) 12 If the reservoir or if that particular 13 pressure system that the reservoir represents was in 14 communication with the broader regional hydrodynamic 15 regime, if you will, then we would see normal 16 hydrostatic pressure when we drilled into it. 17 If we see pressure that is higher than that or 18 lower than that, then that is very definitive proof that 19 we are into a separate pressure system in itself, be it 20 under pressure relative to hydrostatic pressure or be it 21 higher. 22 That is a very strong point for pressure 23 isolation. 24 MR. LIDDLE: I quite agree that it is a 25 separate pressure system. But you would say then that 26 there is no possibility that the lower pressure was due 27 to very slow leakage over geological -- 28 MR. EGDEN: Actually, I would say it is 149 1 somewhat of an ambiguous statement. It could be an 2 indication as well that that reservoir was filled when 3 the overlying sediment cover was much less, and then the 4 reservoir was sealed. Or it could mean that this 5 reservoir was uplifted and there was some leakage, and 6 it was then sealed. 7 There are a number of factors that could be in 8 there. 9 One thing that is without dispute is that 10 there is pressure isolation from the regional 11 hydrostatic pressure at that depth. 12 MR. LIDDLE: But it could be from various 13 historic geological reasons. 14 MR. EGDEN: There are a number of things that 15 could be considered. 16 MR. LIDDLE: And the actual reason is really 17 not provable nor, I guess I would submit, is it 18 necessary to prove what the reason was. 19 MR. EGDEN: I would agree with you on that. 20 MR. LIDDLE: Just one other question with 21 regard to the Michigan practice that I didn't ask. 22 They use the same zero edge in the sense that 23 when people refer to distances that Michigan uses, it is 24 from the zero edge of A1 type porosity as opposed to the 25 principal reef boundary. 26 MR. EGDEN: That is my understanding from the 27 discussions that I was having with their staff people, 28 but recognizing the circumstances under which I was 150 1 having that discussion. We were not bringing out any of 2 their reports and poring over them in detail. But it 3 was certainly the impression they were giving me; that 4 we were dealing with an apples to apples type of 5 comparison. 6 MR. LIDDLE: But to be sure of that would take 7 a little more formal checking, if I could call it that, 8 of your discussion at a geological society meeting. 9 MR. EGDEN: Yes. 10 MR. LIDDLE: Thank you; those are the 11 questions I had. 12 MR. MACKIE: Thank you, Mr. Liddle. 13 Are there any other parties that have 14 questions? 15 MR. VOGEL: Dr. Napier has some questions. 16 MR. MACKIE: Thank you. 17 MR. NAPIER: Mr. Pardy, in response to 18 Mr. Liddle, you mentioned that cable drilling was 19 quieter than the rotary drilling in the context of LOCSA 20 Interrogatory No. 12, could you place those sound 21 pressure levels in relation to the 90 dBA that you 22 mentioned? 23 MR. PARDY: No, we don't have that information 24 available. That was generally an observation on my 25 part. 26 MR. NAPIER: I see. So you can't put those on 27 either side of the 90. 28 MR. PARDY: No. Cable drilling would 151 1 definitely be quieter than rotary drilling, but I 2 wouldn't have the decibel numbers. 3 MR. NAPIER: Just a supplementary to that, 4 Mr. Pardy. Are you going to undertake rotary drilling 5 in this project? 6 MR. PARDY: We have in the stratigraphic test 7 well in some of them. However, in the wells that we 8 have planned to drill from this time forward we don't 9 plan to do any rotary drilling at this point. That 10 would be dependent upon the schedule that we end up 11 with. 12 MR. NAPIER: Thank you, sir. 13 MR. MACKIE: Any other questions? 14 I have a couple of questions that I just want 15 to finish off with. 16 Mr. Vogel has drawn to my attention the 17 response to Board Staff Interrogatory 129. That was an 18 interrogatory which was answered by the Lands Panel 19 originally, Mr. Lowe. 20 But you provided a supplementary response to 21 it, Mr. Egden, at 129.1. 22 Before you leave us this afternoon, I just 23 want to make sure I understand the nature of your 24 response. 25 You were asked to provide or you were asked 26 whether Union has considered alternative well sites to 27 well UND No. 6, that being the well for which Union has 28 not provided a letter of consent or acknowledgement. 152 1 In your response you provided the Guelph 2 isopach of the Mandaumin Pool. Can you just lead us to 3 the alternative sites that Union has considered? 4 --- Pause 5 MR. EGDEN: There are two other well locations 6 that are marked with an open circle. They have the 7 number "8" behind one and the number "7" beside the 8 other. 9 I will deal with no. 7 first. 10 No. 7 is roughly halfway between UMD no. 5 and 11 UMD no. 4 located in Lot 1, Concession 2, Sarnia 12 Township. And the second alterative is an open circle 13 labelled no. 8 in Lot 1, Concession 1 of Plympton 14 Township. 15 When we considered the well locations to 16 drill, we had those eight locations as locations that 17 could be considered, and then we picked what we felt to 18 be the six best locations of the eight. 19 MR. MACKIE: Now, if at the end of the day you 20 do not receive a licence to UMD No. 6 then should we 21 assume that Union would reapply to the Ministry of 22 Natural Resources for a licence to drill either 23 locations 7 or 8? 24 MR. EGDEN: I am not sure that I would want to 25 restrict it just to 7 or 8. As we have said in other 26 hearings there that the number of and placement of wells 27 is done on a package deal, not on an isolated 28 well-by-well basis. 153 1 But I think what we are trying to provide here 2 is that there are some alternatives that are available 3 to us. With the information we have from the 4 stratigraphic test wells to date and this particular 5 situation here with UMD-6 it is not outside of the scope 6 of reason that we could come back to the Board with some 7 movement on some well locations. 8 MR. MACKIE: No, I understand that, but for 9 the purpose of this application Union still is pushing 10 ahead with its preferred location UMD No. 6 and asking 11 the Board to approve that licence, notwithstanding the 12 lack of a letter of consent? 13 MR. EGDEN: That's correct. 14 MR. MACKIE: Thank you. 15 Those are all my questions. Thank you very 16 much, counsel. 17 I suggest that we take a 10-minute break now 18 and we finish with this panel and at least make a start 19 on Panel 3 this afternoon. 20 --- Recess at 1522 21 --- Upon resuming at 1534 22 MR. MACKIE: Jo-Ann, I would like to start, 23 please. I don't suppose the absence of your counsel is 24 terminal to us getting going. Well, we don't have any 25 legal issues to raise. 26 Panel, I just want to tell you where we are 27 going in terms of our questions. You are probably aware 28 that a number of questions related to costs associated 154 1 with the project dropped to third from Panel 1 to Panel 2 3. 3 So we are going to continue with our cost 4 questions, first of all, the ones that Ms Callingham 5 referred to you. I am going to deal with cost 6 questions, Mr. Teper also has some cost questions, and 7 then when we have dealt with that we will get into the 8 body of your evidence dealing with the proposed 9 facilities and operations of the pool. 10 MR. MARUSIC: Mr. Mackie, if I could just add 11 something? 12 MR. MACKIE: Please. 13 MR. MARUSIC: My name is Joe Marusik. I 14 understand you had some questions about Section 2, 15 Schedule 1, earlier. I may be able to help you with 16 some of those if you would like. 17 MR. MACKIE: Thank you. 18 Section 2, Schedule 1? 19 MR. MARUSIC: Yes. 20 MR. MACKIE: Yes. Thank you for volunteering 21 yourself to deal with that table. 22 Bear with me for a moment while I pick up 23 those questions which originally went to Lynn Galbraith. 24 --- Pause 25 MR. MACKIE: We left off at the point where I 26 was going to discuss the unavailable working space of 27 19.3 times 10(6)m(3). Is that related to the Sombra 28 Pool? 155 1 MR. MARUSIC: Yes, it is. 2 MR. MACKIE: What is unavailable space and, 3 more particularly, why is it unavailable? 4 MR. MARUSIC: Union is unable to cycle the 5 entire official working inventory in that pool each year 6 and the 19.3 represents the amount, the shortfall, in 7 our ability to cycle that pool originally. 8 We had brought a request to the Energy Board 9 in the E.B.R.O. 486 application requesting that volume 10 be reclassified to cushion gas. That request was denied 11 at the time. So we consider that to be more or less 12 permanently unavailable to us. 13 MR. MACKIE: Thank you. That addresses my 14 next question which is: Why does the space remain 15 classified as unavailable as opposed to reducing your 16 figure in line 1 for company-owned storage? But I 17 appreciate there can be an issue concerning the volume 18 of gas contained in that part of the reservoir which the 19 Board has determined shall not be categorized as cushion 20 gas. 21 Now, third-party storage on this table 22 remains, and that is at line 5, remains at 85 times 23 10(6)m(3), third-party storage. Why does that volume 24 not increase by the amount of 23.659 times 10(6)m(3) in 25 1989 to reflect the third-party storage that Union has 26 negotiated with NM&N that Ms Galbraith made reference to 27 this morning? 28 MR. MARUSIC: I can't answer that question. 156 1 That would be for Mr. Killeem to answer. 2 MR. MACKIE: Are we going to see Mr. Killeem 3 in these proceedings at some point? I hope so. 4 MR. MARUSIC: I would suggest he will be 5 available at the hearing if need be. 6 MR. MACKIE: Thank you. 7 Thanks. That deals with the balance of my 8 questions on that table. Thanks for volunteering that 9 information. 10 Returning then to some of the cost questions. 11 Would you turn to the response to Board staff 12 Interrogatory 76, please? 13 --- Pause 14 MR. MACKIE: The total costs referred to in 15 this response total $2,042,860. Do you have an estimate 16 of the work that was completed last fall for the 17 preparation of the access roads and the preparation of 18 all of the drilling pads? 19 MR. McNALLY: Are you speaking with Century 20 Pool's Phase I? 21 MR. MACKIE: No, Phase II. 22 MR. McNALLY: Phase II. 23 MR. MACKIE: This application. 24 MR. McNALLY: Last fall? 25 MR. MACKIE: I beg your pardon? 26 MR. McNALLY: Did you say last fall? 27 MR. MACKIE: This fall -- in 1999. I am 28 sorry, yes. I misstated the question. This fall. 157 1 MR. MARUSIC: I don't have that information, 2 no. 3 MR. MACKIE: Does anyone on the Panel have 4 access to that information? You just don't have it at 5 your fingertips, I take it. 6 MR. McNALLY: You want to know how much work 7 has been done on the roads and the drilling pads? 8 MR. MACKIE: Well, my understanding is that 9 the access roads have been constructed, have been 10 completed, and the drilling pads have been laid for all 11 the well locations. I am just looking for the costs 12 that have been incurred to date. 13 Basically, what we are after here is a 14 consolidation of all the construction costs incurred to 15 date pre the Board hearing. 16 MR. LESLIE: Chris, Steve Pardy who was with 17 Jim Egden -- 18 MR. MACKIE: Yes. 19 MR. LESLIE: -- I think can help with some of 20 this and we have asked him to stick around. Ms 21 Patterson has just gone out to get him. 22 MR. McNALLY: But he is excused otherwise, 23 isn't he? 24 MR. LESLIE: Well, the portion of the 25 facilities costs that relates to wells and well drilling 26 is under his responsibility. 27 MR. MACKIE: That's fine, and I don't mind who 28 the information comes from. I appreciate that offer to 158 1 have him back here, actually. 2 So I am going to push on and we will get that 3 information if Mr. Pardy is available. If not, we will 4 deal with it in some other form. 5 Mr. McNally, a question relating to the 6 transmission line: Has Union placed an order yet with a 7 steel mill to run the NPS 10, 12 and 16 inch 8 transmission line required? 9 MR. McNALLY: We haven't placed the order as 10 of today. 11 MR. MACKIE: Does that transmission line need 12 to be pre-ordered from a mill? 13 MR. McNALLY: Yes, it does. 14 MR. MACKIE: And how much lead time is 15 required for that? 16 MR. McNALLY: On this particular project the 17 pipe mills have given us a predicted date of January 18 15th, year 2000, to commit to the pipe. We have already 19 told them we need it by April the 1st and they have said 20 that we can tell them, confirm with them, up to January 21 15th and they can still meet that delivery date. 22 MR. MACKIE: If you pre-order by January the 23 15th? 24 MR. McNALLY: Yes. We have the pipe quoted. 25 We just need to confirm the order. 26 MR. MACKIE: Sure. So the union intends to 27 pre-order and assume that as a shareholder risk until 28 such a time as it receives all the Board approvals that 159 1 it is seeking in terms of leave to construct. Is that 2 correct? 3 MR. McNALLY: Yes. 4 MR. MACKIE: Mr. Pardy, thanks for coming back 5 and joining us after you thought you had got away. And 6 the question to the Panel was can you provide the costs 7 incurred to date in preparing and constructing all of 8 the access roads and the drilling pads for the well site 9 locations? 10 MR. PARDY: I don't have the exact amount of 11 figure that has been spent there to date. However, in 12 the -- one of the interrogatories has asked for a 13 detailed cost summary by well and one of the line items 14 in there would be site construction and restoration. 15 And if you look at the Oil City pool and the Mandaumin 16 pool -- sorry -- the Oil City and Bluewater pools, that 17 money is approximately what would have been spent. 18 MR. MACKIE: And which interrogatory response 19 are you referring to? I know it is one of the Board 20 Staff interrogatories. Can you take us to it? 21 MR. PARDY: That would be Interrogatory 22 No. 86. 23 MR. MACKIE: Thank you. So the information I 24 should be looking at is site construction -- no, that is 25 not it. Sorry. Just direct me again to where that cost 26 information is contained. 27 MR. PARDY: That is correct. It would be the 28 site construction/restoration line. So the money has 160 1 been spent to date on Union Oil UOC 1 and UOC 2 and 2 17-17-V. 3 MR. MACKIE: Yes. 4 MR. PARDY: -- 17-17-V. The well pads and 5 drilling access roads for Union Bluewater 1 and Union 6 Bluewater 2 and BTS 5-3-II those have been built. Union 7 Mandaumin 1 and Union Mandaumin 4 have also been built. 8 MR. MACKIE: Yes, but my understanding of the 9 evidence is that in addition to the wells that are 10 already drilled, the stratigraphic test wells, you have 11 also laid the gravel pads at the well sites for the 12 balance of the wells that you hope to commence drilling 13 some time in winter/spring. Is my understanding 14 correct? 15 MR. PARDY: That is correct in the Oil City 16 and Bluewater pools. 17 MR. MACKIE: Mandaumin? 18 MR. PARDY: No. 19 MR. MACKIE: So we should see -- I understand. 20 All right. So from this table I can sort out then from 21 this table, knowing the wells in question, I can put 22 together a consolidation of those costs. The only 23 difficulty is that these cost estimates also include 24 restoration, which I understand is not applicable to the 25 permanent access roads but probably is applicable to the 26 removal of the gravel drilling pads at the well sites 27 themselves? 28 MR. PARDY: That is correct. I am estimating 161 1 on a $30,000 well pad about $5,000 will be required for 2 restoration. 3 MR. MACKIE: Thank you. Mr. Pardy, are you 4 able to stay till five o'clock. I suspect we might run 5 into the situation where we need your comment on a few 6 more of these questions. 7 MR. PARDY: I am here till then. 8 MR. MACKIE: Would you turn to Schedule 6, 9 section 3, please. This deals with the material on 10 labour costs for constructing the transmission and 11 gathering lines. Now, for the Mandaumin and Bluewater 12 pools, the total contract and company labour, and I have 13 taken three lines and added them together, total 14 $9,301,000. Would you accept that subject to your own 15 calculation later? 16 MR. McNALLY: It looks about right. 17 MR. MACKIE: And that represents 62.4 per cent 18 of the capital costs for the pipeline. That is the 19 14,906,00. Have tenders been received for this -- the 20 contract work required to lay the pipelines? 21 MR. McNALLY: No. 22 MR. MACKIE: What is the estimate based upon? 23 MR. McNALLY: The estimate is based on 24 historical costs as well as courtesy quotes from 25 contractors qualified to complete these projects as 26 well. 27 MR. MACKIE: So you have received a courtesy 28 bid? 162 1 MR. McNALLY: That is correct. 2 MR. MACKIE: What is a courtesy bid? 3 MR. McNALLY: In simply terms a courtesy bid 4 is where we would call one of the potential contractors 5 show them the route of the project and ask them to 6 provide a cost that is -- that they don't spend a huge 7 amount of time in developing but based on how they see 8 the job and based on their expertise in providing 9 costing for similar jobs they would give us a cost 10 estimate. 11 MR. MACKIE: So it is a useful estimate, but 12 it is not a contracted price to which the bidder can be 13 held at a later date? 14 MR. McNALLY: Correct. 15 MR. MACKIE: And in preparing that estimate is 16 the contractor made available or aware of, I should say, 17 of road bores, stream crossings and other obstacles 18 which can add significantly to the expense of 19 constructing a pipeline? 20 MR. McNALLY: He would be able to see all the 21 surface features associated with those particular 22 crossings, but not the subsurface features that may 23 present trouble when he actually gets on site. 24 MR. MACKIE: Right. And that is because he 25 has travelled the route but is not aware of any 26 subsurface conditions? 27 MR. McNALLY: Correct. 28 MR. MACKIE: Thanks. And similarly for the 163 1 Oil City pool, the total labour component is 68.2 per 2 cent using the total contract labour as a proportion of 3 the total project cost. And can you tell us whether 4 that was based upon a courtesy bid also? 5 MR. McNALLY: Yes, it was. 6 MR. MACKIE: And at the end of the day what 7 variance would you attach to the labour component then 8 of these construction costs based upon those courtesy 9 bids? Would you expect the firm prices to come in 10 within plus or minus 10 per cent? I mean I am asking 11 you. 12 MR. McNALLY: I think 10 to 15 is probably a 13 ballpark range. 14 MR. MACKIE: And the reason I am interested is 15 that this is an input that goes into the DCF analysis 16 that Ms Callingham prepares and presents and we need, 17 therefore, to have some understanding of the sensitivity 18 and the variances of those cost inputs. 19 MR. McNALLY: Can I just say that there is 20 probably more downside potential than upside potential 21 to the range. And the reason I say that is when the 22 pipeline projects group gives an estimate to the storage 23 development group if we are under by 15 per cent the 24 internal ramifications are considerably different than 25 if we are over by 15 per cent. I mean we try to be as 26 close as possible, but we don't want to be under by 15 27 per cent. 28 MR. MACKIE: But you don't mind being over by 164 1 15 per cent. 2 MR. McNALLY: We try to be as close as 3 possible. 4 MR. MACKIE: Do you want to explain to us 5 those ramifications to which you made reference? 6 MR. McNALLY: Joe and I are good friends and 7 we want to stay that way. 8 MR. MACKIE: On that same table, I notice that 9 an estimate for the OEB hearing costs and legal expenses 10 have been made and the total of $20,000 has been 11 allocated: 50 per cent to the Oil City Pool and 50 per 12 cent to the Mandaumin and Bluewater Pools. 13 Now, considering that the development of the 14 Oil City Pool is economically marginal -- by which I 15 mean that Ms Callingham's analysis showed it has a 16 profitability index of 1.0 -- I had assumed that Union 17 would shift costs away from the Oil City Pool to the 18 other pools. 19 What am I missing? 20 MR. McNALLY: I guess we are trying to reflect 21 the costs as accurately as possible and whether the pool 22 is a 2-Bcf or a 4-Bcf, the process is the same for both 23 projects, if you tried to separate them, but we equated 24 the expected costs between the two. 25 MR. MACKIE: Well, the pipeline transmission 26 costs, according to Ms Callingham, this morning, at 27 least for the Mandaumin Pool line, have been allocated 28 in accordance to the working capacity of the two pools, 165 1 the Bluewater Pool and the Mandaumin Pool. 2 Was that a consideration in the allocation of 3 your OEB hearing and legal costs? 4 MR. McNALLY: No. 5 MR. MACKIE: And the reason for that being? 6 MR. McNALLY: Well, the hearing costs and the 7 legal costs are not a function of the working capacities 8 of the pools; they are more of a flat rate, if you will. 9 MR. MACKIE. Right. Thank you. 10 Now, the contingency rate applied to these 11 projects, the final contingency figure, is 10 per cent. 12 I just want you to confirm my understanding 13 from Interrogatory 87 that the Union's wet soil shutdown 14 policy is covered under this contingency. 15 MR. McNALLY: No, it's not. 16 MR. MACKIE: So, if wet shutdown days are 17 called for, where does the money come from to pay for 18 the contractor for those days that he is not working? 19 MR. McNALLY: Based on historical projects, 20 there's an allowance for the wet soil shutdown in the 21 "cost to lay pipe"; however, due to the time of year 22 that this is being built, it's felt as though there is a 23 potential for a greater variability than we would 24 normally have seen and so, there may be a component of 25 contingency used to cover that off. 26 MR. MACKIE: I'm sorry. I didn't altogether 27 understand your answer. 28 Normally, provision for the wet soil shutdown 166 1 is built into the labour cost, the estimate of the 2 labour cost; namely, the -- perhaps the $8.6 million, if 3 we look at Mandaumin and Bluewater? 4 MR. MALLETTE: Yes, that's the case. And 5 that's where it is this time, as well. It's in there. 6 I guess what I'm saying is it wouldn't -- it's 7 a possibility that a portion of the contingency could be 8 used for wet soils if the number of days that we 9 actually experience exceed the allotment under the "cost 10 to lay pipe". 11 MR. MACKIE: Fair enough. 12 Now, what is the allotment, then, you have 13 built into this estimated cost? 14 MR. McNALLY: We usually take 5 per cent of 15 the contract of "lay price". But let me just check. 16 Because I think I have that number here. 17 Can I check for you? 18 MR. MACKIE: Yes, sure. Thank you. 19 --- Pause 20 MR. McNALLY: Do you want to go on while I 21 just look for this? It might take me a minute or so. 22 MR. MACKIE: Well, I could, but I think my 23 going on will involve yourself. 24 --- Pause 25 MR. McNALLY: It appears we used approximately 26 3 per cent, in this particular case. 27 MR. MACKIE: And 3 per cent of what figure, 28 again? 167 1 MR. McNALLY: Three per cent of the "lay 2 price". 3 MR. MACKIE: And the laid price? 4 MR. McNALLY: The cost to lay pipe. 5 MR. MACKIE: Yes. So that's the 8,603,000 6 figure? 7 MR. McNALLY: Yes. 8 MR. MACKIE: That's what I understand the 9 contract labour to be. 10 MR. McNALLY: That cost -- Chris, the cost to 11 lay pipe includes the unit prices. We have a "lay 12 price", and then we have "cost to lay pipe". There's 13 kind of two different categories that make up that 8.6. 14 MR. MACKIE: Well, the pipeline material cost 15 is a separate entity of $3.2 million, at the top of that 16 table. That's not part of the "lay price"? 17 MR. McNALLY: No; the "lay price" is included 18 in the "cost to lay pipe". Not that whole figure. 19 MR. MACKIE: Okay. So why don't you tell us, 20 then, what the "lay price" is, for the Mandaumin and 21 Bluewater lines -- line. 22 MR. McNALLY: Would it be better if I give you 23 the exact amount that we have included for wet soil 24 shutdown? 25 MR. MACKIE: Yes. 26 MR. McNALLY: Oil City: 33,000, 27 approximately. Mandaumin and Bluewater: 165,000. 28 MR. MACKIE: And can you interpret those 168 1 figures for us? How many days of wet soil shutdown 2 would those figures cover? I haven't got a clue. Would 3 that be five days of wet soil shutdown? 4 You are always smiling. 5 --- Laughter 6 MR. McNALLY: We based it on historical costs, 7 as a function of their percentage of the contract 8 labour. I don't have that number in days; I have it as 9 a percentage of historical. 10 MR. MALLETTE: Also, to add to that, it 11 depends on which crew is shut down. If it's a very 12 small crew, at the beginning or the end of the job, it 13 wouldn't have the same impact, so -- the greatest impact 14 is when the welding crew is out there. So, I guess the 15 best thing we can say is that, historically, we have had 16 enough coverage by taking this percentage approach, and 17 if we were seeing that it was coming in too high or too 18 low, then we would make the adjustment, accordingly. 19 MR. MACKIE: Yes, I understand that you are in 20 trouble when your welders are at work and have to lay 21 down tools, given the cost of a welding team. Okay. 22 Thanks for that information. I will struggle on. 23 Now, in the evidence -- and it might be in 24 response to Interrogatory 88 -- there was the suggestion 25 that there's going to be re-piping of the high-pressure 26 lines in and around the Enniskillen 28 compressor 27 station and also the Dawn 156 compressor station. 28 Are those costs included in this table? Or 169 1 are they identified elsewhere? 2 MR. MARUSIC: Those amounts are included in 3 that figure. 4 MR. MACKIE: On Schedule 3? 5 MR. MARUSIC: I'm sorry. Not on Schedule 3. 6 They are on another schedule. 7 MR. MACKIE: Are they part of the station -- 8 the measurement and control station estimated capital 9 cost? 10 MR. MARUSIC: Yes, that's correct. 11 MR. MACKIE: All right. Thank you. We will 12 probably come to that -- Mr. Teper will, I'm sure. 13 That's fine, for the moment. 14 And, gentlemen, if you will go to response to 15 Interrogatory 89 -- that was Ms Callingham's breakout of 16 the costs in the DCF analysis, for the pools, on a 17 standalone basis. 18 I want to refer first to the cost associated 19 with the injected cushion gas which, for the Oil City 20 Pool at $1,280 -- there is something wrong with that. 21 These are supposed to be thousands of dollars. 22 MR. TEPER: Thousands. 23 MR. MACKIE: $1,280,000. That is based upon a 24 unit price of $152.40 per times 10(3)m(3). Correct? 25 MR. MARUSIC: Yes. 26 MR. MACKIE: And the same unit price has been 27 used for the Mandaumin and Oil City Pools. 28 MR. MARUSIC: That is correct. 170 1 MR. MACKIE: Can you confirm that that, in 2 Imperial terms or units, is $4.32 an Mcf? 3 MR. MARUSIC: It sounds like it is in the 4 ballpark. 5 MR. MACKIE: Do you have a calculator? 6 I divided by 35.3. 7 MR. MARUSIC: $4.32. 8 MR. MACKIE: That is what I suggested. 9 MR. MARUSIC: Okay. 10 MR. MACKIE: Thank you. Is that the same 11 price that Union has used to estimate the residual gas 12 payments to the landowners? 13 MR. MARUSIC: No, it isn't. 14 MR. MACKIE: Why not? 15 MR. MARUSIC: My understanding is that the 16 price for the residual gas is based on the Ontario 17 Producer Price Index, and Mr. Lowe can give you more 18 detail on that if you need it. 19 MR. MACKIE: We do need to pursue that. 20 In fact, in response to the Lambton County 21 Storage Association Interrogatory no. 37, the estimated 22 figure -- and I appreciate it is an estimate, because 23 Mr. Lowe is looking forward -- is $3.31. 24 Your evidence is that the $1.00 differential 25 is justified because one party is being compensated for 26 native Ontario gas -- namely, the landowers -- whereas 27 Union has to purchase more expensive western Canadian 28 gas to inject into the pools. 171 1 Is that what you are telling us? 2 Why the difference in the price? 3 MR. MARUSIC: The price that is used for 4 injecting cushion gas -- Union buys that gas at the time 5 that injection of that gas takes place. So it would be 6 based on whatever the price of our portfolio of gas 7 purchases are at the time. So it is an estimate as 8 well. 9 MR. MACKIE: You are looking forward to next 10 July, I assume, in pricing your injected cushion gas. 11 MR. MARUSIC: Yes. 12 MR. MACKIE: I am still troubled by this $1.00 13 differential -- $1.00 being used as the basis of 14 payments for compensation; and on the other hand, the 15 higher price is being used to determine an asset value 16 which is going to flow into rate base. 17 The issue is very clear, isn't it, on why we 18 might have a point of departure on that? 19 MR. LESLIE: I think the answer may lie in 20 transportation, but I am told Mr. Lowe will -- 21 MR. MACKIE: We will deal with that. I think 22 Mr. Lowe has clear notice that this is coming up 23 tomorrow. Thank you. 24 I am also still oncost inputs to the DCF 25 analysis. I am still on interrogatory 89. 26 Can you provide any information as to why the 27 storage rights are valued at $920,000 for the Oil City 28 Pool whereas, in total, for the Mandaumin and Blue Water 172 1 Pools together, they are totalled at $974,000? 2 MR. MARUSIC: I would refer you to Mr. Lowe 3 for that question as well. 4 MR. MACKIE: I hope Mr. Lowe is going to be 5 here tomorrow and doesn't take the day off sick. 6 MR. MARUSIC: I think he is getting sicker as 7 time goes on. 8 --- Laughter 9 MR. MACKIE: Gentlemen, thank you. Those are 10 the cost questions that I had originally prepared for 11 Ms Callingham. I will be getting back to you later on, 12 but Mr. Teper has some cost related questions also. 13 MR. TEPER: Yes. Some of these questions have 14 been bumped to you by Laura Callingham, so I will fire 15 away. 16 In Interrogatory no. 87, the contingency is 17 given as 10 per cent, as Mr. Mackie has mentioned. 18 In Union's forthcoming rates application have 19 the capital costs associated with this Century 2 project 20 been included in the projected rate base; and if so, 21 have the 10 per cent contingencies also been included? 22 MR. LESLIE: I am not sure they have a rate 23 base in the next application. I don't think anyone here 24 knows the answer to that question. We will get it for 25 you. 26 MR. MALLETTE: I am certainly unaware of any 27 numbers being generated with a different philosophy. We 28 have generated only one set of numbers, to my knowledge. 173 1 So they would have been used for this application and 2 any other purpose as well. 3 MR. LESLIE: I am told that all those numbers 4 would be in the 2000 -- 5 MR. TEPER: I am just flagging it for the rate 6 base people when it eventually arises. 7 Did I hear one of you say that basically if 8 you erred on the cost estimate it would be on the side 9 of erring somewhat on the higher side rather than on the 10 lower side. 11 MR. McNALLY: We would prefer to be exactly 12 on, but if we were to err on one side or the other, we 13 would prefer to err high. 14 MR. TEPER: The implication being that in the 15 economic analysis, the capital cost estimate would be 16 conservative. 17 MR. McNALLY: That is correct. 18 MR. TEPER: In Interrogatory no. 89 and the 19 response, we asked for economic analysis for the 20 Mandaumin and Blue Water Pools separately, and the 21 capital costs that were used basically were the total 22 capital cost for the pipeline, prorated in accordance 23 with the storage capacities of the various pools. 24 The question I put to Laura was: If you did 25 the economic analysis with each pool separately and the 26 line was sized and costed separately for the two cases, 27 the Mandaumin Pool alone and the Blue Water Pool alone, 28 what would the economics be? 174 1 I understood her to say that if she got the 2 costs, or presumably the line sized and then costed and 3 the costs given to her, that she could run the economic 4 analysis. 5 Have you any problem with that? 6 MR. MARUSIC: To do a facilities design for 7 that system would take one of my employees about a week, 8 fulltime, to do that. I think you would find that the 9 cost would be higher, because you have to run two 10 pipelines instead of one. There are synergies to having 11 both pools able to use the same pipeline. 12 MR. TEPER: Can it not be done on a more 13 approximate basis? Haven't you rules of thumb, for 14 example, which would enable you to size and cost the 15 line? 16 It is only the pipeline really that is 17 affected. 18 MR. MARUSIC: But all of the facilities are 19 inter-related in terms of how the pool performs. You 20 can't really isolate the pipeline from the compressor 21 facilities from the gathering line system. You really 22 have to look at the whole picture to do it accurately. 23 MR. TEPER: Can I ask you to have another look 24 at it and perhaps advise us if such a thing is feasible 25 without doing a week's amount of work on it. 26 MR. MARUSIC: Certainly. I would be happy to. 27 MR. TEPER: Thanks. 28 Interrogatory nos. 91 and 91.1: Apparently 175 1 the additional facilities will result in an extra 1,500 2 person-hours per year of work on the O&M side. I 3 basically ask the question: Would this translate into 4 one more employee, or do you envision that the 5 additional person-hours will be absorbed by Union's 6 existing staff? 7 And you, Mr. Marusic, were given as the 8 potential answerer. 9 MR. MARUSIC: Yes. As a result of the Century 10 Phase I project and the Century Phase II project, there 11 will be one more person hired into the operations and 12 maintenance area. 13 So that would mean that roughly half of their 14 time or 750 hours would be spent on the Century Phase II 15 project. That leaves about 750 hours of work and that 16 would be handled through additional overtime or 17 elimination of lower value work. 18 MR. TEPER: Thank you. 19 Interrogatory No. 92, we asked you the 20 question about the net book value of all of Union's 21 storage facilities in Southwestern Ontario on a dollar 22 per x 10(3)m(3) basis and the response was that 23 including or reflecting depreciation and your answer was 24 $103. 25 First of all, does that figure include all the 26 compression facilities in associated pipelines involved 27 in storage? 28 MR. MARUSIC: Yes, it does. 176 1 MR. TEPER: Okay. Have you got any figures of 2 what it costs on the dollars per 10(3)m(3) versus gas 3 storage facilities either at Consumers Gas or perhaps in 4 Michigan just so that we can see what the order of 5 magnitude is -- the unit costs? 6 MR. MARUSIC: I don't have any book value 7 figures that I could give you, but I have capita costs 8 per a billion cubic feet of working inventory that I 9 could share with you if you would like. 10 MR. TEPER: Yes, please. 11 MR. MARUSIC: We looked at Consumers' 12 Ladysmith application and the capita cost per working 13 space was $5.19, that is millions of dollars per billion 14 cubic feet of working inventory. The Century Phase II 15 project is $5.92, Century Phase I project was $3.08. 16 MR. TEPER: So Century II's dollars per DCF is 17 perhaps 60 per cent more on a unit cost basis. 18 MR. MARUSIC: Sixty per cent more than? 19 MR. TEPER: Century Phase I. I think you told 20 me it was $3.08 per DCF and Century II it was $5.92. 21 MR. MARUSIC: Yes, that is correct. 22 MR. TEPER: Okay. Any corresponding figures 23 for Michigan? 24 MR. MARUSIC: No, I am sorry, I don't have any 25 information about Michigan. 26 MR. TEPER: Thank you. Those are all my 27 questions. 28 MR. MACKIE: Panel, we are now going to move 177 1 into those questions which we have prepared relating to 2 your evidence on the proposed facilities and operation, 3 and I have several questions actually which Mr. Pardy 4 can help me with in terms of the application for the 5 drilling licenses. So I would like to begin with Mr. 6 Pardy while he is still here with us. 7 I understand that Union applied letters of 8 consent from the Rawlings family prior to the drilling 9 of wells UMD No. 1 and also from the Kember Farms for 10 the drilling of UMD No. 4. Is that correct? 11 MR. PARDY: That would be my understanding. 12 MR. MACKIE: Those letters of consent are, of 13 course, provided elsewhere in the evidence, in the 14 land-related evidence. 15 MR. PARDY: Right. 16 MR. MACKIE: Now could you refer to both -- I 17 need to ask you to make two references here, because 18 there are some details of the location of these drilling 19 licenses that I want to sort out with you. 20 Will you refer, first of all, to the drilling 21 license applications -- and they are to be found at 22 Section 3, Schedule 25. 23 MR. PARDY: I don't believe the applications 24 for Mandaumin, Union Mandaumin one are in that section. 25 MR. MACKIE: If you are correct, I think what 26 we have in this section of the applications for the new 27 drilling licenses, and what I need to refer you to then 28 is the well license application for UND No. 2. 178 1 MR. PARDY: I have that. 2 MR. MACKIE: And you also need the letters of 3 consent that refer to these wells, and they are to be 4 found in Section 10 of the pre-filed evidence. 5 Do you have a Volume 4 available? Okay. You 6 need it. We are not going to get through this together 7 without a Volume 4. I will give you the references 8 again. You need to turn to Section 10, Schedule 1, page 9 2. And that is a letter of consent signed by the 10 Rawlings family and we are going to be discussing the 11 well license application for well Union Mandaumin No. 2. 12 Okay? 13 Now would you go back to the drilling license 14 application and would you refer for the coordinates for 15 the site of that well which on the license application 16 are 182.45 metres north of the lot line and 62.6 metres 17 west of the lot boundary. Is that correct? 18 MR. PARDY: That is correct. 19 MR. MACKIE: Would you compare those 20 coordinates, then, to the coordinates which are stated 21 in the letter of consent which indicates that the 22 Rawlings have consented to this well being located 1260 23 metres north of the south limit and 52 metres west of 24 the easterly line. 25 MR. PARDY: I see that. 26 MR. MACKIE: Now, there is a difference 27 between 182.45 metres north and 160 metres north that 28 the Rawlings have consented to, and there is another 10 179 1 metres difference in the east coordinates of the well 2 site. They are not the same. Why not? 3 MR. LESLIE: Chris, I am advised that the 4 letter of acknowledgement was done without the benefit 5 of a survey, but Mr. Lowe, again, knows the detail. He 6 got the letter of acknowledgement. The correct 7 coordinates, I think, are the ones on the application 8 for the well license. 9 MR. MACKIE: Well that may be the answer, but 10 I see that Mr. Pardy is the person who signed the 11 application for a drilling license and Mr. Lowe can't 12 help me with a document that Mr. Pardy has signed, I 13 assume. 14 MR. LESLIE: No, but I think the correct 15 document is the one that Mr. Pardy is associated with 16 and the one that has the incorrect coordinates is the 17 one that Mr. Lowe is associated with. 18 MR. MACKIE: Okay. That may well be true, but 19 let me flog through this and at the end of the day we 20 will know where we all stand in terms of what needs to 21 be reconciled and what is up then. 22 Can we move on now to well UND No. 3 and the 23 coordinates for this well on the drilling license 24 identified -- and I am going to round off the last two 25 decimal places -- are 96 metres north and let's say 251 26 metres east. Is that correct Mr. Pardy? 27 MR. PARDY: That would be 250 metres west. 28 MR. MACKIE: I beg your pardon. You are right 180 1 west, not east. Thank you. 2 And if I go to the letter of consent signed by 3 the Rawlings, I find that for that well the letter shows 4 87.3 metres north and 48.7 metres west. There is a 5 difference of 202 metres for the location of that well. 6 Same question, why? 7 MR. PARDY: Again I can only speak to the 8 coordinates that came from the survey. 9 MR. MACKIE: That is fine. So your evidence 10 is that you have applied for these licenses, this is 11 what is before us at the present time. This, of course, 12 is what the Board is going to have deal with, but you 13 must understand the Board's dilemma when it sees before 14 it a letter of consent which gives consent for totally 15 different locations. 16 MR. PARDY: I understand that. 17 MR. MACKIE: So Union will address this 18 through Mr. Lowe. 19 MR. PARDY: That is fine. 20 MR. MACKIE: Thank you. There are also some 21 minor inconsistencies that I have noted for well site 22 UND No. 5 on the Kember property. 23 MR. MACKIE: Chris, for what it is worth, I am 24 told that the people involved know where these wells are 25 physically located. I mean they have there and seen the 26 site. But Dave will deal with that. 27 MR. MACKIE: That again is fine, but the 28 extent that your evidence relies upon letters of 181 1 consent. I mean, at the end of the day I am going to 2 suggest that we have the letters of consent reflecting 3 by Union which is the drilling license. My question is 4 what is the purpose of these letters of consent. I 5 mean, that is quite clear, and if we can resolve this 6 before the hearing, it will save a lot of irritation and 7 annoyance for the panel that has to sort it out. 8 MR. LESLIE: Yes, and I think the fact that 9 these people have actually seen the location means that 10 it is remedial and shouldn't be a problem. 11 MR. MACKIE: That is fine then. 12 And we understand that you do not have a 13 letter of consent yet from 1236596 Ontario Ltd. That is 14 for the location of UMD No. 6. 15 Mr. Pardy, perhaps I will just point out that 16 on -- I am going to refer to one of the maps as the 17 facilities map. It is probably the most single 18 informative piece of evidence that Union presents to the 19 Board in which all the infrastructure is basically shown 20 on one map. And it is contained in the prefiled 21 evidence under facilities evidence at Schedule 5. 22 There is some confusion, not with regards to 23 the location of UMD No. 6, but to actually the 24 registered company that holds that land. The evidence 25 indicated, that is your prefiled evidence, that it is 26 held by 1236596 Ontario Ltd. This map shows that the 27 land is the registered property of 839160 Ontario Ltd. 28 Do you have any knowledge of these two companies and who 182 1 is the present owner of that land or is that Mr. Lowe 2 again? 3 MR. PARDY: I think Mr. Lowe would be able to 4 help you there. 5 MR. MACKIE: Mr. Pardy, I am coming back to a 6 general question about access roads and the drilling 7 pads that have been what I call pre-constructed and this 8 is really a very general question. I would just like 9 your comments on it. 10 On whose authority does Union proceed to 11 construct these facilities before the application has 12 even arrived and been heard by the Board? 13 MR. PARDY: Union does go out and get 14 permission from the landowners to do this work and I 15 guess that is a risk that we undertake. 16 MR. MACKIE: That is interesting. So the 17 landowners in question grant their permission. Their 18 permission is sought first of all and there is 19 absolutely nothing wrong with that. It is their 20 property. They grant permission and therefore you go 21 out and provide for that and that is done to ease the 22 construction. So that if you get approval for winter 23 construction, the access roads are already there, your 24 drilling pad is there and it is going to minimize 25 subsequent compaction and problems for the landowner. 26 MR. PARDY: That is correct. 27 MR. MACKIE: Let us suppose hypothetically 28 that Union did not receive Board approval for the 183 1 development of these pools. Would Union be able to 2 reverse the work it had undertaken to date and restore 3 the affected land to its original level of agricultural 4 productivity? 5 MR. PARDY: I think that would be our goal. 6 MR. MACKIE: That would be your goal, but 7 would you be able to accomplish that? 8 MR. PARDY: Yes, to the extent that we put 9 down temporary pads in any places or temporary road 10 access. To the extent that we can do it there, we can 11 do it here. And I would say that yes, we can do that. 12 MR. MACKIE: What about the access roads which 13 are characterized as being permanent access roads? 14 MR. PARDY: The only difference between those 15 and anything else is we say they are permanent. They 16 are not built any differently. 17 MR. MACKIE: Well, let's just explore that 18 together. 19 MR. PARDY: Well, it may be -- they may be a 20 little thicker. 21 MR. MACKIE: Because I have seen some 22 differences when I have been out in the field. 23 Are the access roads also laid on a fabric or 24 a material, and I forget the name of it for the moment. 25 MR. PARDY: Geotextile fabric. 26 MR. MACKIE: Yes, the geotextile fabric. 27 Thank you. In the same way that the drilling pads are 28 so that it can be physically lifted up at the end of the 184 1 day. 2 MR. PARDY: Yes, they would be. 3 MR. MACKIE: Thank you. And the access roads 4 might require either a drainage ditch on either side or 5 a header tile drain to ensure that soil drainage is not 6 interfered by the access road. Is that correct. 7 MR. PARDY: Yes, any time there is any tile 8 work, we would do that. 9 MR. MACKIE: Pardon? 10 MR. PARDY: Any time that that is necessary 11 for tile work to be done, that would be done. 12 MR. MACKIE: But if you had -- and if you were 13 going to reverse the construction of the access road, 14 you would then, of course, be able to reestablish the 15 tile drainage flows to their original condition. 16 MR. PARDY: I think anything that we -- if 17 there was any work required there as far as tile go, we 18 would undertake it. We would have the proper people 19 come and look at that, the experts, and tell us what we 20 had to do and we would do it. 21 MR. MACKIE: Okay. Thank you. 22 And what is the width of those access roads? 23 I believe in one of the letters of consent I saw a 24 reference to a six metre width. Is that the standard 25 width of the access roads? 26 MR. PARDY: That sounds about right. 27 MR. MACKIE: And I can assume that that is 28 uniform. It is in one letter of consent. It is not 185 1 unique to that property. It would be six metres for all 2 the landowners? 3 MR. PARDY: I would -- yeah, I would say. 4 MR. MACKIE: Mr. McNally, can you confirm 5 that? 6 MR. McNALLY: I have seen them five metres in 7 the past. So I -- 8 MR. MACKIE: Okay. The six metres would be 9 the maximum then. I am not concerned if it is less than 10 that particularly. 11 MR. McNALLY: For the permanent access roads I 12 don't see a reason to have them more than six metres 13 wide, but I can't say that that is all that has been 14 built in the past. There may be extenuating 15 circumstances that require you to have a double lane for 16 whatever reason, if you had a well going to each side. 17 I think generally they are five to six metres in width. 18 MR. MACKIE: But it is these access roads. It 19 is not the past access roads in other pools that we are 20 interested in. 21 MR. PARDY: I think in these pools it would be 22 that width. All of them. 23 MR. MACKIE: Yes, thank you. 24 Now, the City of Sarnia noted in its response, 25 I believe, there is some correspondence which might have 26 come in through the OPCC. The City of Sarnia noted that 27 a permanent easement should be reviewed by the Committee 28 of Adjustment should the roads in question be required 186 1 for a period exceeding 21 years. Does Union intend to 2 claim to the Committee of Adjustment for those roads 3 falling within the city limits? 4 MR. PARDY: I don't know the answer to that. 5 MR. MACKIE: Does anybody? Is that a lands 6 question for Mr. Lowe? It might be. 7 MR. LESLIE: It might be, Chris. I'm not sure 8 what that requirement would relate to. So let us look 9 into it. Mr. Lowe may know the answer. I think Sarnia 10 may be wrong about that, but we would have to look into 11 it. 12 MR. MACKIE: And I am still on generally 13 access roads and drilling pad locations. Mr. Pardy, 14 what are the general dimensions of the gravel drilling 15 pads, please. 16 MR. PARDY: I would say for a cable tool 17 drilling it would be approximately 50x50. 18 MR. MACKIE: And where you are required to 19 finish off or to undertake some rotary drilling, would a 20 larger pad size be required? 21 MR. PARDY: Yes. 22 MR. MACKIE: How much larger? 23 MR. PARDY: It would be approximately 60 to 65 24 metres square. 25 MR. MACKIE: 60 or 65 metres square. 26 MR. PARDY: Yes, somewhere between 60 and 65. 27 MR. MACKIE: Okay. Thank you. 28 MR. PARDY: Actually it may not be square. It 187 1 may be a little longer at one end than the other. 2 MR. MACKIE: All right. And as a general 3 facilities question, do any of the fields where the 4 gathering lines and the access roads and the drilling 5 pads are located, do any of those fields have schematic 6 tile drainage? 7 MR. PARDY: I don't have that answer. 8 MR. MACKIE: That is perhaps a question the 9 environmental assessment panel is better equipped to 10 deal with or the lands panel tomorrow. 11 MR. McNALLY: It may be in the environmental 12 assessments. 13 MR. MACKIE: Yes, I think that we are going to 14 deal with that under that panel so I will defer that 15 question. 16 Now, if we could go back to this facilities 17 map. The NPS 12" Mandaumin pool line is considered to 18 be a transmission line by Union. Can you define or show 19 us on this map exactly where the transmission portion of 20 that line commences? 21 MR. McNALLY: If you look at the Mandaumin 22 detail on the top right corner of the page, if you look 23 at the intersection of Churchill Road and Mandaumin 24 Road, there is a 12-inch T there, south of that T would 25 be considered transmission. Everything else would be 26 considered gathering. 27 MR. MACKIE: Everything else upstream of that 28 is a gathering line and that is the last point of 188 1 convergence of the gathering line, so from that point it 2 becomes the transmission line? 3 MR. McNALLY: That is correct, yes. 4 MR. MACKIE: Thank you. 5 And from that point onwards, am I correct that 6 you remain within the road allowance down to the 7 proposed Bluewater and on to Mandaumin control 8 station -- that is for the transmission line. 9 MR. McNALLY: That is correct, yes. 10 MR. MACKIE: Now I am going to switch over to 11 the Bluewater Pool, but rather than take up a lot of 12 time, I will just note on the record that there are the 13 same difficulties in reconciling the letter of consent 14 signed by Mr. Hardy in terms of Union Bluewater No. 2. 15 and the letter of acknowledgement that has been received 16 and we will sort that out with Mr. Lowe tomorrow. 17 Could you look at the location of the access 18 road leading from Churchill Road South, the UBW 1 and 19 the UBW 2 well sites. Just south of Churchill Road a 20 station is located in the access road. 21 MR. PARDY: I don't think it is in the access 22 road, however it is on this map. 23 MR. MACKIE: Yes, sure. What is the station? 24 Is that part of Union's infrastructure? 25 MR. PARDY: That would be the original 26 production station for the Bluewater Pool. 27 MR. MACKIE: As a gas production pool, there 28 is a line running up to that station presumably from the 189 1 production wells in question. 2 MR. PARDY: Yes. 3 MR. MACKIE: Is there an access road, was 4 there an access road already there then before you 5 constructed your permanent access road? 6 MR. PARDY: There was access in the form of a 7 lane way, and part of it, I think, my understanding is 8 part of it you would have to go out onto the field to 9 get to that well. I don't think the lane way extended 10 all the way to the well. 11 MR. MACKIE: And Union brought up to its 12 permanent access road standards, I take it, according to 13 your specification? 14 MR. PARDY: That is correct. 15 MR. MACKIE: Now the NPS 10-inch line leading 16 from the Bluewater injection withdrawal wells occupies 17 what I assume are going to become private easements 18 running close to the boundary line between concessions 19 one and two in the Township of Moore? 20 Is that correct? 21 MR. PARDY: That is correct. 22 MR. MACKIE: And it is my understanding that 23 these easements have not been negotiated yet. 24 MR. PARDY: The easements have not been 25 finalized as yet, that is correct. 26 MR. MACKIE: We will deal with the easements 27 or the option to grant an easement as a land-related 28 matter, but as a facilities matter, are you aware of 190 1 whether the respective landowners have expressed any 2 concern at the location of the line across their 3 respective properties? Mr. McNally, you would know 4 that? 5 MR. McNALLY: No, I don't. Mr. Payne would be 6 better to answer that question. 7 MR. MACKIE: Are we going to see him tomorrow? 8 MR. McNALLY: Yes, we are. 9 MR. MACKIE: That is fine, thank you. 10 You have ordered the acquired land, I believe, 11 to construct a measurement and control station. 12 Is that correct? 13 MR. McNALLY: I believe they have approached 14 the landowner. 15 MR. MACKIE: They have made an offer. 16 MR. McNALLY: An option, I think they have an 17 option. 18 MR. MACKIE: Okay. 19 MR. McNALLY: That is better answered by Ron 20 Haley. He will be up tomorrow as well. 21 MR. MACKIE: And could we now turn to the 22 second of those maps which relates to the infrastructure 23 applies to the infrastructure -- and that is contained 24 at Schedule 8 of the pre-filed evidence. 25 And I understand that well site, your C1, that 26 A well is being drilled and, therefore, the access road 27 from Courtright Line would have been constructed to that 28 well site. Correct? 191 1 MR. PARDY: That is correct. 2 MR. MACKIE: And similarly, you have 3 preconstructed, I take it, the access road to well site 4 your C2, which has not yet been drilled? 5 MR. PARDY: That is correct. That would also 6 extend up to 7-17-V. 7 MR. MACKIE: Right. And what is the status of 8 7-17-V? Is more work required on that well? 9 MR. PARDY: That well will be converted to an 10 ops well, and, yes, there would be some remedial work 11 that would be required on that well. Also from an 12 access standpoint, that is the well that we would be 13 taking the weekly pressures on, so it is probably the 14 most important well to have access to. 15 MR. MACKIE: I believe you confirmed 16 earlier -- and maybe it is by way of general 17 proposition -- there has been no tree cutting to date 18 for this project. Is that correct? 19 MR. PARDY: That is correct. 20 MR. MACKIE: So the access road to your C1, 21 did not involve any removal or cutting of the trees to 22 the west of that access road? 23 MR. PARDY: That is correct. 24 MR. MACKIE: And what about the new access 25 road that gains access from Courtright Line? That seems 26 to cut through what I understand from this map to be a 27 line of trees, coniferous or otherwise? 28 MR. PARDY: From being out on site, I don't 192 1 recall any trees or anything being there. 2 MR. MACKIE: What is this map showing then? 3 What is that thick green band on the north side? The 4 legend certainly suggests, or I have interpreted the 5 legend to suggest that was a row a trees. 6 MR. PARDY: We are not exactly sure that that 7 is a solid line of trees. They may have been dispersed 8 or the surveyor that did the work may have just lumped 9 them all as one row. 10 MR. MACKIE: Okay. Now I might add, Mr. 11 Pardy, that I did check the coordinates of the clearing 12 license for your T, well number two and the letter of 13 consent, and in this instance they agree with each 14 other. We don't need to refer that to Mr. Lowe. 15 So I have some questions on the construction 16 schedule at Schedule 4, Question 2. Would you mind 17 turning to that, please? 18 Now as you filed this construction schedule 19 with the Board, the well drilling was scheduled to 20 commence in early January and to last six months. Is 21 that correct? 22 MR. PARDY: It is correct, approximately six 23 months. 24 MR. MACKIE: Right. It might have been five 25 and a half months, but approximately six months. 26 Now Union's total drilling program for which 27 it has applied for these drilling licenses, is to drill 28 four more wells in the Mandaumin Pool, one in Bluewater 193 1 and one in Oil City, for a total of six wells. Is that 2 correct? 3 MR. PARDY: Yes. 4 MR. MACKIE: And you intend using two cable 5 tool rigs. Is that correct? 6 MR. PARDY: Yes. 7 MR. MACKIE: How long does it take to drill 8 one of these wells using a cable tool rig? I have 9 assumed six weeks per well. 10 MR. PARDY: I would say in the Mandaumin and 11 Bluewater reservoirs it is closer to eight weeks just 12 because of the additional depth, and in the Oil City 13 Pool it would be closer to six or seven weeks. 14 MR. MACKIE: What is the depths of the wells 15 then that you are going to be drilling in the Mandaumin 16 and Oil City Pools? 17 MR. PARDY: The proposed total vertical depth 18 for the Maudaumin Pool is approximately 688 metres. 19 MR. MACKIE: And Oil City? 20 MR. PARDY: Oil City is approximately 570 21 metres. 22 MR. MACKIE: Five hundred and seventy? 23 MR. PARDY: That is correct. 24 MR. MACKIE: Okay. So you have five wells at 25 eight weeks per well, and one well at six weeks? 26 MR. PARDY: Six to seven weeks, yes. 27 MR. MACKIE: All right, seven weeks. That is 28 47. So divided by two drilling rigs, you will get 194 1 through 47 weeks of drilling with two rigs in 23 and a 2 half weeks. 3 MR. PARDY: I think that would be -- yes, the 4 three wells at eight weeks each would be the -- 5 MR. MACKIE: I thought it was five at eight 6 weeks. Is there only three at eight weeks? 7 MR. PARDY: If you have six wells, at least 8 three of which have to take eight weeks, that would be 9 the constricting factor. 10 MR. MACKIE: Sorry? 11 MR. PARDY: Six wells, five of them will take 12 eight weeks. 13 MR. MACKIE: Right. 14 MR. PARDY: And one will take less. So if I 15 look at the one rig that drills three wells, it has to 16 drill at least three wells of eight weeks. 17 MR. MACKIE: That is 24 weeks. Right. So 18 your point is one of your rigs has to be on site for at 19 least 24 weeks. 20 MR. PARDY: Yes. 21 MR. MACKIE: I get your point. Sorry, I am a 22 little bit slow at the end of the day here. 23 If we go back to that schedule then -- and 24 that is what you have shown here basically, it is almost 25 six months for drilling. I am surprised that the 26 drilling program is going to require as long as six 27 weeks, and that has some implications when we look at 28 your revised construction schedule in which I invited 195 1 you to submit a construction schedule with an April 15th 2 drilling date. 3 MR. PARDY: I believe that request is also 4 using two rigs. 5 MR. MACKIE: Yes, it is also using two rigs. 6 Okay. Thank you. 7 If we just look at that -- which is 8 Interrogatory response number 69, I think. Now this was 9 the Interrogatory 69 to the revised construction 10 schedule, assuming that drilling commences in mid-April. 11 First of all, what is the in-service date of the project 12 according to this schedule, that is the revised 13 construction schedule? It looks to me as if it might be 14 October the 26th. 15 MR. PARDY: That is correct. 16 MR. MACKIE: It doesn't give you much time to 17 inject your cushion and working volume gas. 18 MR. PARDY: Not at all. 19 MR. MACKIE: I guess that is the purpose of 20 the answer you have provided us. 21 MR. PARDY: I think we did, as you suggested, 22 using two rigs and starting April 15th we show what the 23 impact will be. 24 MR. MACKIE: Well, this schedule raises a 25 number of issues. 26 Now in the original schedule, construction of 27 the two lines from the Enniskillen Compressor Station to 28 the Bluewater and Maudaumin Pools, that is the NPS 196 1 10-inch line and the NPS 12-inch line were originally 2 schedule from April to July -- April, May, June or July, 3 or four months. That construction is now scheduled from 4 April to mid-November, the same well now extends over 5 seven and a half months and appears to be on a critical 6 path. 7 Why has a delay in the commencement of the 8 drilling date extended the construction of those two 9 pipelines by three and a half months? 10 MR. McNALLY: There was no need to have the 11 pipelines in service prior to the completion of the 12 well-drilling program, so we extended the in-service 13 date of the pipelines to coincide with the completion of 14 the well drilling. Once the wells are completed, then 15 we can complete our final tie-ins to those wells. 16 MR. MACKIE: This schedule says that the well 17 drilling is going to be completed by September the 18 30th -- I am sorry, I was looking at the overall wells 19 program. The well-drilling program will be completed, 20 yes, by September the 30th, but your pipeline 21 construction activity continues until November the 15th. 22 MR. McNALLY: If you look a little further 23 down, the actual pipeline construction is also completed 24 on September the 30th and you have testing, tie-ins and 25 commissioning that extend and then clean-up is also 26 included in that overall total time frame. 27 MR. MACKIE: So what you are pointing out to 28 me is the pipeline construction and that presumably 197 1 includes the hydraulic testing of the pipeline that is 2 also completed by September the 30th, which I believe 3 confirms your answer to me, they are completed by the 4 same date. 5 MR. McNALLY: The testing would be done just 6 after. We would have to wait until the drilling rig was 7 off the well so that we could connect the final 8 gathering lines to that well. 9 MR. MACKIE: And so the answer to my question, 10 why has the delay in the drilling date extended 11 construction by three and a half months, the answer was 12 you saw no need to complete the construction of the 13 pipeline sooner than that? 14 MR. McNALLY: We can't complete until the 15 final rig is off the well. 16 MR. MACKIE: Right. Okay. 17 MR. MALLETTE: It is not to say that the 18 construction would start on April the 15th and go all 19 the way through the summer. 20 I guess I don't agree that that is on the 21 critical path. That's the time available to do the 22 work. As long as it is finished by the time that the 23 drilling rigs are off, then we would be okay. 24 MR. MACKIE: What is on the critical path 25 according to your revised schedule? 26 MR. PARDY: The well drilling is the critical 27 path. 28 MR. MACKIE: Why not expedite and speed up 198 1 your well drilling program? 2 MR. PARDY: I think that is something that we 3 will look up doing. 4 MR. MACKIE: Do you need any suggestions as to 5 how to do that? 6 MR. PARDY: I think I can come up with a few. 7 MR. MACKIE: Frankly, I was not very impressed 8 by this revised schedule in response to Interrogatory 9 69. It seemed to me to be contrived to try and show 10 that the project would not be able to proceed if well 11 drilling did not commence until April 15th. 12 I am going to ask you to reconsider that and 13 come up with a more realistic schedule that the Board 14 can be comfortable with. 15 MR. PARDY: In response to the question -- I 16 think the question the Board stated was to use two rigs, 17 which is what Union did. If we used two rigs and start 18 on April 15th, this is all we can do. 19 Are there other options? Yes, there are other 20 options. And will Union consider those? Yes. 21 MR. MACKIE: I would like you to consider the 22 other options and come back with a revised construction 23 schedule, please, which would at least give Union an 24 opportunity to commence injection of gas within these 25 pools no later than August the 1st in the year 2000 -- 26 and even, if it is still achievable, July the 1st. But 27 it is not clear to me that that is achievable. 28 MR. PARDY: And we have looked at those 199 1 options. 2 MR. MACKIE: I notice that the station 3 construction for the Oil City Pool, the original 4 measurement and control station was originally scheduled 5 for April through July, or four months. That has been 6 delayed by two months, according to this revised 7 schedule, and it has also been extended. 8 Is that again a reason that you didn't see the 9 necessity of constructing within the two-month period? 10 There wasn't the same necessity to. 11 MR. MARUSIC: That's correct. 12 MR. MACKIE: I am going to leave this now. We 13 need to close for the day. The court reporter can't be 14 asked to continue beyond five o'clock. 15 I want to make sure that I have a commitment 16 from Union to revisit this construction schedule and to 17 refile it with a more realistic in-service date. 18 MR. MARUSIC: We will do that. 19 MR. MACKIE: We will continue with questions 20 of this panel tomorrow morning. I am hopeful that we 21 won't be too much longer so that we can get on to the 22 environmental assessment and the land related issues. 23 There is a lot accumulated for Mr. Lowe 24 tomorrow. I recognize that. 25 I want to thank the court reporter, who has 26 put in a long day on his own. Thank you. 27 Is there anything from your side that needs to 28 be put on the record now? 200 1 MR. LESLIE: I don't think so, Chris. 2 MR. MACKIE: Thank you, everybody. We will 3 see you tomorrow morning at 9 o'clock. 4 --- Whereupon the hearing adjourned at 1701, 5 to resume on Friday, December 17, 1999 6 at 0900