GAO SEES WAYS TO BOLSTER PROFITS FROM NPR

The General Accounting Office has suggested several ways the U.S. Department of Energy could increase its revenues from the Elk Hills Naval Petroleum Reserve in California.

In its fiscal 1996 budget request, DOE proposed to operate its NPRs in a "caretaker" status and ask Congress for permission to sell or lease the NPRs in fiscal 1997. As a result, it cut its budget request for the NPRs from $186 million in fiscal 1995 to $101 million in fiscal 1996.

The Senate armed services committee asked GAO, a congressional watchdog agency, to examine the government's options for Elk Hills.

Elk Hills produces about 23,000 b/d. The U.S. owns a 78% interest in the field, Chevron Corp. 22%. The field is operated by Bechtel Petroleum Operations Inc. under a contract that expires in July.

GAO pointed out, "In May 1993 Chevron proposed that it operate the NPR, estimating it could reduce operating costs by as much as $37 million/year.

"However, negotiations between Chevron and DOE on this proposal were suspended in spring 1994 because of the secretary of energy's concern that this proposal might not be appropriate, given the need to ensure competitive selection of the next operator or contractor."

PROFITS, NOT RECOVERY

GAO noted that federal law requires DOE to set the rate of production at the maximum efficient rate.

It said the field could be more profitable if DOE were allowed to set the rate of production to maximize profits rather than ultimate recovery.

"For example," GAO said, "DOE has traditionally reinjected gas produced from the reserve to maximize recovery of oil from the NPR. While this practice has increased oil recovery, DOE, Chevron, and Bechtel have estimated that selling the gas could be more profitable.'

GAO said DOE and Chevron have an open ended arrangement under which their ownership shares of the field are constantly revised.

"This open ended situation has undermined trust and cooperation between the two owners, and both spend a significant amount of resources examining the likely impact of proposed investments on their equity shares before committing to new projects. These expenditures, and the slowed decision making, result in reduced profits.

"Making a final decision on how ownership shares in the NPR are distributed between DOE and Chevron could enhance the reserve's profitability by allowing the owners to focus on investments that enhance the venture as a whole."

NONCONSENT CLAUSE

Finally, GAO said, adding a clause to the DOE-Chevron contract to promote risk sharing could help encourage investments that increase profits.

"Under the current contract, DOE and Chevron may be drilling fewer profitable wells than they could because they do not always share in the risks or costs of drilling."

GAO said "nonconsent clauses' in other industry contracts govern how a partner who does not share the costs of a project will be treated.

"Because the current contract has no such clause, DOE has sometimes borne all of the initial risks or costs of drilling potentially profitable wells, only to have Chevron later share in the profits without penalty." GAO said that happened only once, and Chevron is willing to amend the contract to include a nonconsent clause.