Oxy to get Elk Hills stake for $3.65 billion

The U.S. Energy Department plans to sell its 78% interest in Elk Hills field, 15 miles west of Bakersfield, Calif., to Occidental Petroleum Corp. for $3.65 billion in cash.

DOE said the sale would be the largest privatization in the history of the U.S. government. The field was acquired as a naval petroleum reserve in 1912 and was dormant until production began in the 1970s. A 1996 law authorized the sale.

Chevron Corp. owns the other 22% of the field. Oxy will be operator. Elk Hills is one of the 11 largest oil and natural gas fields in the Lower 48 states.

Oxy said the sale, effective Oct. 1, includes reserves of about 670 million bbl of oil and 1.9 tcf, or about 1 billion bbl of oil equivalent (boe).

The property covers more than 47,000 acres and includes significant oil and gas reserves, more than 1,000 producing wells, a 47-MW electric power plant, and two large gas processing plants. Current production is about 60,000 b/d of 31? gravity oil and 390 MMcfgd of gas. Two thirds of the gas is reinjected for pressure maintenance.

DOE Assistant Sec. Patricia Fry Godley, who is overseeing the sales process, said, "We're getting maximum value for this asset, and we're turning one of the nation's premier oil and gas fields over to the private sector-to a respected and experienced U.S. oil and gas producer. The Navy no longer needs Elk Hills, and this sale helps get the government out of the oil and gas business."

DOE said that, under the 1996 National Defense Authorization Act, the sale still is subject to a 60-day Justice Department antitrust review, completion of an environmental impact assessment, and a 31-day congressional review period.

Closing is expected in December or January. The statutory deadline is Feb. 10, 1998.

High bid

DOE had offered to sell Elk Hills in two types of segments: one "operatorship" segment consisting of 74% of the U.S. interest in the field and 13 non-operating segments each consisting of 2% of the U.S. interest. Potential purchasers could bid on one, some, or all of the segments. If a single purchaser wanted to buy all of the U.S. interest, its bid had to exceed the total of the highest bids for all of the individual segments.

Godley said, "The sales strategy was designed to maximize competition and to allow all qualified bidders to compete on an equitable basis. I am pleased to report that the process worked."

DOE said more than 200 companies worldwide expressed interest in the sale, 46 attended technical data presentations, and 15 parties acting alone or together filed 22 bona fide offers.

Godley said, "Our bidder group was diverse and included major oil companies, independent oil companies, independent oil refiner interests, and financial parties.

"The proposed sales price satisfies the statutory requirements that we maximize proceeds to the government. It also exceeds the minimum acceptable price established under the provisions of the sales statute." Federal agencies previously estimated the sale would garner $1.5-2.4 billion.

Reserves boost

Occidental said the purchase of Elk Hills reserves will triple its U.S. oil reserves and more than double its U.S. gas reserves. Its total worldwide oil and natural gas reserves will increase by about 75% to 2.3 billion boe.

It said the deal would increase its net U.S. production by 46,000 b/d of oil and 93 MMcfd of gas.

"This increase has the effect of almost doubling current domestic oil production and increasing current domestic gas production about 20%. Under its operatorship, Occidental expects its share of the Elk Hills net production to increase to over 80,000 b/d and 300 MMcfd."

Ray Irani, Oxy chairman and CEO, said, "Elk Hills field represents a unique opportunity to enhance production from existing reserves and to add substantial new reserves through exploration. Our enhanced oil recovery team has been studying this field for over 18 months. Production from Elk Hills will provide a significant increase in our earnings and cash flow and greatly enhance the value of Occidental for our shareholders both in the near term and the long term. This field will be producing for more than 30 years."

MidCon sale

Oxy also said it will raise funds for the Elk Hills purhcase from the planned sale of its MidCon gas pipeline subsidiary, also disclosed last week: "The Elk Hills acquisition will be completely funded using $2 billion of proceeds from the divestiture of MidCon and an additional $1.6 billion that Occidental expects to raise from the sale of other non-strategic assets that earn a lower rate of return than Elk Hills. In the interim, the acquisition will be funded with short-term debt."

Oxy said the MidCon divestiture would be completed early next year. Proceeds will be used to buy Elk Hills and and pay for a stock buyback program. Oxy said it would immediately repurchase 40 million shares of common stock, about $1 billion worth, using short-term debt.