The U.S. continues to pursue sale of another of its major energy assets, its 78% interest in Elk Hills oil field near Bakersfield, Calif.
Its ownership of Elk Hills is an anachronism. The field became a naval petroleum reserve in the early 1900s, when the federal government feared the U.S. was running out of oil and would not be able to fuel its naval fleet.
In 1976, Congress directed that the field be produced. Last year, the Defense Authorization Act ordered the field be sold by Feb. 10, 1998. The sale is expected to bring $1.2-4 billion.
Chevron owns 22% of the field, although the exact federal/ Chevron split is yet to be determined. That will be difficult, because the field covers 47,409 acres and has 14 reservoirs at depths of 1,400-10,000 ft.
Elk Hills is the 11th largest oil field and 10th largest gas field in the Lower 48. In 1995, gross production was 63,000 b/d of oil, 325 MMcfd of gas, and 435,000 gal/day of propane, butane, and gas liquids.
Strong interest
Patricia Fry Godley, assistant secretary for fossil energy, said there was "very high industry interest" at DOE briefings on the sale held last October in Houston and Bakersfield. More than 150 persons attended each meeting.
"Our investment bankers have been deluged with inquiries and requests for information. There isn't any comparable property like it on the market right now. And it's particularly valuable, because most California production is lower grade or quality."
DOE plans to offer buyers "nonoperating working interests" in the field or bid for an "operating working interest" of more than 50% (OGJ, Oct. 14, 1996, p. 40).
The department also may sell some of the field's surface facilities (a cogeneration plant, gas processing plants, and gathering lines) separately to attract companies that specialize in natural gas processing or power generation.
Godley said, "Congress has required DOE to determine that the market value of the field exceeds the value to the taxpayer of continued federal ownership. If it does not, the government will not proceed with the sale."
CS First Boston and Petrie Parkman & Co. are DOE's advisers for the sale. DOE said the sale strategy will maximize the value of the asset, enable all qualified bidders to compete on an equitable basis, and not preclude from bidding independent producers and refiners, which blend light Elk Hills crude with heavier oil from surrounding fields for easier pipeline shipment and refining.
Last year, DOE settled a long dispute with California over "school lands" within Elk Hills (OGJ, Oct. 21, 1996, p. 31). The federal law permitting the sale set aside 9% of the net proceeds to benefit the State Teachers' Retirement System.
Timetable
Godley said the Elk Hills sale deadlines have been adjusted and the sale process is on track. A report on reserves is due in April.
DOE and Chevron are due to agree on their respective ownership of the field by late summer.
Five independent assessors will file reports in September that will be used to establish the minimum price for the field. Purchase proposals will be due later in September.
By December, DOE will select the best offer(s), which are subject to congressional review.
The 1996 Defense Authorization Act also required DOE to consider disposing of other naval petroleum reserves. They are Buena Vista field in California, Teapot Dome field in Wyoming, and oil shale reserves in Colorado and Utah.
After a consultant reports to DOE on those, the department will make recommendations to Congress.
Godley said, "Three administrations, including the Clinton administration, have questioned the role of government as the owner of commercial oil and gas fields and sought authority to lease or sell these fields.
"Moreover, continued fiscal constraints have made it difficult to invest funding for facility upgrading and field maintenance necessary to maximize production and profits."
Antitrust concerns
Citizen Action, a consumer watchdog group, said last month that Elk Hills should not be sold to a major producer.
It released a 1989 memorandum by the DOE General Counsel that said an Elk Hills sale to any of the seven major oil producers in the state could have antitrust implications. And the memo said there could be antitrust problems if any of the three largest producers obtained 50% of the field.
Ed Rothschild of Citizen Action said, "This memorandum was written before Shell and Mobil, the first and third largest crude producers in California, announced their intention to merge their crude oil operations which, if combined, would account for approximately a third of California's crude production."
He said the Energy Department has a duty to ensure there is competition in the supply of fuels: "This does not mean assuring that just the sale itself is conducted in a manner that promotes competition, but that the end result of the sale does not lessen competition in an already highly concentrated market.
"Based on our knowledge of how the department intends to conduct the sale, we have little confidence that there is any sensitivity to the problems of selling a large part of the reserve to one or more of the largest producers in California.
"DOE has said nothing publicly that would instruct likely bidders that a high bid may not be accepted if the resulting 'merger' results in a lessening of competition.
"We intend to pursue this issue, especially in light of the determination of Chevron and other large California producers to acquire Elk Hills or large portions of the field," Rothschild said.
Copyright 1997 Oil & Gas Journal. All Rights Reserved.
