DOE pressing disposition of western assets

U.S. Department of Energy is proceeding with a flurry of actions related to disposition of its petroleum assets in the U.S. West.

DOE has determined how it plans to sell its 78% interest in Elk Hills field near Bakersfield, Calif. DOE plans to complete the sale by next Feb. 10 (OGJ, Jan. 13, 1997, p. 22). Chevron owns the other 22% of the field.

In addition, DOE has recommended Congress transfer 145,000 acres in its Colorado and Utah Naval Oil Shale Reserves to the Interior Department for future leasing.

It also recommended Congress let Interior administer the Buena Vista Hills Naval Petroleum Reserve (NPR) No. 2 adjacent to Elk Hills field. Existing mineral leasing agreements would remain intact.

And DOE proposed that it continue producing Teapot Dome field in Wyoming (NPR No. 3), until the small stripper well field is depleted in about 2003. It then would sell the government's interest in the reserve.

Elk Hills plan

Interested firms can bid on a single "operating working interest" that represents about three fourths of the government's interest in Elk Hills field.

The purchaser of this package will have a working interest of at least 51% in each of the productive zones.

DOE will offer the remaining one-fourth interest in separate non-operating working interests, each of which will represent 2% of the government's interests. Purchasers can bid on one or more of those.

The department said it "has not dismissed the possibility of selling a portion of its interests in Elk Hills in ways that could appeal to institutional investors, if such a structure would help maximize value to the U.S."

DOE said it had decided not to sell the government's interest in the field's surface facilities separately from the reserves. Instead, interests in facilities such as the large gas processing plants, an onsite cogeneration plant, and crude and gas handling equipment will be included in the offering of the overall undivided working interests in the field.

Patricia Fry Godley, assistant DOE secretary for fossil energy, said the department's investment banking advisors had recommended that DOE sell an operating interest of at least 51% in each productive zone to ensure there would be no question over who held a majority interest in the field after the sale.

She said the decision to offer the remaining portion of the government's ownership in 2% segments is intended to give bidders the opportunity to purchase smaller interests in the field. But it does not preclude one buyer from purchasing the entire block.

DOE has drafted a field unitization agreement that will take effect after the sale of the field, covering the interests of both the U.S. and Chevron.

It also named five independent consultants to assess the value of the oil field. They are Miller & Lents Ltd., Houston; Scotia Group Inc., Dallas; S.A. Holditch & Associates Inc., College Station, Tex.; Gaffney, Cline & Associates, Dallas; and Ernst & Young, Washington, D.C.

Oil shale reserves

The 1996 National Defense Authorization Act ordered DOE to study options for maximizing the value of the reserve properties other than the Elk Hills field.

DOE let contract to John Gustavson & Associates to conduct the study.

Congress set aside the oil shale reserves in the early 1900s to provide fuel for the military, but began producing the oil properties after fuel shortages in the 1970s. The oil shale reserves have not been economic to produce.

DOE said Naval Oil Shale Reserves (NOSR) No. 1 and No. 3, both near Rifle, Colo., are in a region where gas is being produced from nearby tracts. Since 1985, DOE has drilled several wells in reserve No. 3 to protect against drainage.

It said NOSR No. 2, in a remote area of Utah southwest of Vernal, has geologic potential for oil and gas production, although the acreage is still considered exploratory.

Gustavson reported the government would glean the same revenues either from selling or leasing the shale reserves, but since it shares half of its lease revenues with the states, it would be best off selling the properties.

DOE opted for leasing to benefit states because that "would allow undeveloped acreage to be explored while still under federal ownership, providing a more accurate evaluation of the properties' future mineral value"; and because some of their wilderness values "outweighed any near-term financial gain that a sale might produce."

Buena Vista, Teapot

DOE also estimated that selling Buena Vista Hills, a "checkerboarded" array of 50 tracts, would be so costly it might only net $500,000.

"This small monetary gain would not offset the potential lessening of environmental protection for several endangered or threatened animals and plants present on the federal property that likely would occur if the property was sold."

DOE agreed with Gustavson that it retain Teapot Dome field, which is producing less than 1,800 b/d. DOE has established the Rocky Mountain Oil Field Test Center to test oil field products and services at the field.