Department of Energy Formally Places Naval Oil Reserve on Market

Elk Hills Privatization Could Be Largest Since Conrail

The giant Elk Hills Naval Petroleum Reserve -- one of the largest government assets ever to be offered for public sale -- is now officially on the market.

In a news conference today, the U.S. Department of Energy (DOE) set into motion a four-month marketing and sales process that could ultimately return to the Treasury a value surpassing the federal privatization of Conrail in 1987. Offers will be due on October 1, 1997.

"After nearly a decade of discussing and debating the divestiture of the Naval Petroleum Reserves, it is now time to hear what the market has to say. The next four months will tell us who is truly interested in this asset and the value they place on it," said Patricia Fry Godley, DOE's Assistant Secretary for Fossil Energy, who is heading the divestiture effort.

The Elk Hills field, about 35 miles west of Bakersfield in Kern County, CA, is among the 11 largest oil and natural gas fields in the lower 48 States. Originally set aside in the early 1900s to ensure a future source of crude oil for the U.S. Navy, the field no longer serves a military purpose. Since 1976, it has been operated primarily for its commercial value. Today, the field produces nearly 60,000 barrels of oil and more than 350 million cubic feet of natural gas per day. The U.S. Government owns or controls about 80 percent of Elk Hills with the remainder owned by Chevron U.S.A. Production Co.

"Elk Hills is premium property. Its crude oil is among the highest quality in southern California, and it is the State's most prolific natural gas field. We believe the property will appeal to both large and small buyers, and we have structured our sales process to encourage a wide variety of prospective purchasers to offer bids," Godley said.

DOE has authorized its financial advisors -- CS First Boston of New York and Petrie Parkman & Co. of Houston -- to begin contacting prospective purchasers interested in buying the federal portion of the property.

Interested bidders who sign a standard non-collusion agreement and pay a $200 preparation and copying charge will receive a two-volume sales brochure and be invited to technical data presentations in Bakersfield on June 9-12 and in Houston on June 16-19.

An extensive package of printed and electronic data will be available at the technical briefings for a preparation and copying charge of $5,000. Included will be an independently-prepared reserve analysis and an "upside study" that describes the potential value of enhancements a private owner might make to improve the field's current operations.

Purchasers who meet certain financial qualification requirements (a tangible net worth of at least $10 million) can submit written requests for further information, discussions with the engineering firm that conducted the independent reserve report, and site visits to the field. All such requests will be handled by CS First Boston and Petrie Parkman & Co. throughout the summer.

Offers will be accepted only on an all cash basis, payable at closing. During October, DOE and its financial advisors will conduct further discussions and negotiations with the offerors whose bids maximize the value of the property to the Government. DOE will sell the field only if bids exceed the government's minimum sales price. The Department will set the price threshold this fall after five independent assessors complete their separate valuation analyses.

The U.S. Government is offering its share of Elk Hills in two types of interests: a single operating working interest that will give the purchaser clear right to at least 51 percent of each of the field's productive zones, and multiple non-operating working interests, each equivalent to two percent of the government's interest in the field. Prospective purchasers may submit offers on one, some, or all of the interests being sold.

The United States' offering includes specified percentage shares of production from the field's four unitized producing zones. The final sales percentages are the result of an agreement executed by DOE and Chevron for purposes of the sale, in which Chevron has waived any right to challenge the final sale participating percentage shares.

Successful bidders must submit earnest money deposits with executed purchase and sale agreements. DOE then will send a required report to Congress describing the contract terms and whether the sale remains in the best interests of the United States. Congress has 31 days to review the report prior to DOE's execution of the sales contract(s). The Department expects to close the sale by February 10, 1998, the statutory sales date.

Prospective purchasers should contact Jon Hughes, Petrie Parkman & Co., Houston, TX, at (713) 650-3383.

- End of TechLine -