Testimony Of Michael Stay Program Director, Elk Hills Special Projects Group
Testimony Of Michael Stay Program Director,
Elk Hills Special Projects Group, Chevron, U.S.A.
Before The Energy And Power Subcommittee Of
The House Commerce Committee
Mr. Chairman and members of the subcommittee, my name is Michael Stay, I am Program Director of the Elk Hills Special Projects group for the Western Business Unit of Chevron U.S.A. Production Company. I appreciate the opportunity to appear before you today to offer Chevron's position on Naval Petroleum Reserve No.1, or as it is more commonly known, Elk Hills. The future of the Elk Hills field is important, not only to Chevron, but to all American taxpayers.
We are particularly grateful for this opportunity to set the record straight. This morning, I welcome the opportunity to define, once and for all, what Chevron's interest in Elk Hills is--and what it is not.
The Naval Petroleum Reserves were established between 1912 and 1915 to supply America's naval fleet with emergency sources of fuel. In the early 1940's, after it was determined that the reserve extended into adjacent property owned by Chevron, the U.S. government and Chevron agreed to jointly develop the field. Elk Hills was largely inactive until the early 1970's. At that time, in response to the OPEC oil embargo, Congress altered the "reserve" status of Elk Hills and called for maximum production, passing responsibility for the field from the Navy to the U.S. Energy Department. The government owns 78% of the field, Chevron owns the rest.
Despite the fact that the U.S. government no longer needs to supplement domestic oil production, the U.S. Government is still in the oil business at Elk Hills.
After more than 50 years of partnership with the U.S. government at Elk Hills, Chevron agrees with the Clinton Administration proposal that the government should sell its share of the field to a commercial oil company. Chevron believes that is the best option for our company and for the U.S. taxpayer. Chevron's sole objective is to maximize the financial return of its 22% stake in Elk Hills. That cannot happen, Mr. Chairman, as long as Chevron has the U.S. Government as a business partner.
The domestic oil industry is a high risk, harshly competitive business. It demands operations that are lean and efficient--operations at Elk Hills are anything but.
Employing government processes in the management of the Elk Hills reserve is incredibly wasteful. Over the past two years alone, overstaffing, inefficiencies and the failure to pursue competitive practices has cost the taxpayer over $50 million dollars in excessive expenditures. Every week the government runs the Elk Hills field, nearly a million taxpayer dollars go down the drain. That money would be saved, Mr. Chairman, if a private company ran the operation according to standard industry practices. For example, private oil companies in California employ an average of 17 workers for every 100 wells, compared with the government's contract operator staff of 50 workers per 100 wells at Elk Hills.
In 1992, Chevron conducted a study to determine why oil field operating costs and manpower levels at Elk Hills were steadily increasing, contrary to industry trends that were moving in the opposite direction. The study uncovered wasteful and inefficient practices in nearly every area of operation: bloated staffing levels, fragmented and multi-layered management, a tremendous investment of staff time spent on non-productive tasks, and a mis-match of objectives and incentives among Chevron, the government and its third party contractors.
This study disclosed a simple truth: the government can't run an oil field as efficiently as an oil company. Chevron offered to operate the field at cost, allowing the company to maximize its return and also save the taxpayers up to $77 million dollars a year. To date, the Department of Energy has not accepted the offer, and the government continues to waste nearly a million dollars every week at Elk Hills.
Chevron believes the government's best option is to sell Elk Hills. Privatizing naval petroleum reserve #1 will bring meaningful deficit reduction and long-term cost savings for taxpayers--and it will give Chevron an efficient, commercial business partner.
While Chevron advocates the sale of Elk Hills, let me state clearly and for the record, that despite what you may have heard, and what has been reported, Chevron has not decided whether it would bid on Elk Hills if the government sells its share. We cannot make that decision until we have reviewed the offer and determined whether it makes economic sense for our company. Let me also clarify that if a sale takes place, Chevron will have no head-start, no inside track, and no special advantage in the bidding process. Mr. Chairman, anyone who says otherwise is peddling fiction.
Under the proposed legislation, the field will be valued by independent experts who understand the petroleum industry and Elk Hills revenue potential. The Department of Energy and the Office of Management and Budget will set a minimum bid price based on the valuation. The bidding will be open to all companies, the bids will be sealed, and all the government's 75 years of data on the field will be shared with all bidders.
Having defined Chevron's interest in this matter, I respectfully suggest that the issue of real concern to this committee and to Congress is the best interest of taxpayers. While I am no expert on that topic generally, certain facts about Elk Hills are self-evident.
The Elk Hills Naval Petroleum Reserve no longer serves the public interest. At Elk Hills, the government is simply in the oil business, competing with private companies who are far better equipped to run a commercial concern. The government has a chance to sell Elk Hills, achieving meaningful deficit reduction in FY 96 as well as long-term savings.
Some say to get the best deal for the taxpayers you need to: extend the timetable to properly value the field, establish a government corporation to operate the field, restrict the terms of the sale in a number of ways and set the minimum bid high enough to insure the taxpayers get full value for the asset. These suggestions may be well intentioned, Mr. Chairman, but they are also misguided.
Corporatization of Elk Hills is just another form of Government control over what should, by any measure, be a commercial operation. The government's attempt to act like a private company just won't work and it won't serve the interest of the American people.
Regarding the schedule and valuation, there is an entire industry of analysts, investment bankers and other experts who are in the business of valuing and selling oil fields, for them this is not difficult, its what they do, and they do it every day. Numerous oil field sales have occurred in the U.S. over the past five years. Many of those transactions were much more complex than the sale of a single mature Elk Hills oil field. Such industry sales typically take 6-9 months from start to finish.
Restrictions on the sale, additional burdens on the purchaser, proposals to break up the parcel, all should be viewed skeptically and cautiously, because they have the net effect of making the sale less attractive to any potential buyer.
Estimates of what the field is worth have ranged from $1 billion to $4 billion. Until an independent credible valuation is conducted, these are all just guesses. It's true that Elk Hills produces significant revenue, but it's also true that Elk Hills is a mature oil field in the late stages of its producing life. To illustrate, in 1981 Elk Hills produced 181,000 barrels of oil a day. Today, the daily production has declined by two-thirds to 66,000 barrels a day. The yield of the Elk Hills Field will continue to drop sharply over the next few years. Any significant delay of a sale, means that the government will have a greatly diminished asset to offer when the field is finally put on the auction block.
There also has been a great deal of concern expressed over the prospect of the government setting the bid price too low. That's a situation that the market will correct. If potential bidders see a good value in the package the competition among bidders will drive up the price. The greater danger is that the minimum price will be set too high, pricing Elk Hills out of the market, or that the sale will carry so many restrictions it will be unattractive to buyers. If that happens, taxpayers will lose a tremendous opportunity to reduce the deficit now and save millions in the future.
If there is any urgency at all about the sale of Elk Hills--it should belong to taxpayers who are losing nearly a million dollars every week, and who have a valuable, but diminishing asset to offer.
Thank you, Mr. Chairman for the opportunity to share Chevron's views. I welcome any questions you and the Committee may have.
Updated: September 1995