Case Study 1: Divestiture of the Elk Hills Naval Petroleum Reserve

Background

Since 1912, the Federal Government has managed the Elk Hills Naval Petroleum Reserve (NPR) in Kern County, California. The original purpose of the NPR was to ensure a supply of oil for the U.S. Navy. In 1976, in response to the 1974 oil embargo, Congress directed the NPR to be put into production and operation. DOE has managed the NPR for the Federal Government since 1977. It is operated under a Unit Plant Contract with Chevron U.S.A.

The Effort

With the enactment of Title XXXIV of the National Defense Authorization Act for fiscal year 1996, DOE was directed to sell the U.S. interest in NPR 1, Elk Hills, California, by February 10, 1998. The Elk Hills initiative revealed bipartisan congressional support to divest what historically had been considered a strategic national asset.

However, the legislation also evidenced caution in disposing of such a large Government asset. The statute contains numerous procedural safeguards designed to ensure that the Government receives full value for Elk Hills and that the sale is competitive. For example, the law requires that the Government retain eight outside consultants to help conduct the sale and sets out specific schedules and deliverables for each consultant:

• An investment banker or financial adviser to administer the sale to be retained within 2 months

• Five independent experts to assess the value of the reserve to be retained in 7 months and to complete their work in 11 months

• An independent petroleum engineer to prepare a Reserve Report on the remaining recoverable oil and gas reserves within 11 months

• An independent petroleum engineer to make recommendations for the finalization of equity within 8 months.

Additionally, the Secretary is required to establish a minimum price which, under the Act, may not be below the higher of the average of the five independent assessments or the average of the middle three independent assessments. Further, the Secretary is required to consult with a number of other agencies (OMB, the Treasury Department, and the General Services Administration) at various points in the sales process. Contract(s) of sale are subject to a 31-day “report and wait” requirement, and the sale may be suspended if the Secretary and the Director of OMB jointly determine that the sale is proceeding in a manner inconsistent with achievement of a sale price that reflects full value or that some course of action other than immediate sale is in the best interests of the United States. Finally, the Comptroller General is tasked under the Act to “monitor” the Secretary’s sales activities.

Lessons Learned

A detailed elaboration of lessons learned is premature at this point because the Department is in the early stages of the Elk Hills divestiture. However, we have learned that the establishment of a dedicated DOE team to internally administer the sale has proven to be critical to the successful accomplishment of the ambitious schedule of the Defense Authorization Act. This Divestiture Administration Team consists of a project manager, procurement specialists, attorneys, and technical experts from DOE’s Naval Petroleum and Oil Shale Reserve office and a representative from OMB.