Elk Hills: Private or public?

Introduction

The political decision to sell the Elk Hills oil reserve was made from high in the Clinton administration nearly three years before the bids were due on Oct. 1, 1997. The critical time was late 1994 and early 1995, when Patricia Godley, then the Department of Energy’s assistant secretary for fossil energy, tried to get the executive branch to sign off on a plan to create a public corporation to run the field more efficiently and obtain a better assessment of its worth.

The groundwork for the public corporation idea had already been laid in 1993 when, before Godley took office, the then-Democrat-dominated Senate Armed Services Committee asked the National Academy of Public Administration to assess how the government could restructure Elk Hills to maximize profit. NAPA is a statutory body that Congress relies on for its independent, expert opinion on government affairs.

NAPA recommended to Congress in May 1994 that Elk Hills be transformed into a government corporation, like the Tennessee Valley Authority or the U.S. Postal Service, and estimated its net present value under that scenario, citing an internal DOE study, to be nearly $4 billion. And in January 1995, the General Accounting Office, another independent government body, also suggested the option of a publicly owned corporation as a means of increasing profit.

Godley liked the idea of operating Elk Hills as a government corporation and in late 1994 and early 1995 sought the approval of Energy Secretary Hazel O’Leary. She already had received the OK from key department officials.

“The Department’s studies and the NAPA report have concluded that corporatization offers the best opportunity to maximize the value of the reserves as a national asset, increase net revenues to the U.S. Treasury, and reduce operational costs,” Godley wrote in a November 1994 memo to O’Leary. “Most recently, there has been bipartisan interest from the Senate Armed Services Committee in corporatizing the program.”

But the White House was already balking. The incoming Congress was going to be controlled by Republicans, who philosophically didn’t want the government operating an oil field. President Clinton and Vice President Gore were reinventing government, bringing in the private sector to take over a number of government functions. And the administration was touting its Middle Class Bill of Rights, which promised tax cuts and balancing the budget. Selling Elk Hills was consistent with these objectives.

So on December 19, 1994, while O’Leary was on a trip to Moscow, her deputy, William H. White, announced at a news conference – with Clinton and Gore at his side – that Elk Hills would be privatized. After mentioning other cuts to slash DOE’s budget, White announced, “Finally, we’re going to get rid of some programs that are programs that the vice president referred to as programs of yesterday.”

But even after White’s announcement, Godley again asked O’Leary to sign the report to Congress recommending corporatization — this time as an interim stage before an outright sale. That would improve performance and therefore increase the field’s value.

In that January 5, 1995, memo to O’Leary, Godley described an earlier meeting with T.J. Glauthier, associate director of the White House’s Office of Management and Budget. OMB is the office that assists the president in overseeing preparation of the federal budget, evaluates the effectiveness of agency programs, and coordinates the administration’s procurement, financial management, information and regulatory policies.

Godley wrote that Glauthier (who is now DOE’s deputy secretary) made it clear that OMB “continues to favor immediate privatization of the Reserves . . . As a result, we have modified the [recommendation to Congress] to delete an express proposal for corporatizing the Reserves.”

Although in March 1995 O’Leary eventually signed that memo, which endorsed the NAPA report, the proposal never made it to Capitol Hill. Not only did OMB object, but it was a struggle for Godley to get adequate support in Congress for the corporatization idea. By April 1995, she was pushing for an outright sale, abandoning the possibility of trying to run a public corporation to establish true value.

“Congress didn’t think that it was viable as a government corporation,” one congressional staff member familiar with Elk Hills told The Public i. “We weren’t convinced it wouldn’t work, but we weren’t sure it would be the highest value.”

Another congressional source who worked on Elk Hills remembers that there was “a strong section, a small minority of members [of Congress], which believed the government shouldn’t sell it but continue to put money in the Treasury. Others believed it should get out of the oil business.”

Anton Dammer, the current director of DOE’s Office of Naval Petroleum and Oil Shale Reserves, which managed Elk Hills at the time, says the change in Congress was pivotal in making the sale happen. “There was no accountability or follow-through [in Congress] on corporatization from the previous year, and you had all these gung-ho, quasi-energy lawyers in DOE who are Democrats,” he said, referring to White, Godley and others. “I’m not making a value judgment about this thing, but in my estimation, it [full privatization] went through because it was a Republican House and Senate.”

Despite all the wrangling and the higher value attributed to the 1997 DOE-Bechtel “Upside Study” (which put Elk Hills’ worth at $5.575 billion, or potentially $6.64 billion), Godley insisted in an interview with The Public i that the government got the best price it could, and that a government corporation would not have increased the property’s value to taxpayers. She said she had only one incidental contact with the White House on the Elk Hills sale and never discussed her strategy with Gore or members of his staff.

In the end, Occidental won the auction in October 1997 with $3.65 billion, a figure higher than expected, so the two Democrats who had put up the biggest fight against the sale—ex-Senator Dale Bumpers, D-Ark., and Senator Jeff Bingaman, D-N.M.—gave it up.